UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
February 3, 2008.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number
001-13927
CSK Auto Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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86-0765798
(I.R.S. Employer
Identification No.)
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645 E. Missouri Ave.
Suite 400
Phoenix, Arizona
(Address of principal
executive offices)
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85012
(Zip
Code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered:
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Common Stock, $.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to section 13 or 15(d) of the
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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(Do not check if a smaller reporting company)
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Smaller reporting
company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
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No
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As of August 3, 2007, the aggregate market value of our
voting and non-voting common stock held by non-affiliates was
approximately $541.2 million. For purposes of the above
statement only, all directors and executive officers of the
registrant are assumed to be affiliates.
As of April 11, 2008, there were 44,033,363 shares of
our common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of our definitive Proxy Statement for our 2008 Annual
Meeting of Stockholders are incorporated by reference into
Part III of this
Form 10-K.
TABLE OF
CONTENTS
As used herein, the terms CSK, CSK Auto,
the Company, we, us, and
our refer to CSK Auto Corporation and its
subsidiaries, including its operating subsidiary, CSK Auto,
Inc., and its subsidiary, CSKAUTO.COM, Inc. The term
Auto as used herein refers to our operating
subsidiary, CSK Auto, Inc., and its subsidiary, CSKAUTO.COM, Inc.
You may obtain, free of charge, copies of this Annual Report on
Form 10-K
(this Annual Report) as well as our Quarterly
Reports on
Form 10-Q
and Current Reports on
Form 8-K
(and amendments to those reports) filed with or furnished to the
Securities and Exchange Commission (SEC) as soon as
reasonably practicable after such reports have been filed or
furnished by accessing our website at
www.cskauto.com
,
then clicking Investors. Information contained on
our website is not part of this Annual Report.
Note
Concerning Forward-Looking Information
Certain statements contained in this Annual Report are
forward-looking statements and are usually identified by words
such as may, will, expect,
anticipate, believe,
estimate, continue, could,
should or other similar expressions. We intend
forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect current views about our
plans, strategies and prospects and speak only as of the date of
this Annual Report.
2
We believe that it is important to communicate our future
expectations to our investors. However, forward-looking
statements are subject to risks, uncertainties and assumptions
often beyond our control, including, but not limited to,
competitive pressures, the overall condition of the national and
regional economies, factors affecting import of products,
factors impacting consumer spending and driving habits such as
high gas prices, war and terrorism, natural disasters
and/or
extended periods of inclement weather, consumer debt levels and
inflation, demand for our products, integration and management
of any current and future acquisitions, conditions affecting new
store development, relationships with vendors, risks related to
compliance with Section 404 of the Sarbanes-Oxley Act of
2002 (SOX and such Section, SOX 404) and
litigation and regulatory matters. Actual results may differ
materially from anticipated results described in these
forward-looking statements. For more information related to
these and other risks, please refer to the Risk Factors section
in this Annual Report. In addition to causing our actual results
to differ, the factors listed and referred to above may cause
our intentions to change from those statements of intention set
forth in this Annual Report. Such changes in our intentions may
cause our results to differ. We may change our intentions at any
time and without notice based upon changes in such factors, our
assumptions or otherwise.
Except as required by applicable law, we do not intend and
undertake no obligations to update publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise. Given the uncertainties and risk factors
that could cause our actual results to differ materially from
those contained in any forward looking statement, you should not
place undue reliance upon forward-looking statements and should
carefully consider these risks and uncertainties, together with
the other risks described from time to time in our other reports
and documents filed with the SEC.
3
PART I
Merger
Agreement
On April 1, 2008, the Company entered into an Agreement and
Plan of Merger (the Merger Agreement) with
OReilly Automotive, Inc. (OReilly) and
an indirect wholly-owned subsidiary of OReilly pursuant to
which the Company is expected to become a wholly-owned
subsidiary of OReilly (the Acquisition).
In order to effectuate the Acquisition, OReilly has agreed
to commence an exchange offer (the Exchange Offer)
pursuant to which each share of the Companys common stock
tendered in the Exchange Offer will be exchanged for (a) a
number of shares of OReillys common stock equal to
the exchange ratio (as calculated below), plus
(b) $1.00 in cash (subject to possible reduction as
described below). Pursuant to the Merger Agreement, the
exchange ratio will equal $11.00 divided by the
average trading price of OReillys common stock
during the five consecutive trading days ending on and including
the second trading day prior to the closing of the Exchange
Offer; provided, that if such average trading price of
OReillys common stock is greater than $29.95 per
share, then the exchange ratio will be 0.3673, and if such
average trading price is less than $25.67 per share, then the
exchange ratio will be 0.4285. If such average trading price is
less than or equal to $21.00 per share, the Company may
terminate the Merger Agreement unless OReilly exercises
its option to issue an additional number of its shares or
increase the amount of cash to be paid such that the total value
of OReilly common stock and cash exchanged for each share
of the Companys common stock is at least equal to $10.00
(less any possible reduction of the cash component of the offer
price as described below).
Upon completion of the Exchange Offer, any remaining shares of
the Companys common stock will be acquired in a
second-step merger at the same price at which shares of the
Companys common stock were exchanged in the Exchange Offer.
The Acquisition is expected to be completed during the second
quarter of the Companys fiscal year ending
February 1, 2009 (fiscal 2008) and is
subject to regulatory review and customary closing conditions,
including that at least a majority of the Companys
outstanding shares of common stock be tendered in the Exchange
Offer and the expiration or termination of any waiting period
(and any extension thereof) under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
The Merger Agreement includes customary representations,
warranties and covenants by the Company, including covenants
(a) to cease immediately any discussions and negotiations
with respect to an alternate acquisition proposal, (b) not
to solicit any alternate acquisition proposal and, with certain
exceptions, not to enter into discussions concerning or furnish
information in connection with any alternate acquisition
proposal, and (c) subject to certain exceptions, for the
Companys Board of Directors not to withdraw or modify its
recommendation that the Companys stockholders tender
shares into the Exchange Offer. In addition, the Company has
agreed to use reasonable best efforts to obtain appropriate
waivers or consents under the Companys credit or debt
agreements and instruments if needed or if requested by
OReilly to remedy any default or event of default
thereunder that may arise after the date of the Merger Agreement
(the Credit Agreement Waivers). The $1.00 cash
component of the offer price for each share of the
Companys common stock tendered in the Exchange Offer will
be subject to reduction in the event that the Company pays more
than $3.0 million to its lenders in order to obtain any
Credit Agreement Waivers. The Company does not anticipate any
need to obtain any Credit Agreement Waivers prior to the
anticipated closing of the Exchange Offer.
The Merger Agreement contains certain termination rights for
both the Company and OReilly, including if the Exchange
Offer has not been consummated or if the expiration or
termination of any waiting period (and any extension thereof)
under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, has not
occurred, in either case on or before the date that is
180 days after the date of the Merger Agreement, and
provisions that permit termination in connection with the
exercise of the fiduciary duties of the Companys Board of
Directors with respect to superior offers. The Merger Agreement
further provides that upon termination of the Merger Agreement
under specified circumstances, the Company may be required to
pay OReilly a termination fee of $22.0 million.
4
In connection with the Acquisition, OReilly has received a
commitment letter from Lehman Commercial Paper Inc., Lehman
Brothers Inc., Lehman Brothers Commercial Bank, Bank of America,
N.A., and Banc of America Securities LLC to provide a
$1,200.0 million first lien senior secured revolving credit
facility, which OReilly is expected to use, in part, to
repay at the time of the closing of the Exchange Offer all
amounts outstanding and other amounts payable under the
Companys $350.0 million floating rate term loan
facility (the Term Loan Facility) and
$325.0 million senior secured revolving line of credit (the
Senior Credit Facility), following which such
Facilities will be terminated. Thus, although the consummation
of the Exchange Offer would result in an event of default and
the possible acceleration of indebtedness under those
Facilities, it is contemplated that those Facilities will be
repaid in full and cease to exist at the closing of the Exchange
Offer. If the Acquisition is completed as planned, the
Companys $100.0 million of
6
3
/
4
% senior
exchangeable notes
(6
3
/
4
% Notes)
will remain outstanding. OReillys acquisition of the
Company and the closing of the Exchange Offer are not
conditioned upon the completion of, or availability of funding
under, its committed $1,200.0 million credit facility.
Term Loan
Facility Financial Covenants
Our Term Loan Facility contains a maximum leverage ratio that we
do not believe at this time we will be able to satisfy beginning
in the first quarter of the Companys fiscal year ending
January 30, 2010 (fiscal 2009). In
addition to having the potential to cause a default under the
Term Loan Facility at the end of the first quarter of fiscal
2009, if we do not obtain a waiver or amendment of that covenant
prior to the completion of our financial statements for the
first quarter of fiscal 2008, our belief that it is probable
that this covenant will not be satisfied for the first quarter
of fiscal 2009 will cause us to have to classify all of our
indebtedness under the Term Loan Facility and the Senior Credit
Facility, as well as the
6
3
/
4
%
Notes, as current liabilities in our financial statements
beginning with our financial statements for the first quarter of
fiscal 2008. Furthermore, beginning with the second quarter of
fiscal 2008, we would be required to reduce (to twelve months)
the time period over which we amortize debt issuance costs and
debt discount, increasing the interest costs we report in our
financial statements. The classification of all such
indebtedness as current liabilities and the acceleration of the
amortization of interest costs will not cause a default under
our borrowing agreements. However, any such classification could
have adverse consequences upon our relationships with, and the
credit terms upon which we do business with, our vendors,
although we expect such consequences, if any, to be limited due
to the expected closing of the Exchange Offer in the second
quarter of fiscal 2008. The Company does not expect to seek
waivers or amendments under its credit facilities prior to the
closing of the Exchange Offer as these credit facilities are
expected to be repaid and terminated upon the closing of the
Exchange Offer.
If the Exchange Offer were to fail to close, prior to the end of
the first quarter of fiscal 2009, we would seek to obtain a
waiver or amendment of certain covenants contained in the Term
Loan Facility, including the maximum leverage ratio covenant. No
assurance can be given that we would be able to obtain such a
waiver or amendment on terms that would be satisfactory to us.
Failure to comply with the financial covenants of the Term Loan
Facility would result in an event of default under the Term Loan
Facility after the first quarter of fiscal 2009, which could
result in possible acceleration of all of our indebtedness
thereunder, under the Senior Credit Facility and under the
indenture under which the
6
3
/
4
%
Notes were issued, all of which could have a material adverse
effect on us.
General
CSK Auto Corporation is the largest specialty retailer of
automotive parts and accessories in the Western United States
and one of the largest such retailers of such products in the
entire country, based, in each case, on store count.
Headquartered in Phoenix, Arizona, CSK became a publicly traded
company in March 1998, and has historically grown through a
combination of acquisitions and organic growth. CSK was
incorporated under the laws of the State of Delaware in 1993.
We have the number one market position in 22 of the 32 major
markets in which we operate, based on store count. As of
February 3, 2008, through our wholly owned subsidiary, CSK
Auto, Inc., we operated 1,349 stores in
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22 states, with our principal concentration of stores in
the Western United States. Our stores are known by the following
four brand names (referred to collectively as CSK
Stores):
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Checker Auto Parts, founded in 1969, with 487 stores in the
Southwestern, Rocky Mountain and Northern Plains states and
Hawaii;
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Schucks Auto Supply, founded in 1917, with 222 stores in
the Pacific Northwest states and Alaska;
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Kragen Auto Parts, founded in 1947, with 504 stores primarily in
California; and
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Murrays Discount Auto Stores, founded in 1972, with 136
stores in the Midwest.
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In December 2005, we purchased all the outstanding stock of
Murrays Inc. and its subsidiary, Murrays Discount
Auto Stores, Inc. (collectively Murrays). As
of the acquisition date, Murrays operated 110 automotive
parts and accessories retail stores in Michigan, Illinois, Ohio
and Indiana states in which the Company previously
had no significant market presence. The 110 acquired
Murrays stores, as well as new stores we open in our
Midwest markets, will retain the Murrays name. The
Murrays stores complemented our existing operations and
expanded our markets served from 19 to 22 states.
We offer a broad selection of national brand name, private-label
and generic automotive products for domestic and imported cars
and light trucks. Our products include new and remanufactured
automotive replacement parts, maintenance items and accessories.
The following table reflects several of the types of products we
sell:
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Hard Parts
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Maintenance Products
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Accessory Products
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A/C Compressors
Alternators
Batteries & Accessories
Brake Drums, Rotors, Shoes & Pads
Carburetors
Clutches
CV Axles
Engines
Fuel Pumps
Mufflers
Shock Absorbers & Struts
Starters
Water Pumps
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Antifreeze & Windshield
Washer Fluid
Belts & Hoses
Chemicals, including Brake &
Power Steering Fluid, Oil &
Fuel Additives
Fuses
Lighting
Oil & Transmission Fluid
Oil, Air, Fuel & Transmission
Filters
Oxygen Sensors
Protectants & Cleaners
Refrigerant & Accessories
Sealants & Adhesives
Spark Plugs & Wires, Wash &
Wax, Windshield Wipers
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Air Fresheners
Cell Phone Accessories
Drinks & Snacks
Floor Mats
Hand Cleaner
Neon Lighting
Mirrors
Paint & Accessories
Performance Products
Seat Covers
Steering Wheel Covers
Stereos
Tools
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Our stores average approximately 7,500 square feet in size
and typically offer a store specific mix averaging approximately
16,000 SKUs. We also operate a highly efficient network of
strategically located priority parts depots to provide the
majority of our stores an additional 40,000 SKUs on a
same-day
delivery basis. Through our extensive on-line vendor network, we
make available up to an additional 250,000 SKUs on a
same-day
delivery basis to the majority of our stores and up to 1,000,000
additional SKUs on a
next-day
delivery basis to substantially all of our stores.
We serve both the do-it-yourself (DIY) and the
commercial installer, also referred to as the do-it-for-me
(DIFM), markets. The DIY market, which is comprised
of consumers who typically repair and maintain vehicles
themselves, is the foundation of our business. Sales to the DIY
market represented approximately 82% of our net sales for fiscal
2007. The DIFM market is comprised of auto repair professionals,
fleet owners, governments and municipalities, and is estimated
to have accounted for over 68% of the annual sales in the
U.S. automotive aftermarket industry in 2007 (excluding the
sales of tires and services performed by DIFM professionals),
according to statistics published by the Automotive Aftermarket
Industry Association (AAIA). Sales to the DIFM
market represented approximately 18% of our net sales for fiscal
2007. We believe we are well positioned to effectively and
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profitably further penetrate the highly fragmented DIFM market
because of our sales force dedicated to DIFM customers,
experienced in-store sales associates, level of customer
service, conveniently located stores, efficient depot delivery
network, attractive pricing, and ability to provide timely
availability of a broad selection of national brand name
products.
E-Commerce
We operate separate
e-commerce
sites for our retail and commercial customers. Our retail
website, which utilizes the
partsamerica.com
URL, has
become a targeted destination for DIY auto parts consumers. Our
customers can find price, availability, images and other rich
content on hundreds of thousands of our products on the website.
The site is completely integrated with our warehouse, inventory
and store systems and was one of the first to offer in-store
pickup and returns. Through a business arrangement we have with
Advance Auto Parts, we are able to offer the in-store service
virtually coast to coast. Our commercial
e-commerce
site,
cskproshop.com
, offers DIFM customers the ability
to develop estimates, perform complex diagnostics, research
vehicle problems and order products online. The site is also
integrated with our store systems so that an online order will
be automatically delivered to the customer. The site also
provides our customers the ability to review their monthly
statements and digital reproductions of all their signed
invoices.
Industry
Overview
We compete in the U.S. automotive aftermarket industry,
which, according to statistics by the AAIA published in 2007,
has estimated annual sales of approximately $121 billion.
Estimated sales include replacement parts, accessories,
maintenance items, batteries and automotive fluids for cars and
light trucks but exclude sales of tires and services performed
by DIFM professionals. The industry is comprised of the DIY
market and the DIFM market. We believe that the
U.S. automotive aftermarket industry is characterized by
stable demand and is growing because of increases in:
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the number and age of automotive vehicles in use;
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the number of miles driven annually per vehicle;
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the number of licensed drivers;
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the percentage of the total light vehicle fleet represented by
light trucks (including SUVs), which generate higher average
aftermarket product purchases versus such purchases generated
per car; and
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the existence of $53 billion per year of unperformed and
underperformed maintenance by U.S. vehicle owners,
according to the Automotive Aftermarket Suppliers Association.
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While consolidation of automotive aftermarket retailers
continues to occur, the industry remains highly fragmented. Our
primary competitors include national and regional automotive
parts chains, wholesalers, jobber stores, including those
associated with national parts distributors and associations,
such as NAPA and CARQUEST, independent operators, automobile
dealers, and discount stores and mass merchandisers that carry
automotive products.
Competitive
Strengths and Strategies
We believe that our competitive strengths and strategies include
the following:
Leading Market Position in the Western United
States.
We are the largest specialty retailer of
automotive parts and accessories in the Western United States
and have the number one market position in 22 of the 32 major
markets in which we operate, based on store count. We believe
that we have better brand name recognition than many of our
competitors due to the long operating history of our stores, our
advertising and marketing programs and the breadth of our
product selection.
As the largest specialty retailer of automotive parts and
accessories in the Western United States, we believe we have
certain competitive advantages over smaller retail chains and
independent operators. These advantages include: (1) our
brand name recognition as a trusted source of automotive parts
and accessories, (2) our ability to
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make available a broad selection of products on a timely basis,
(3) marketing and distribution efficiencies due to
economies of scale, and (4) our efficient store level
information and distribution systems. We also believe that we
enjoy a competitive advantage over mass merchandisers due to our
convenient locations, our focus on automotive parts and
accessories and our knowledgeable sales associates.
Focus on Customer Service.
As part of our
promise of G.R.E.A.T. service, our internally
developed customer service initiative, we aim to provide the
highest level of customer service in our industry in order to
generate repeat business. G.R.E.A.T. service includes:
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G
reet the customer
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R
espond to the customers needs
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E
xpedite the customers transaction
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A
sk the customer if we can be of further assistance
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T
hank the customer
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We provide specialty tools to our customers through our
POWERBUILT
®
Specialty Tool Rental Program that allows customers to use
certain specialty tools for specific applications without
purchasing the tools on a permanent basis. We have approximately
sixty-five specialty tools in this program available to our
customers, including a harmonic balancer puller, ball joint
separator set and valve spring compressor. Our sales associates
also provide certain free services to our customers including
oil and battery recycling and check engine light
readings in certain of our markets, as well as wiper blade
installation, battery charging and testing of starters,
alternators and batteries in all of our markets.
Recruiting, training and retaining high quality sales associates
are major components of our focus on customer service. Our
training programs and incentives encourage our sales associates
to develop technical expertise that enables them to effectively
advise customers on product selection and use. We have an
average of two National Institute for Automotive Service
Excellence, or ASE, certified parts professionals per store. To
further satisfy our customers needs, we also offer a
no hassle returns policy, electronically maintained
warranties and a customer service call center.
Efficient Store-Level Information and Distribution
Systems.
We have optimized our store-level
information systems and warehouse and distribution systems in
order to more effectively manage our inventory and increase the
availability of products to our customers. We have an advanced
electronic product catalog in our stores that enhances our
associates ability to assist our customers in selecting
the right parts for their automotive needs. Our sophisticated
inventory management systems provide inventory movement
forecasting based on history, trends and seasonality. Our
systems have enhanced our ability to predict the size and timing
of product requirements by closely monitoring service level
goals, vendor lead times and cost of inventory assumptions. Our
store level replenishment system generates orders based upon
store on-hand and store model stock quantities. Store model
stock quantities are determined by an automatic model stock
adjustment system that utilizes historical sales patterns,
seasonality and store presentation requirements. Our fully
integrated warehouse and distribution network and our 36
strategically located priority parts depots have allowed us to
improve distribution efficiency. Our investment in these systems
in our stores and in our distribution network has enhanced our
ability to have the right parts in the right places to meet our
customers needs.
We also maintain a market specific pricing program that seeks to
optimize margins while maintaining price competitiveness. Our
pricing philosophy is that we should not lose a customer because
of price. We closely monitor our competitors pricing
levels through our store specific pricing program, which
analyzes prices at the store level rather than at the market or
chain level. This initiative enables us to establish pricing
levels at each store based upon that stores local market
competition. Our opening price point products offer excellent
value at low prices. In addition, our sales associates are
encouraged to offer premium products at higher price points
yielding higher margins. These premium products typically
provide extra features, improved performance, an enhanced
warranty, or are nationally branded items.
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Drive Customer Traffic and Increase Sales
Base.
Our marketing and merchandising strategy is
designed to drive customer traffic and build market share. Our
strategy is to make available to our customers one of the
broadest selections of quality brand name products on a timely
basis in order to maximize customer satisfaction and generate
loyal customers. We also strive to be the industry leader in
introducing new and innovative product offerings, supported by
our promotional print advertising programs that include color
circulars and newspaper advertisements. We offer our products at
competitive prices in conveniently located and attractively
designed stores. Our advertising programs are specifically
tailored to target our various customer constituencies for
maximum appeal and effectiveness.
Store
Operations
Late in fiscal 2007, we reorganized our store operations
management function and reduced our geographic regions from ten
to eight. Our stores are currently divided into the following
eight geographic regions: Southwest, Rocky Mountain, Northwest,
Southern California, Los Angeles, Bay Area, Northern California,
and Great Lakes. Regional vice presidents, each of whom oversees
9 to 12 district managers, lead each region. Each of our
district managers has responsibility for between 10 and 20
stores.
The table below sets forth, as of February 3, 2008, the
geographic distribution of our stores and the trade names under
which they operate.
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Murrays
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Checker
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Schucks
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Kragen
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Discount
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Company
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Auto Parts
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Auto Supply
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Auto Parts
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Auto Stores
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Total
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California
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1
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2
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485
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488
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Washington
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142
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142
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Arizona
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128
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128
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Colorado
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87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Michigan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
60
|
|
Illinois
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
59
|
|
Minnesota
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Utah
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Nevada
|
|
|
27
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
46
|
|
Oregon
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
New Mexico
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Idaho
|
|
|
9
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Wisconsin
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Texas
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Ohio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
Hawaii
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Wyoming
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Alaska
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Montana
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
North Dakota
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
South Dakota
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Indiana
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
487
|
|
|
|
222
|
|
|
|
504
|
|
|
|
136
|
|
|
|
1,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our stores are generally open seven days a week, with hours from
8:00 a.m. to 9:00 p.m. on Monday through Friday, from
8:00 a.m. to 8:00 p.m. on Saturday and from
9:00 a.m. to 7:00 p.m. on Sunday. Some stores are open
24 hours and some stores are open until midnight. The
stores employ an average of approximately 7 to 9 associates,
including a store manager, two assistant store managers and a
staff of full-time and part-time associates.
9
Store
Formats
Approximately 62% of our stores are freestanding, with the
balance located within strip shopping centers. Stores range in
size from approximately 2,700 to 24,000 square feet,
average approximately 7,500 square feet in size and offer a
store specific mix of approximately 16,000 SKUs.
As of February 3, 2008, other than the 136 Murrays
stores approximating 10,200 square feet, we have three
principal store formats, which are 6,000, 7,000 and
8,000 square feet in size. The store size for a given new
location is selected generally based upon sales volume
expectations determined through a detailed market analysis that
we conduct as part of our site selection process. The majority
of the Murrays stores we acquired in fiscal 2005 are
10,000 square feet or larger. The following table
categorizes our stores by size as of February 3, 2008:
|
|
|
|
|
|
|
Number of
|
Store Size
|
|
Stores
|
|
10,000 sq. ft. or greater
|
|
|
184
|
|
8,000 9,999 sq. ft.
|
|
|
249
|
|
6,000 7,999 sq. ft.
|
|
|
652
|
|
5,000 5,999 sq. ft.
|
|
|
192
|
|
Less than 5,000 sq. ft.
|
|
|
72
|
|
|
|
|
|
|
|
|
|
1,349
|
|
|
|
|
|
|
When shopping for hard parts (e.g., starters, alternators, water
pumps), our customers are serviced by knowledgeable parts
personnel utilizing our electronic parts catalogs, with enhanced
product application information, instant inventory availability
and product images on thousands of parts. Accessory and
maintenance items are easily accessible to our customers via
convenient to shop shelving fixtures that contain such products
as oil and air filters, additives, waxes and other items. We
provide specifically designed shelving for batteries and, in
many stores, oil products.
Our newest prototypical store format is referred to as a
pod store. Unlike the traditional store layout,
wherein our sales associates are situated behind parts counters,
these new store formats have free-standing pods centrally
located on the sales floor in the stores. Our associates
interact with our customers using the electronic product
catalogs located on these pods. We believe that having our
associates on the sales floor with our customers will enhance
the positive shopping experience.
Growth
Strategy
Our growth strategy is focused on our existing and adjacent
markets and includes:
|
|
|
|
|
stabilizing our current business and judiciously opening new
stores;
|
|
|
|
relocating under-performing stores with expiring leases to
better locations;
|
|
|
|
restoring top line sales growth in both the DIY and DIFM
business through improved merchandising mix with a greater
emphasis on hard parts depth; and
|
|
|
|
improving top-of-mind awareness of our brands with our customer
base.
|
Store
Location Selections
Our real estate department utilizes a comprehensive,
market-based approach that identifies and analyzes potential
store locations based on detailed demographic and competitive
studies. These studies include analysis of population density,
growth patterns, age, per capita income, vehicle traffic counts
and the number and type of existing automotive-related
facilities, such as automotive parts stores and other
competitors within a pre-determined radius of the potential new
location. These potential new locations are compared to our
existing locations to determine opportunities for opening new
stores and relocating or expanding existing stores.
10
The following table sets forth our store development activities
during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2007
|
|
2006
|
|
2005
|
|
Beginning stores
|
|
|
1,332
|
|
|
|
1,277
|
|
|
|
1,134
|
|
New stores (excluding relocated stores)
|
|
|
38
|
|
|
|
64
|
|
|
|
36
|
|
Acquired stores
|
|
|
|
|
|
|
|
|
|
|
110
|
|
Relocated stores
|
|
|
7
|
|
|
|
8
|
|
|
|
8
|
|
Closed stores (including relocated stores)
|
|
|
(28
|
)
|
|
|
(17
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending stores
|
|
|
1,349
|
|
|
|
1,332
|
|
|
|
1,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new, acquired and relocated stores
|
|
|
45
|
|
|
|
72
|
|
|
|
154
|
|
In fiscal 2008, we plan to open 21 new stores (excluding
relocated stores), relocate 7 stores and close approximately 47
stores (including the relocated stores), resulting in an
estimated net decrease of 19 stores.
Store
Merchandising
Our store merchandising program, which classifies our product
mix into separate categories, is designed to determine the
optimal inventory mix at each individual store based on that
stores historical sales, lookup inquiries, and company
internal search engines. We believe that we can improve store
sales, gross profit margin and inventory turnover by tailoring
individual store inventory mix based on SKU specific information.
Purchasing
Merchandise is selected from over 250 primary and approximately
350 special order suppliers and purchased for all stores by
personnel at our corporate headquarters in Phoenix, Arizona. No
one single supplier accounted for 10% or more of our purchases
in fiscal 2007, 2006 or 2005. Our stores offer products with
nationally recognized, well-advertised brand names, such as
Armor All, Autolite, Castrol, Fel Pro, Fram, Goodyear, Havoline,
Mobil, Monroe, Pennzoil, Prestone, Quaker State, RayBestos,
Stant, Sylvania, Turtle Wax and Valvoline. In addition to brand
name products, our stores carry a wide variety of high quality
generic products. Most of our generic products are produced by
nationally recognized manufacturers; therefore, we believe that
our generic products are of a quality that is comparable to
brand name products.
Our inventory management systems include the
E-3
Advanced
Warehouse Replenishment Buying System, which provides inventory
movement forecasting based upon history, trend and seasonality.
Combined with service level goals, vendor lead times and cost of
inventory assumptions, the
E-3
Buying
System determines the timing and size of purchase orders. The
vast majority of the dollar values of transactions are sent via
electronic data interchange, with the remainder being sent by a
computerized email or facsimile interface. Our store
replenishment system generates orders based upon store on-hand
and store model stock. This includes an automatic model stock
adjustment system utilizing historical sales, seasonality and
store presentation requirements. We can also allocate seasonal
and promotional merchandise based upon a stores history of
prior promotional and seasonal sales.
Commercial
Sales Program
In addition to our primary focus on serving the DIY consumer, we
have significantly increased our marketing directed at the
commercial or DIFM customer in the automotive replacement parts
market. According to the AAIA, the commercial or DIFM market is
estimated to have constituted in excess of 68% of the annual
sales in the automotive aftermarket (excluding the sales of
tires and services performed by DIFM professionals) in 2006 and,
based on 2007 research by Lang Marketing Resources, Inc., in
2006 the DIFM market grew at a slightly faster rate than the DIY
market relative to the prior year (2005). Our commercial sales
program, which is intended to facilitate greater penetration of
the DIFM market, is targeted toward professional mechanics, auto
repair shops, auto dealers, fleet owners, mass and general
merchandisers with auto repair facilities and other commercial
repair outlets located near our stores.
11
We have made a significant commitment to this portion of our
business and upgraded the information systems capabilities
available to our commercial sales organization. In addition, we
employ one district sales manager for every approximately six
stores with a commercial sales center. The district sales
manager is responsible for servicing existing and developing new
commercial accounts. In addition, at a minimum, each commercial
sales center has a dedicated in-store salesperson, driver and
delivery vehicle.
We have developed commercial marketing programs to reward our
commercial customers and provide value added services to their
clients. One such program is our ProShop NASCAR
Performance Network (PNPN). This program is a
co-branded membership program between CSK ProShop and the
National Association for Stock Car Auto Racing
(NASCAR) that provides to our commercial customers
nationwide repair warranty service supported by over 30,000
participating repair shops throughout the U.S. and, among
other benefits, a comprehensive marketing and advertising
package allowing our commercial customers to market themselves
using the NASCAR and CSK ProShop co-branded logo. The PNPN
program also gives our commercial customers a chance to
participate in special promotions and incentives from NASCAR
licensed brands like Goodyear, Raybestos, BWD and Autolite.
We believe we are well positioned to effectively and profitably
service commercial customers, who typically require a higher
level of customer service and broader product availability than
the DIY customer. The commercial market has traditionally been
serviced primarily by jobbers. However, automotive specialty
retailing chains, such as CSK, have continued to increase their
share of the commercial market. We believe we have significant
competitive advantages in servicing the commercial market
because of our user-friendly information systems developed
specifically for our DIFM business, as well as our experienced
sales associates, conveniently located stores, attractive
pricing and ability to consistently deliver a broad product
offering with an emphasis on national brand names.
As of February 3, 2008, we operated commercial sales
centers in 737 of our 1,349 stores. Our sales to commercial
accounts (including sales by stores without commercial sales
centers) were $340.5 million and $320.2 million in
fiscal 2007 and 2006, respectively. On a comparable store basis,
our commercial sales increased approximately 6% in fiscal 2007.
We believe there is opportunity for further commercial sales
growth in all of our markets.
Advertising
We support our marketing and merchandising strategy primarily
through print and radio advertising, in-store promotional
displays and targeted direct mail programs. The print
advertising is primarily comprised of color circulars and
spadea, which are wrapped around Sunday newspaper
comics sections. We also advertise on radio to support print
advertising events and to reinforce our image and name
recognition. Advertising efforts include Spanish language radio
and billboards as well as bilingual print advertising and store
signage. In-store signs and displays are used to promote
products, identify departments, and to announce store specials.
We also sponsor Major League Baseball in major markets
throughout our trade area and a National Hot Rod Association
(NHRA) Powerade Championship
Series
®
nitro funny car team, and have been designated the Official Auto
Parts Store of the NHRA.
Websites
Our websites include the following:
|
|
|
|
|
http://www.cskauto.com;
|
|
|
|
http://www.cskautoparts.com;
|
|
|
|
http://www.checkerauto.com;
|
|
|
|
http://www.schucks.com;
|
|
|
|
http://www.kragen.com;
and
|
|
|
|
http://www.murraysdiscount.com.
|
12
Associates
As of February 3, 2008, we employed approximately
9,100 full-time associates and approximately
5,697 part-time associates. Approximately 86% of our
personnel are employed in store level operations, 8% in
distribution and 6% in our corporate headquarters.
For at least the past 10 years, we have not experienced any
significant labor disruption and we believe that our labor
relations are good. Except for a limited number of our stores in
the Northern California market, whose associates have been
represented by a union for many years, none of our personnel are
represented by a labor union.
Competition
We compete in both the DIY and DIFM markets of the automotive
aftermarket industry, which is highly fragmented and generally
very competitive. We compete primarily with national and
regional retail automotive parts chains (such as AutoZone, Inc.,
The Pep Boys Manny, Moe and Jack, OReilly
Automotive, Inc. and Advance Auto Parts, Inc.), wholesalers or
jobber stores (some of which are associated with national
automotive parts distributors or associations, such as NAPA and
CARQUEST), automobile dealers, and discount stores and mass
merchandisers that carry automotive replacement parts,
maintenance items and accessories (such as Wal-Mart Stores,
Inc.). As the largest specialty retailer of automotive parts and
accessories in the Western United States based on store count,
we believe we have certain competitive advantages over smaller
retail chains and independent operators. These advantages
include: (1) our brand name recognition as a trusted source
of automotive parts and accessories, (2) our ability to
make available a broad selection of products on a timely basis,
(3) marketing and distribution efficiencies achieved from
economies of scale, and (4) our efficient store level
information and distribution systems. We also believe that we
enjoy a competitive advantage over mass merchandisers due to our
convenient locations, our focus on automotive parts and
accessories and our knowledgeable sales associates.
The principal competitive factors that affect our business are
store location, customer service, product selection,
availability, quality and price. While we believe that we
compete effectively in our various markets, certain competitors
are larger in terms of number of stores and sales volume, have
greater financial and management resources and have been
operating longer than we have in certain geographic areas.
Trade
Names, Service Marks and Trademarks
We own the trade names and service marks Checker Auto Parts,
Schucks, Schucks Auto Supply, Kragen and Kragen Auto
Parts, and have registered Schucks and Kragen Auto Parts
with the United States Patent and Trademark Office for use in
connection with our automotive parts retailing business. We
acquired the trade name Murrays Discount Auto Stores and
the registered service mark Murrays Auto Parts, among
other marks, in connection with our December 2005 acquisition of
Murrays. In addition, we own and have registered numerous
trademarks with respect to many of our private label products
and advertising and marketing strategies. We believe that our
various trade names, service marks and trademarks are important
to our merchandising strategies. There are no infringing uses
known by us that materially affect the use of such items.
Warehouse
and Distribution
Our warehouse and distribution system utilizes bar coding, radio
frequency scanners and sophisticated conveyor and put-to-light
systems. In all our distribution centers, we operate with metric
based incentive programs measuring accuracy, safety and
productivity. These metric based programs have contributed
significantly to improved efficiencies in labor productivity and
other areas of focus in our distribution centers. Each store is
currently serviced by one of our four main distribution centers,
with the four regional distribution centers handling bulk
materials, such as oil and antifreeze. All of our merchandise is
shipped from the vendors to our distribution centers, with the
exception of batteries and certain other products, which are
shipped directly to stores by the vendor. In fiscal 2007, we
completed an approximately 80,000 square foot expansion of
our Phoenix, Arizona distribution center.
13
International
Trade
To help protect ourselves against difficulties of bringing
imported goods into the United States, we have participated in
the U.S. Customs and Border Protection (CBP)
worldwide supply chain security initiative and have achieved a
Customs Trade Partnership Against Terrorism
(C-TPAT) member status with the CBP. Among other
benefits to C-TPAT members, our imported containers have
experienced reduced border wait time, compared to containers
belonging to importers that have not voluntarily participated in
this CBP partnership program.
Seasonality
Our business is somewhat seasonal in nature, with the highest
sales occurring in the months of June through October
(overlapping our second and third fiscal quarters). In addition,
our business is affected by weather conditions. While unusually
severe or inclement weather tends to reduce sales, as our
customers are more likely to defer elective maintenance during
such periods, extremely hot and cold temperatures tend to
enhance sales by causing auto parts to fail and sales of
seasonal products to increase.
Environmental
Matters
We are subject to various federal, state and local laws and
governmental regulations relating to the operation of our
business, including those governing the handling, storage and
disposal of hazardous substances, the recycling of batteries and
used lubricants, and the ownership and operation of real
property. For example, under environmental laws, a current or
previous owner or operator of real property may be liable for
the cost of removal or remediation of hazardous substances in
soil or groundwater. Such laws often impose joint and several
liability and liability may be imposed without regard to whether
the owner or operator knew of, or was responsible for, the
release of such hazardous substances. We have recorded no
liabilities to provide for the cost of environmental remediation
activities, as we do not believe that we have incurred any such
liabilities.
At some of our locations acquired in prior years, automobiles
are serviced in automotive service facilities that we sublease
to third parties. As a result of investigations undertaken in
connection with such acquisitions, we are aware that soil or
groundwater may be contaminated at some of these properties. In
certain of these cases, we obtained indemnities from the former
operators of these facilities. Although there can be no
assurance, based on current information, we believe that any
such contamination will not result in any liabilities that would
have a material adverse effect on our financial position,
results of operations or cash flows.
As part of our operations, we handle hazardous materials in the
ordinary course of business and our customers may bring
hazardous materials onto our property in connection with, for
example, our oil recycling program. We currently provide a
recycling program for batteries in California and for the
collection of used lubricants at certain of our stores as a
service to our customers pursuant to agreements with third-party
vendors. The batteries and used lubricants are collected by our
associates, deposited into vendor-supplied containers/pallets
and then disposed of by the third-party vendors. In general, our
agreements with such vendors contain provisions that are
designed to limit our potential liability under applicable
environmental regulations for any damage or contamination that
may be caused by the batteries and lubricants to off-site
properties (including as a result of waste disposal) and to our
properties, when caused by the vendor.
Environmental laws and regulations have not had a material
impact on our operations to date, but there can be no assurance
that compliance issues relative to such laws and regulations
will not have a material adverse effect on our financial
position, results of operations or cash flows in the future.
Executive
Officers
The following table sets forth the name, age and position of
each of our executive officers as of April 11, 2008. Below
the table appears a brief account of each executive
officers business experience. Our executive officers also
have the same titles at our subsidiary, CSK Auto, Inc.
14
Certain executive officers who were employed by the Company
during fiscal 2007 are no longer employed by the Company. James
B. Riley, the Companys former Chief Financial Officer,
resigned from the Company effective at the end of June 2007.
Steven L. Korby, who has worked for the Company as a consultant
since July 2006, was the Companys interim Chief Financial
Officer until the Company hired Mr. James D. Constantine as
a permanent replacement for Mr. Riley in November 2007.
Also, the Companys former Chief Executive Officer, Maynard
Jenkins, retired from the Company on August 15, 2007. Upon
Mr. Jenkins retirement, Mr. Lawrence Mondry was
appointed as the Companys President and Chief Executive
Officer.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Lawrence N. Mondry
|
|
|
47
|
|
|
President, Chief Executive Officer and Director
|
James Constantine
|
|
|
55
|
|
|
Executive Vice President of Finance and Chief Financial Officer
|
Dale Ward
|
|
|
58
|
|
|
Executive Vice President Operations
|
Brian Woods
|
|
|
37
|
|
|
Executive Vice President Merchandising
|
Michael Bryk
|
|
|
53
|
|
|
Senior Vice President of Finance and Controller
|
Larry Buresh
|
|
|
63
|
|
|
Senior Vice President and Chief Information Officer
|
Larry Ellis
|
|
|
53
|
|
|
Senior Vice President Logistics
|
Greg Langdon
|
|
|
53
|
|
|
Senior Vice President Store Operations
|
Randi V. Morrison
|
|
|
43
|
|
|
Senior Vice President, General Counsel and Secretary
|
John Saar
|
|
|
57
|
|
|
Senior Vice President Real Estate and Human
Resources
|
Lawrence N. Mondry
became our President and Chief
Executive Officer and a director on August 15, 2007.
Mr. Mondry has over 20 years experience in
merchandising and executive management positions in the
multi-unit
specialty retailing industry. Most recently, he served as the
Chief Executive Officer of CompUSA Inc., a retailer and reseller
of personal computers and related products and services, from
November 2003 to May 2006. He had served as President and Chief
Operating Officer of CompUSA Stores since March 2000. From
December 1993 to March 2000, he served as Executive Vice
President Merchandising and, from 1990 to December
1993, as Senior Vice President and General Merchandise Manager.
Mr. Mondry began his retail career in 1983 with Highland
Superstores, a multi-regional consumer electronics retailer,
where he held various merchandising positions including Vice
President, National Merchandise Manager. Mr. Mondry
currently serves on the board of directors of Micron Technology,
Inc.
James Constantine
became our Executive Vice President of
Finance and Chief Financial Officer in November 2007. From 2006
to November 2007, Mr. Constantine was Senior Vice President
and Chief Financial Officer of ShopKo Stores Operating Co., a
retailer of goods and services with stores located throughout
the Midwest, Mountain and Pacific Northwest regions. From 2000
to 2005, Mr. Constantine was Executive Vice President,
Chief Financial and Administrative Officer of Factory
Card & Party Outlet, a specialty retailer of party and
special occasion merchandise. Prior to that,
Mr. Constantine was Senior Assistant Treasurer for, and
held various other managerial positions with, Sears, Roebuck and
Co. from 1981 to 1999. From 1974 to 1981, he held various
managerial positions with Deloitte & Touche LLP.
Mr. Constantine holds a Masters of Business Administration
from the University of Chicago and is a Certified Public
Accountant.
Dale Ward
became our Executive Vice President
Operations, with oversight responsibility for Store Operations
and Commercial Sales in January 2008. Prior to this appointment,
Mr. Ward was Executive Vice President overseeing Store
Operations, Commercial Sales, Human Resources and
Merchandising & Marketing from October 2006. Prior to
this appointment, Mr. Ward served the Company in numerous
roles, including Senior Vice President
Merchandising & Marketing since May 2005, Executive
Vice President Commercial Operations from October
2001 to May 2005 and Senior Vice President Store
Operations from March 1997 to October 2001. Prior to that,
Mr. Ward served as Executive Vice President and Chief
Operating Officer of Orchard Supply Hardware since April 1996.
Mr. Ward served as President and Chief Executive Officer of
F&M Super Drug Stores, Inc., a drugstore chain, from 1994
to 1995. He also served as President and Chief Executive Officer
of Ben Franklin Stores, Inc., a variety and craft store chain,
from 1988 to 1993 and as Chairman of Ben Franklin Crafts Inc., a
craft store chain, from 1991 to 1993.
15
Brian Woods
became our Executive Vice
President Merchandising in August 2007. Before
joining CSK Auto, Mr. Woods was employed by CompUSA, a
retailer and reseller of personal computers and related products
and services, for fifteen years and served in a variety of
executive and management positions. From October 2003 to
February 2007, he served as Executive Vice President and General
Merchandising Manager. Prior to that, from March 2000 to October
2003, he held the position of Vice President of Technology
Services.
Michael Bryk
became our Senior Vice President of Finance
and Controller in October 2007. Mr. Bryk served for
fourteen years in a variety of financial executive and
management positions with CompUSA, a retailer and reseller of
personal computers and related products and services. In
particular, from February 2007 through September 2007, he served
as Executive Vice President and Chief Financial Officer. From
2002 through February 2007, he served as Vice
President Finance and Administration. Prior to that,
from 2000 to 2002, he served as Vice President
Controller. Before joining CompUSA in 1993, Mr. Bryk served
as the Chief Financial Officer and in other finance management
capacities while employed with other consumer product retailers
in the Midwestern and Southeastern United States.
Larry Buresh
became our Senior Vice President and Chief
Information Officer in November 1998. Prior to that,
Mr. Buresh was Vice President and Chief Information Officer
of Chief Auto Parts, Inc. from 1995 to November 1998. From 1994
to 1995, Mr. Buresh was Senior Director of Central
Information Services for Sears, Roebuck & Co. From
1986 to 1994, Mr. Buresh was Vice President and Chief
Information Officer of Franks Nursery & Crafts,
Inc. Prior to that, Mr. Buresh was Vice President of
Management Information Services for Ben Franklin Stores Company.
Mr. Buresh is also a director of Service Repair Solutions
(formerly Mobile Productivity Incorporated) and Association for
Retail Technology Standards.
Larry Ellis
became our Senior Vice President
Logistics in April 2002. Prior to that, Mr. Ellis served as
Vice President Distribution, Transportation,
Priority Parts and Replenishment. Mr. Ellis career in
Logistics began over thirty years ago with Fleenors, Inc.,
which, through a series of transactions, was subsequently
acquired by Northern Automotive Corporation (a predecessor to
CSK Auto, Inc.) in 1988. During his career, Mr. Ellis has
served in several middle and senior management positions.
Greg Langdon
became our Senior Vice President
Store Operations in February 2008. Mr. Langdon has more
than thirty-five years of retail store operations management
experience. Most recently, Mr. Langdon served as Vice
President and Divisional Vice President Operations
since October 2005, and Regional Vice President
Operations between October 1999 and October 2005.
Mr. Langdon began his career with CSK Auto in May 1986 and,
before joining CSK, worked for Sears and Roebuck for thirteen
years in a variety of management positions.
Randi V. Morrison
became our Senior Vice President,
General Counsel & Secretary in October 2006.
Ms. Morrison was formerly Vice President, General
Counsel & Secretary since August 2005. Prior to that
Ms. Morrison was Vice President, Assistant General
Counsel & Secretary from February 2004 to August 2005,
Assistant General Counsel & Assistant Secretary from
April 2001 to February 2004 and Senior Counsel from March 2000
to April 2001. Ms. Morrison joined CSK Auto as Legal
Counsel in March 1997.
John Saar
became our Senior Vice President
Real Estate and Human Resources in January 2008. Prior to that,
Mr. Saar served as Senior Vice President
Commercial Sales since October 2006 and Divisional Vice
President since 2001. Mr. Saar has more than 35 years
of tenure with the Company and has served in various management
and senior management roles with responsibility for real estate,
human resources, store operations and other functions.
The term of office of each officer is until election and
qualification of a successor or otherwise at the pleasure of the
Board of Directors. There is no arrangement or understanding
between any of the above-listed officers and any other person
pursuant to which any such officer was elected as an officer.
None of the above-listed officers has any family relationship
with any director or other executive officer.
Available
Information and Exchange Certifications
In addition to this Annual Report, we file quarterly and
periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the SEC).
All documents that are filed with the SEC are available free of
charge on the CSK Auto corporate website at
www.cskauto.com
. Also, the public may read
16
and copy any materials we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington,
DC 20549. Information on the operation of the Public Reference
Room is available by calling the SEC at
1-800-SEC-0330.
We also post our corporate governance guidelines, code of
business conduct and ethics and the charters of the committees
of our Board of Directors on our website. Any amendments to, or
waivers from, a provision of our code of ethics applicable to
our principal executive officer, principal financial officer,
controller, or persons performing similar functions will be
disclosed by posting such information on our website. The
reference to our website address does not constitute
incorporation by reference of the information contained on our
website and such information should not be considered part of
this document.
The New York Stock Exchange (NYSE) requires that the
Chief Executive Officer of each listed company certify annually
to the NYSE that he or she is not aware of any violation by the
company of NYSE corporate governance listing standards as of the
date of such certification. The Company submitted the
certification of its Chief Executive Officer with its 2007
Annual Written Affirmation to the NYSE on December 10, 2007.
We included the certifications of the Chief Executive Officer
and the Chief Financial Officer of the Company required by
Section 302 of SOX and related SEC rules, relating to the
quality of the Companys public disclosure, in this Annual
Report as Exhibits 31.1 and 31.2.
Item 1A.
Risk
Factors
Our business, operations and financial condition are subject to
various risks. Some of these risks are described below, and you
should take such risks into account in evaluating us or any
investment decision involving the Company. This section does not
describe all risks that may be applicable to us, our industry or
our business, and it is intended only as a summary of certain
material risk factors.
Risks
Related to the Merger Agreement
The
failure of the Acquisition to close could have material adverse
consequences for the Company.
The Company has focused a great deal of internal resources on
the strategic review process and the review of strategic
initiatives that culminated in the execution of the Merger
Agreement and will continue to focus resources on the
consummation of the Merger Agreement. The Merger Agreement
contains many conditions to its consummation as summarized under
Item 1, Business. Should the Acquisition fail
to close for any reason and the Company be unable to promptly
pursue other strategic alternatives, the Company could be left
in a materially weaker position than it might have been if it
never commenced the processes that led to the execution of the
Merger Agreement, including as a result of employee departures
in anticipation of the Acquisition. In addition, if the
Acquisition does not close, prior to the end of the first
quarter of fiscal 2009, the Company expects that it would need
to obtain a waiver or amendment of certain covenants in its Term
Loan Facility, which, if not attainable upon reasonably
satisfactory terms, could have adverse effects on the Company in
fiscal 2008 as described below under Risks Related to Our
Financial Condition
Our failure to Comply with
the covenants contained in our Debt Agreements could have a
material effect on us.
In addition, if the Acquisition
is not completed, the price of the Companys common stock
may decline, as the market price of the Companys common
stock increased significantly upon the announcement of the
Acquisition.
Risks
Related to Our Internal Controls
We
have identified material weaknesses in our internal control over
financial reporting, which could continue to impact our ability
to report our results of operations and financial condition
accurately and in a timely manner.
As required by SOX 404, management has conducted an assessment
of our internal control over financial reporting, identified
material weaknesses in our internal control over financial
reporting and concluded that our internal control over financial
reporting was not effective as of February 3, 2008. For a
detailed description of our material weaknesses, see
Item 9A, Controls and Procedures. Our material
weaknesses result in more than a reasonable possibility that a
material misstatement in our financial statements will not be
prevented or detected. As a result, we must perform extensive
additional work to obtain reasonable assurance regarding the
reliability of our
17
financial statements. Even with this additional work, given the
material weaknesses identified, including the significant
turnover of Finance organization personnel and use of
consultants to augment the Companys accounting staff,
there is a risk of additional errors not being prevented or
detected timely, which could result in a material misstatement
of our published financial statements. In addition, it is
possible that other material weaknesses may be identified.
Although we have remediated several material weaknesses
previously identified, we have extensive work remaining to
remedy the material weaknesses and other deficiencies we have
determined exist at February 3, 2008. We are in the process
of implementing a full work plan for remedying the identified
material weaknesses, and this work will continue during fiscal
2008. There can be no assurance as to when the remediation will
be completed. Until our remedial efforts are completed,
management will continue to devote significant time and
attention to these efforts. There will also continue to be an
increased risk that we will be unable to timely file future
periodic reports with the SEC, that a default under our debt
agreements could occur as a result of delays and that our future
financial statements could contain errors that will be
undetected.
The
continuing existence of material weaknesses in our internal
control over financial reporting and the frequency of our
restatements of our financial statements may make it more
difficult and expensive to refinance our capital
structure.
In 2006 we entered into a Term Loan Facility. Should we desire
to refinance our Term Loan Facility or to otherwise issue
securities, the continued existence of our material weaknesses
and the fact that we have restated our financial statements
twice in the last three years may make it more difficult for us
to do so and may increase the cost of doing so. Both the
continued exposure to floating rate interest rates through the
Term Loan Facility and our Senior Credit Facility and the
increased costs associated with any refinancing of the Term
Credit Facility could have negative impacts on our results of
operations and financial condition.
Risks
Related to Our Fiscal 2006 Audit Committee-led Investigation and
Prior Restatement of Historical Financial Statements
Pending
and future governmental inquiries may adversely affect us, the
trading prices of our securities and our ability to access the
capital markets.
Our fiscal 2006 Audit Committee-led investigation and the
related restatement of historical financial statements is
summarized under Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations Other Significant Events. During
the course of our Audit Committee-led investigation conducted in
fiscal 2006 and following its substantial completion,
representatives of the Audit Committee and its advisors shared
with the SEC the conclusions of such investigation. The Company
continues to share information with the SEC and believes it is
cooperating fully with the agency in its formal investigation.
In addition, certain of our former and current executive
officers, directors and other employees are or may be subject to
investigation by the SEC in connection with these matters.
During fiscal 2007, the U.S. Attorneys office in
Phoenix and the Department of Justice in Washington, D.C.
indicated that they have opened an investigation related to
historical accounting practices that were the subject of the
Audit Committee-led investigation. Adverse developments in
connection with these proceedings, including any expansion of
their scope or a referral to and investigation by other
governmental agencies, could negatively impact us and divert our
resources and the focus of our management team from our ordinary
business operations. In addition, we have incurred and we may
continue to incur significant expenses associated with
responding to these investigations (including substantial fees
of lawyers and other professional advisors and potential
obligations to indemnify officers and directors who may be
subject to such investigation(s)), and we may be required to pay
criminal or civil fines, consent to injunctions on future
conduct or suffer other penalties, any of which could have a
material adverse effect on us. It is also possible that the
existence, findings and outcome of these inquiries may have a
negative impact on lawsuits that are pending or may be filed
against us, the trading prices of our securities and our ability
to access the capital markets. See Item 3, Legal
Proceedings for a more detailed description of these
proceedings.
18
We
have been named as a defendant in a class action lawsuit that
may adversely affect our financial condition, results of
operations and cash flows.
We and certain of our former executive officers and current and
former directors are defendants in a consolidated securities
class action lawsuit. Our managements attention may be
diverted from our ordinary business operations by this lawsuit
and we have incurred and we may continue to incur significant
expenses associated with the defense of this lawsuit (including
substantial fees of lawyers and other professional advisors and
potential obligations to indemnify officers and directors who
may be parties to such actions). In addition, as a result of
this lawsuit, we may be required to pay a judgment or settlement
that could have a material adverse effect on our results of
operations, financial condition, liquidity and our ability to
meet our debt obligations. We recently entered into an agreement
in principle to settle this class action lawsuit. See
Item 3, Legal Proceedings for a more detailed
description of these proceedings and the agreement in principle.
Potential
indemnification obligations and limitations of our director and
officer liability insurance could adversely affect
us.
As discussed above and in Item 3, Legal
Proceedings, several of our current and former directors,
officers and employees are or may become the subject of
criminal, administrative and civil investigations and lawsuits.
Under Delaware law, our charter documents and certain
indemnification agreements, we may have an obligation to
indemnify and are currently incurring expenses on the behalf of
our current and former officers and employees and directors in
relation to these matters. Some of these indemnification
obligations may not be covered by our directors and
officers insurance policies. If the Company incurs
significant uninsured indemnity obligations in the future, this
could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Risks
Related to our Industry and Business
Our
industry is highly competitive and we may not have the resources
to compete effectively.
The retail sale of automotive parts and accessories is highly
competitive. Some of our competitors have more financial
resources, are more geographically diverse, or have better name
recognition than we do, which might place us at a competitive
disadvantage. Because we seek to offer competitive prices, if
our competitors reduce their prices, we may reduce our prices to
maintain a competitive position, which could cause a material
decline in our revenues and earnings and hinder our ability to
service our debt.
We compete primarily with the following types of businesses:
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national and regional retail automotive parts chains;
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wholesalers or jobber stores (including those associated with
national parts distributors or associations, such as NAPA and
CARQUEST);
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automobile dealers; and
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mass merchandisers and discounters that carry automotive
replacement parts, maintenance items and accessories.
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We may
not be able to grow our number of stores in a profitable manner
or achieve the synergies anticipated when acquisitions are
made.
Our store growth is based, in part, on expanding selected
stores, relocating existing stores, adding new stores primarily
in markets we currently serve, and, from time to time, acquiring
stores in our existing and new markets from other automotive
parts and accessories retailers.
Our successful future organic growth and growth through
acquisitions are dependent upon a number of factors, including
our ability to:
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locate and obtain acceptable store sites;
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negotiate favorable lease terms;
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complete the construction of new and relocated stores in a
timely manner;
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hire, train and retain competent managers and associates;
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integrate new and acquired stores into our systems and
operations; and
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achieve the anticipated synergies and operating results that are
often built into the purchase price when existing stores or
chains are acquired.
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Acquisitions involve a variety of risks. Failure to successfully
integrate a large number of acquired stores into our existing
business or failure to achieve anticipated synergies and
operating results from such acquisitions could adversely affect
our financial condition and results of operations, particularly
during the periods closely following the acquisition of such
stores.
We cannot assure you that we will be able to continue to open
new stores as we have in the past or that our opening of new
stores in markets we already serve will not adversely affect
existing store profitability, nor can we assure you that we will
be able to manage our growth effectively.
A
decrease in vehicle miles driven, higher gasoline prices and
mild summer or winter temperatures may negatively affect our
revenues.
The need to purchase or replace auto parts is affected by the
number of vehicle miles driven. A substantial decrease in the
number of vehicle miles driven could have a negative impact on
our revenues. Factors that may cause the number of vehicle miles
to decrease include:
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weather conditions;
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increases in gasoline prices;
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changes in the economy; and
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changes in travel patterns.
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Increases in gasoline prices, as we experienced during fiscal
2007 and 2006, may also adversely affect our revenues because
our customers may defer purchases of certain items as they use a
higher percentage of their income to pay for gasoline. While we
generally experience increased sales when temperatures are
extreme, mild summer or winter temperatures may adversely affect
our revenues. These factors could result in a decline in the
customer traffic at our stores, which could adversely affect our
business, financial condition, results of operations and cash
flows.
A
decrease in the demand for products we offer for sale could
adversely affect our financial condition and results of
operations.
Overall demand for products we sell depends on many factors and
may decline for a number of reasons, including:
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Improving or declining economic conditions
During periods of declining economic conditions, both DIY and
DIFM customers may defer vehicle maintenance or repair. During
periods of good economic conditions, more of our DIY customers
may pay others to repair and maintain their cars instead of
working on their own cars or consumers may opt to purchase new
vehicles rather than service the vehicles they currently own.
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Declining vehicle ages and numbers and improving parts
quality
A decline in the average age of
vehicles, in the number of cars on the road or the continued
increase in the quality of auto parts could result in a
reduction in the demand for our product offerings.
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If any of these factors cause overall demand for the products we
sell to decline, our business, financial condition, results of
operations and cash flows could be adversely affected.
20
A
decrease in the ability and willingness of our suppliers to
supply products to us on favorable terms may have a negative
impact on our business.
Our business depends on developing and maintaining productive
relationships with our vendors and upon their ability and
willingness to sell products to us on favorable price and other
terms. Many factors outside our control may harm these
relationships and the ability or willingness of these vendors to
sell these products on such terms. For example, financial
difficulties that some of our vendors may face may increase the
cost of the products we purchase from them. In addition, our
failure to pay promptly or order sufficient quantities of
inventory from our vendors may increase the cost of products we
purchase from them or may lead to their refusal to sell products
to us at all. The trend towards consolidation among automotive
parts suppliers may disrupt our relationship with some vendors.
Any disruption in our vendor relationships or in our vendor
operations, including those that could arise as a result of the
Acquisition or because of concern about our compliance with the
covenants contained in our credit facilities, could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
We receive various payments, allowances, and discounts from our
vendors based on, among other things, the volume of our product
purchases or the services that we provide to them. These vendor
discounts and allowances reduce our costs of sales when the
corresponding product is sold. Monies received from the vendors
include rebates, allowances, and promotional funds. Typically,
these funds are dependent on purchase volumes and advertising
plans. The amounts to be received are subject to changes in
market conditions, vendor marketing strategies, and changes in
the profitability or sell-through of the related merchandise.
Any material change in, or failure to obtain vendor allowances
and discounts, such as might result from our failure to sell a
sufficient quantity of the vendors products, could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
Our
operations are concentrated in the Western United States, and
therefore our business is subject to fluctuations when adverse
conditions occur in that region.
The overwhelming majority of our stores are located in the
Western United States. As a result of this geographic
concentration, we are subject to regional risks such as the
economy, weather conditions, power outages, cost of electricity,
earthquakes and other natural disasters. In recent years,
certain areas in which we operate have experienced economic
recessions and extreme weather conditions. Although temperature
extremes tend to enhance sales by causing a higher incidence of
parts failure and increasing sales of seasonal products,
unusually severe weather can reduce sales by causing deferral of
elective maintenance. Because our business is somewhat seasonal,
inclement weather occurring during traditionally peak selling
months may harm our business. Several of our competitors operate
stores across the United States and, therefore, may not be as
sensitive to such regional risks.
War or
acts of terrorism or the threat of either may have a negative
impact on our financial condition, results of operations and
cash flows.
War or acts of terrorism or the threat of either may have a
negative impact on our results of operations by making it more
difficult to obtain merchandise available for sale in our
stores. In fiscal 2007, we imported approximately 6% of our
merchandise directly from other countries, primarily China. If
imported goods become difficult or impossible to bring into the
United States and if we cannot obtain such merchandise from
other sources at similar costs, our sales and profit margins may
be negatively affected. To help protect ourselves against
difficulties of bringing imported goods into the United States,
we have participated in the CBP worldwide supply chain security
initiative and have achieved a C-TPAT member status with the
CBP. Among other benefits to C-TPAT members, our imported
containers have experienced reduced border wait time, compared
to the containers belonging to importers that have not
voluntarily participated in this CBP partnership program. If we
are unable to maintain our current
C-TPAT
status it would increase the time it takes to get products into
our stores. In the event that commercial transportation is
curtailed or substantially delayed, our business may be
adversely impacted, as we may have difficulty shipping
merchandise to our distribution centers and stores, which could
result in a diminished ability to meet our customer demand. War
or acts of terrorism or the threat of either may negatively
affect the economy and may also cause the number of vehicle
miles to decrease, the price of gasoline to increase and
elective maintenance to be deferred.
21
Because
we are involved in litigation from time to time, and are subject
to numerous governmental laws and regulations, we could incur
substantial judgments, fines, legal fees and other
costs.
We currently and from time to time face complaints or litigation
incidental to the conduct of our business, including asbestos
and similar product liability claims, slips and falls, and other
general liability claims, discrimination and employment claims,
vendor disputes, and miscellaneous environmental and real estate
claims. In some cases, the damages claimed against us are
substantial. We accrue reserves using our best estimate of the
probable and reasonably estimable contingent liabilities.
Although we maintain liability insurance for some litigation
claims, if one or more of the claims greatly exceed our coverage
limits or our insurance policies do not cover a claim, it could
have a material adverse effect on our business and operating
results. We are also currently subject to a securities class
action lawsuit that is not incidental to our business and is
described in greater detail below. See Item 3, Legal
Proceedings in this Annual Report.
In addition, we are subject to numerous federal, state, and
local governmental laws and regulations relating to, among other
things, taxation, employment, environmental protection, and
building and zoning requirements. If we fail to comply with
existing or future laws or regulations, we may be subject to
governmental or judicial fines or sanctions.
We are
subject to environmental laws and the cost of compliance with
these laws could negatively impact our financial condition,
results of operations and cash flows.
We are subject to various federal, state, and local laws and
governmental regulations relating to the operation of our
business, including those governing the handling, storage, and
disposal of hazardous substances, the recycling of batteries and
used lubricants, and the ownership and operation of real
property. As a result of investigations undertaken in connection
with certain of our store acquisitions, we are aware that soil
or groundwater may be contaminated at some of our properties.
There can be no assurance that any such contamination will not
have a material adverse effect on us. In addition, as part of
our operations, we handle hazardous materials and our customers
may also bring hazardous materials onto our properties in
connection with, for example, our oil recycling program. There
can be no assurance that compliance with environmental laws and
regulations will not have a material adverse effect on us in the
future. See Environmental Matters in Item 1,
Business in this Annual Report.
Risks
Related to our Financial Condition
We are highly leveraged and, in fiscal 2007, we had higher
annual interest costs than we had in fiscal 2006. As of
February 3, 2008, we had an aggregate of approximately
$487 million of outstanding indebtedness under our Senior
Credit Facility, our Term Loan Facility and the indenture under
which $100.0 million of our
6
3
/
4
% Notes
were issued (collectively, the Debt Agreements). Our
substantial debt could adversely affect our business, financial
condition and results of operations in many ways, including
those set forth below.
Our
substantial debt and increased interest payment obligations
could adversely affect our financial health, undermine our
ability to grow and operate profitably and prevent us from
fulfilling our obligations under the Debt
Agreements.
The degree to which we are leveraged and the increased interest
rates resulting from the refinancing of most of our indebtedness
in fiscal 2006 and the amendments to our Term Loan Facility in
fiscal 2007 could subject us to the following risks:
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it may be more difficult to meet our payment and other
obligations;
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our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes
may be impaired in the future;
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a substantial portion of our cash flow from operations must be
dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available for other
purposes;
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the majority of our indebtedness, including our Senior Credit
Facility and Term Loan Facility, carries variable rates of
interest, and our interest expense could increase if interest
rates in general increase;
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we are substantially more leveraged than some of our
competitors, which might place us at a competitive disadvantage
to those competitors who have lower debt service obligations and
significantly greater operating and financial flexibility than
we do;
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we may not be able to adjust rapidly to changing market
conditions;
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we may be more vulnerable in the event of a downturn in general
economic conditions or in our business;
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our failure to comply with the financial and other restrictive
covenants governing our other Debt Agreements, which, among
other things, require us to maintain certain financial ratios
and limit our ability to incur additional debt and sell assets,
could result in an event of default that, if not cured or
waived, could have a material adverse effect on our business or
our prospects. See Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, under the heading Factors Affecting
Liquidity and Capital Resources Debt
Covenants; and
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a credit rating downgrade may increase the cost of refinancing
our existing debt or obtaining additional financing in the
future.
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Any of the above-listed factors could have an adverse effect on
our business, financial condition, results of operations, and
the price of our common stock.
Our
failure to comply with the covenants contained in our Debt
Agreements could have a material effect on us.
Our credit facilities require us to maintain certain financial
ratios. Failure to comply with these ratios or other financial
or restrictive covenants could result in an event of default
under the applicable credit facility, which could result in a
default or acceleration of all of our other indebtedness, which
acceleration, if it occurs, would have a material adverse effect
on us. In particular, our Term Loan Facility contains a maximum
leverage ratio with which we do not expect to be able to comply
beginning with the first quarter of fiscal 2009.
In addition to having the potential to cause a default under the
Term Loan Facility at the end of the first quarter of 2009, if
we fail to obtain a waiver for amendment of that covenant prior
to the completion of our financial statements for the first
quarter of fiscal 2008, our belief that it is probable that this
covenant will not be satisfied for the first quarter of fiscal
2009 will require us to classify substantially all of our
indebtedness as current liabilities at May 4, 2008 (the end
of the Companys first quarter of fiscal 2008). The
classification of all such indebtedness as current liabilities
(i.e., due within twelve months) will not cause a default under
our borrowing agreements. However, such reclassification could
have adverse consequences upon our relationships with and the
credit terms upon which we do business with our vendors although
we expect such consequences, if any, to be limited due to the
expected closing of the Exchange Offer in the second quarter of
fiscal 2008. Furthermore, beginning with the second quarter
of fiscal 2008, we would be required to reduce (to twelve
months) the time period over which we amortize debt issuance
costs and debt discount relating to reclassified indebtedness,
increasing the interest costs we report in our financial
statements.
Our
Debt Agreements restrict or prohibit our ability to engage in or
enter into some operating and financing arrangements, which may
limit our ability to operate our business.
The operating and financial restrictions and covenants in
certain of our Debt Agreements impose significant operating and
financial restrictions on us and require us to meet certain
financial tests. These restrictions may also have a negative
impact on our business, results of operations and financial
condition by significantly limiting or prohibiting us from
engaging in certain transactions, including:
|
|
|
|
|
incurring or guaranteeing additional indebtedness;
|
|
|
|
making investments;
|
|
|
|
creating liens on our assets;
|
23
|
|
|
|
|
transferring or selling assets currently held by us;
|
|
|
|
paying dividends;
|
|
|
|
engaging in mergers, consolidations, or acquisitions; or
|
|
|
|
engaging in other business activities.
|
These restrictions could place us at a disadvantage relative to
competitors that are not subject to such limitations.
In addition, a breach of the covenants, ratios, or restrictions
contained in our Debt Agreements could result in an event of
default thereunder. Upon the occurrence of such an event of
default, the lenders under all of our Debt Agreements, or, in
the case of the
6
3
/
4
% Notes,
the holders of such
6
3
/
4
%
Notes, could elect to declare all amounts outstanding under the
agreements, together with accrued interest, to be immediately
due and payable. If our lenders or the holders of the
6
3
/
4
% Notes
accelerate the payment of any of our indebtedness, we cannot
assure you that our assets securing such debt would be
sufficient to repay in full that indebtedness and our other
indebtedness.
The
market price for our common stock may be volatile.
In past periods, there has been volatility in the market price
for our common stock. In addition, the market price of our
common stock could fluctuate substantially in the future in
response to a number of factors, including but not limited to
the following:
|
|
|
|
|
actual or anticipated fluctuations in our operating results;
|
|
|
|
actual or anticipated changes in our growth rates or our
competitors growth rates;
|
|
|
|
changes in stock market analyst recommendations regarding our
common stock, the common stock of companies that investors deems
comparable to us or our industry generally;
|
|
|
|
uncertainties created by our inability to timely file our
periodic reports with the SEC;
|
|
|
|
operating and stock price performance of other companies that
investors deem comparable to us;
|
|
|
|
changes in governmental regulations;
|
|
|
|
geopolitical conditions, such as acts or threats of terrorism or
military conflicts; and
|
|
|
|
concentration of the ownership of our common stock and possible
speculation as to our future as a stand-alone organization.
|
General market fluctuations, industry factors and general
economic and political conditions or events, economic slowdowns,
interest rate changes, credit loss trends or currency
fluctuations could also cause the market price of our common
stock to decrease regardless of our operating performance. In
recent years the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many
companies for reasons unrelated to their operating performance.
These broad market fluctuations may materially adversely affect
our stock price regardless of our operating results.
In addition, the market price for our common stock could be
subject to significant fluctuation based on rumors and events
relating to the Acquisition.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
24
The following table sets forth certain information concerning
our principal leased facilities as of February 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
Square
|
|
|
of Stores
|
|
Facility
|
|
Location
|
|
Area Served
|
|
Footage
|
|
|
Served
|
|
|
Distribution Centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
center
(1)
|
|
Dixon, CA
|
|
California, Nevada, Washington, Oregon, Idaho, Alaska, Hawaii
|
|
|
325,500
|
|
|
|
544
|
|
Distribution
center
(2)
|
|
Phoenix, AZ
|
|
Arizona, California, Colorado, Idaho, Montana, Nevada, New
Mexico, Oregon, South Dakota, Texas, Utah, Wyoming
|
|
|
353,504
|
|
|
|
582
|
|
Office, warehouse and distribution center
|
|
Mendota Heights, MN
|
|
Michigan, Minnesota, North Dakota, South Dakota, Wisconsin
|
|
|
124,783
|
|
|
|
94
|
|
Office, warehouse and distribution
center
(3)
|
|
Belleville, MI
|
|
Illinois, Indiana, Michigan, Ohio
|
|
|
352,009
|
|
|
|
137
|
|
Corporate Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate office
|
|
Phoenix, AZ
|
|
All
|
|
|
127,810
|
|
|
|
|
|
Corporate warehouse and mail center
|
|
Phoenix, AZ
|
|
Arizona, Colorado, Washington
|
|
|
52,087
|
|
|
|
|
|
Regional Distribution Centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional distribution center
|
|
Auburn, WA
|
|
Washington, Oregon, Idaho, Alaska
|
|
|
81,761
|
|
|
|
192
|
|
Regional distribution center
|
|
Aurora, CO
|
|
Colorado, Wyoming, South Dakota
|
|
|
34,800
|
|
|
|
88
|
|
Regional distribution center
|
|
Clearfield, UT
|
|
Colorado, Utah, Idaho, Wyoming, Montana, Oregon
|
|
|
60,000
|
|
|
|
98
|
|
Regional distribution center
|
|
Commerce, CA
|
|
California
|
|
|
75,000
|
|
|
|
205
|
|
Return Centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns center
|
|
Phoenix, AZ
|
|
Arizona, California, Colorado, Idaho, Montana, Nevada, New
Mexico, Oregon, South Dakota, Texas, Utah, Wyoming
|
|
|
69,796
|
|
|
|
582
|
|
Returns center
|
|
West Sacramento, CA
|
|
California, Nevada, Washington, Oregon, Idaho, Alaska, Hawaii
|
|
|
65,400
|
|
|
|
544
|
|
|
|
|
(1)
|
|
Subject to time period and other restrictions, we have the
ability to expand the Dixon distribution center by
161,000 square feet should the need arise.
|
|
(2)
|
|
In fiscal 2007, we completed an approximately 80,000 square
foot expansion of our Phoenix, Arizona distribution center
(included in the square footage noted above).
|
|
(3)
|
|
The distribution center in Belleville is approximately
285,000 square feet and currently services 137 stores. This
distribution facility has the capacity to service approximately
400 stores.
|
25
As of February 3, 2008, all but one of our operating stores
was leased. The expiration dates (including renewal options) of
the store leases are summarized as follows:
|
|
|
|
|
|
|
Number of
|
Years
|
|
Stores
|
|
2008 2009
|
|
|
72
|
|
2010 2011
|
|
|
43
|
|
2012 2013
|
|
|
67
|
|
2014 2020
|
|
|
384
|
|
2021 2030
|
|
|
611
|
|
2031 thereafter
|
|
|
171
|
|
|
|
|
|
|
|
|
|
1,348
|
|
|
|
|
|
|
Additional information regarding our facilities appears in
Item 1, Business, under the captions
Store Operations, Store Formats, and
Warehouse and Distribution.
|
|
Item 3.
|
Legal
Proceedings
|
Securities
Class Action Litigation
On June 9 and 20, 2006, two shareholder class actions alleging
violations of the federal securities laws were filed in the
United States District Court for the District of Arizona against
the Company and four of its former officers: Maynard Jenkins
(who also was a director), James Riley, Martin Fraser and Don
Watson. The cases are entitled Communication Workers of America
Plan for Employees Pensions and Death Benefits v. CSK Auto
Corporation, et al.,
No. CV-06-1503
PHX DGC (Communication Workers) and Wilfred
Fortier v. CSK Auto Corporation, et al.,
No. CV-06-1580
PHX DGC. The cases were consolidated on September 18, 2006
with Communication Workers as the lead case. The consolidated
actions have been brought by lead plaintiff Communication
Workers of America Plan for Employee Pensions and Death Benefits
(the Lead Plaintiff) on behalf of a putative class
of purchasers of CSK Auto Corporation stock between
March 20, 2003 and April 13, 2006, inclusive. Lead
Plaintiff filed an Amended Consolidated Complaint on
November 30, 2006. Lead Plaintiff voluntarily dismissed
James Riley by not naming him as a defendant in the Amended
Consolidated Complaint. The Company and Messrs. Jenkins,
Fraser and Watson (collectively referred to as the
Defendants) filed motions to dismiss the Amended
Consolidated Complaint, which the court granted on
March 28, 2007. The court allowed Lead Plaintiff leave to
amend its complaint, and it filed its Second Amended
Consolidated Complaint on May 25, 2007.
The Second Amended Consolidated Complaint alleges violations of
Section 10(b) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and
Rule 10b-5
promulgated thereunder, as well as Section 20(a) of the
Exchange Act. The Second Amended Consolidated Complaint alleges
that Defendants issued false statements before and during the
putative class period about the Companys income, earnings
and internal controls, allegedly causing the Companys
stock to trade at artificially inflated prices during the
putative class period. It seeks an unspecified amount of
damages. Defendants filed motions to dismiss the Second Amended
Consolidated Complaint on July 13, 2007. On
September 27, 2007, the court issued an order granting the
motion to dismiss Mr. Fraser with prejudice and denying the
motions to dismiss the Company and Messrs. Jenkins and
Watson. On October 24, 2007 the court issued a scheduling
order setting forth a pretrial schedule that contemplates a
trial, if necessary, in March 2009. Lead Plaintiff filed its
motion to certify the class on January 18, 2008 and the
Company filed its response on February 15, 2008. Lead
Plaintiff filed its reply in support of its motion for class
certification on March 14, 2008. A hearing on the motion
was scheduled to take place on March 21, 2008.
Before the hearing on March 21, 2008, and as a result of
ongoing settlement discussions, Lead Plaintiff and the
defendants (including the Company) reached an agreement in
principle to settle the case. Pursuant to the agreement in
principle, the settlement amount will be $10.0 million in
cash (which the Company expects will be paid by its directors
and officers liability insurance) and $1.7 million in the
Companys stock (to be contributed by the Company and
valued at the closing price on March 20, 2008). The Company
would also pay interest on the cash portion of the settlement at
the rate of 5% per annum to the extent that it is not deposited
into the settlement escrow account within 30 days of
March 21, 2008. The agreement in principle also includes
certain corporate governance
26
and contracting policy terms that would apply so long as the
Company remains an independent company. The court has scheduled
a hearing on preliminary approval of the settlement on
April 22, 2008. See Note 22 Subsequent
Events in the notes to the audited consolidated financial
statements included in Item 8 of this Annual Report for
additional information.
Shareholder
Derivative Litigation
On July 31, 2006, a shareholder derivative suit was filed
in the United States District Court for the District of Arizona
against certain of CSKs former officers and certain
current and former directors. The Company was a nominal
defendant. On June 11, 2007, plaintiff filed a Second
Amended Complaint alleging claims under Section 304 of the
Sarbanes-Oxley Act of 2002 and for alleged breaches of fiduciary
duties, abuse of control, gross mismanagement, waste of
corporate assets, and unjust enrichment. The Second Amended
Complaint sought, purportedly on behalf of the Company, damages,
restitution, and equitable and injunctive relief. On
June 22, 2007, the Company filed a motion to dismiss the
Second Amended Complaint for failure to plead demand futility
adequately or, in the alternative, to stay the case until the
shareholder class action litigation is resolved. The individual
defendants joined in the Companys motion. On
August 24, 2007, the court granted the Companys
motion to dismiss the suit based on plaintiffs failure to
adequately plead demand futility. The court entered a judgment
in defendants favor on October 22, 2007. Plaintiff
did not file a notice of appeal in the 30 days allowed for
doing so, and the judgment in defendants favor is now
final.
Governmental
Investigations
The SEC is conducting an investigation related to certain
historical accounting practices of the Company. On
November 27, 2006, the SEC served a subpoena on the Company
seeking the production of documents from the period
January 1, 1997 to the date of the subpoena related
primarily to the types of matters identified in the Audit
Committee-led investigation, including internal controls and
accounting for inventories and vendor allowances. On
December 5, 2006, the SEC also served document subpoenas on
Messrs. Jenkins, Fraser and Watson. Since that time, the
SEC has served subpoenas for documents and testimony on, and
requested testimony from, current and former employees,
officers, directors and other parties it believes may have
information relevant to the investigation. The Companys
Audit Committee has shared with the SEC the conclusions of the
Audit Committee-led investigation. In addition, the
U.S. Attorneys office in Phoenix (the
USAO) and the Department of Justice in
Washington, D.C. (the DOJ) have opened an
investigation related to these historical accounting practices.
Counsel for the Companys Audit Committee has met with the
USAO and DOJ and has shared with them requested information from
the Audit Committee-led investigation. At this time, we cannot
predict when these investigations will be completed or what
their outcomes will be.
Other
Litigation
During fiscal 2007, we accrued approximately $1.5 million
for the estimated costs of settling various regulatory
compliance matters relating to our operating practices. We do
not believe these matters will have a material adverse effect on
our consolidated financial position, results of operations or
cash flows.
We currently and from time to time are involved in other
litigation incidental to the conduct of our business, including
but not limited to asbestos and similar product liability
claims, slip and fall and other general liability claims,
discrimination and employment claims, vendor disputes, and
miscellaneous environmental and real estate claims. The damages
claimed in some of this litigation are substantial. Based on
internal review, we accrue reserves using our best estimate of
the probable and reasonably estimable contingent liabilities. We
do not currently believe that any of these other legal claims
incidental to the conduct of our business, individually or in
the aggregate, will result in liabilities material to our
consolidated financial position, results of operations or cash
flows.
27
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
We held our Combined 2006 and 2007 Annual Meeting of
Stockholders on November 8, 2007. The following are the
results of certain matters voted upon at the meeting:
I. Stockholders elected seven directors to serve until our
2008 Annual Meeting of the Stockholders. The stockholders voted
as follows:
|
|
|
|
|
|
|
|
|
Directors
|
|
Votes for
|
|
Withheld
|
|
Lawrence N. Mondry
|
|
|
39,533,001
|
|
|
|
757,800
|
|
James G. Bazlen
|
|
|
38,725,609
|
|
|
|
1,565,192
|
|
Morton Godlas
|
|
|
38,777,688
|
|
|
|
1,513,113
|
|
Terilyn A. Henderson
|
|
|
38,777,949
|
|
|
|
1,512,852
|
|
Charles K. Marquis
|
|
|
39,481,549
|
|
|
|
809,252
|
|
Charles J. Philippin
|
|
|
38,782,175
|
|
|
|
1,508,626
|
|
William A. Shutzer
|
|
|
38,693,607
|
|
|
|
1,597,194
|
|
There were no broker non-votes with respect to the election of
directors.
II. Stockholders ratified the appointment of
PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending February 3,
2008. The stockholders voted as follows:
|
|
|
|
|
|
|
For: 38,891,131
|
|
Against: 1,388,750
|
|
Abstain: 10,920
|
|
Broker non-vote: 3,838,281
|
III. Stockholders approved an amendment to the
Companys 2004 Stock and Incentive Plan to increase the
total number of shares of common stock available for issuance
under the Plan by 1,500,000 shares. The stockholders voted
as follows:
|
|
|
|
|
|
|
For: 33,921,318
|
|
Against: 3,355,777
|
|
Abstain: 212,932
|
|
Broker non-vote: 6,639,053
|
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Price
Our common stock has been listed on the New York Stock Exchange
under the symbol CAO since March 12, 1998. As of
April 11, 2008, there were 44,033,363 shares of our
common stock outstanding and there were 48 record holders
of our common stock.
The following table sets forth, for the periods indicated, the
high and low sales prices for our common stock as reported by
the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
Price Range of Common Stock
|
|
|
High
|
|
Low
|
|
Fiscal 2007:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
17.83
|
|
|
$
|
16.27
|
|
Second Quarter
|
|
|
19.14
|
|
|
|
12.42
|
|
Third Quarter
|
|
|
13.95
|
|
|
|
10.03
|
|
Fourth Quarter
|
|
|
10.72
|
|
|
|
3.96
|
|
Fiscal 2006:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
16.84
|
|
|
$
|
12.23
|
|
Second Quarter
|
|
|
13.29
|
|
|
|
10.71
|
|
Third Quarter
|
|
|
15.90
|
|
|
|
10.62
|
|
Fourth Quarter
|
|
|
17.27
|
|
|
|
15.17
|
|
28
Performance
Graph
The following graph reflects the cumulative stockholder return
(change in stock price plus reinvested dividends) of a $100
investment in our common stock for the five-year period from
February 2, 2003 through February 3, 2008, in
comparison with the Standard & Poors 500
Composite Stock Index and the Standard & Poors
SmallCap Specialty Stores Index. The comparisons are not
intended to forecast or be indicative of possible future
performance of our common stock. The performance graph shall not
be deemed to be incorporated by reference into our SEC filings
and shall not constitute soliciting material or otherwise be
considered filed under the Securities Act of 1933, as amended,
or the Exchange Act.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among CSK Auto, Inc., The S&P 500 Index
And The S&P SmallCap Specialty Stores
* $100 invested on 2/2/03 in stock or 1/31/03 in
index-including reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright
©
2008, Standard & Poors, a division of The McGraw-Hill
Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
Source: Research Data Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/2/03
|
|
|
|
2/1/04
|
|
|
|
1/30/05
|
|
|
|
1/29/06
|
|
|
|
2/4/07
|
|
|
|
2/3/08
|
|
CSK Auto, Inc.
|
|
|
|
100.00
|
|
|
|
|
196.28
|
|
|
|
|
154.73
|
|
|
|
|
159.96
|
|
|
|
|
165.59
|
|
|
|
|
90.34
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
134.57
|
|
|
|
|
142.96
|
|
|
|
|
157.79
|
|
|
|
|
180.70
|
|
|
|
|
176.52
|
|
S&P SmallCap Specialty Stores
|
|
|
|
100.00
|
|
|
|
|
191.32
|
|
|
|
|
191.27
|
|
|
|
|
199.52
|
|
|
|
|
229.87
|
|
|
|
|
144.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
We have not paid any dividends on our common stock during the
fiscal years shown above. We currently do not intend to pay any
dividends on our common stock.
CSK Auto Corporation is a holding company with no business
operations of its own. It therefore depends upon payments,
dividends and distributions from Auto, its wholly owned
subsidiary, for funds to pay dividends to our stockholders. Auto
currently intends to retain its earnings to fund its working
capital, debt repayment and capital expenditure needs and for
other general corporate purposes. Auto has no current intention
of paying dividends or making other distributions to us in
excess of amounts necessary to pay our operating expenses and
taxes. The Senior Credit Facility, Term Loan Facility and the
indenture under which the
6
3
/
4
% Notes
were issued contain restrictions on Autos ability to pay
dividends or make payments or other distributions to us. See
Note 10 Long-Term Debt to the consolidated
financial statements included in Item 8 of this Annual
Report.
29
|
|
Item 6.
|
Selected
Financial Data
|
The following table sets forth our selected consolidated
statement of operations, balance sheet and operating data. The
selected statement of operations and balance sheet data are
derived from our consolidated financial statements. You should
read the data presented below together with our consolidated
financial statements and related notes included in Item 8,
Financial Statements and Supplementary Data, and the
information in Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year
(1)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts and selected store
data)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,851,647
|
|
|
$
|
1,907,776
|
|
|
$
|
1,651,285
|
|
|
$
|
1,604,991
|
|
|
$
|
1,606,731
|
|
Cost of sales
|
|
|
984,649
|
|
|
|
1,011,712
|
|
|
|
864,674
|
|
|
|
839,564
|
|
|
|
904,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
866,998
|
|
|
|
896,064
|
|
|
|
786,611
|
|
|
|
765,427
|
|
|
|
702,641
|
|
Operating and administrative
|
|
|
804,265
|
|
|
|
788,400
|
|
|
|
653,471
|
|
|
|
629,309
|
|
|
|
624,557
|
|
Investigation and restatement
costs
(2)
|
|
|
12,348
|
|
|
|
25,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities class action
settlement
(8)
|
|
|
11,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store closing
costs
(3)
|
|
|
1,983
|
|
|
|
1,487
|
|
|
|
2,903
|
|
|
|
2,229
|
|
|
|
12,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
36,702
|
|
|
|
80,438
|
|
|
|
130,237
|
|
|
|
133,889
|
|
|
|
65,562
|
|
Interest expense
|
|
|
54,163
|
|
|
|
48,767
|
|
|
|
33,599
|
|
|
|
33,851
|
|
|
|
52,754
|
|
Loss on debt
retirement
(4)
|
|
|
|
|
|
|
19,450
|
|
|
|
1,600
|
|
|
|
1,026
|
|
|
|
49,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of
change in accounting principle
|
|
|
(17,461
|
)
|
|
|
12,221
|
|
|
|
95,038
|
|
|
|
99,012
|
|
|
|
(36,686
|
)
|
Income tax expense (benefit)
|
|
|
(6,309
|
)
|
|
|
4,991
|
|
|
|
37,248
|
|
|
|
39,450
|
|
|
|
(14,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(11,152
|
)
|
|
|
7,230
|
|
|
|
57,790
|
|
|
|
59,562
|
|
|
|
(21,948
|
)
|
Cumulative effect of change in accounting principle, net of
tax
(5)
|
|
|
|
|
|
|
(966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,152
|
)
|
|
$
|
6,264
|
|
|
$
|
57,790
|
|
|
$
|
59,562
|
|
|
$
|
(21,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(0.25
|
)
|
|
$
|
0.16
|
|
|
$
|
1.30
|
|
|
$
|
1.30
|
|
|
$
|
(0.48
|
)
|
Cumulative effect of change in accounting
principle
(5)
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.14
|
|
|
$
|
1.30
|
|
|
$
|
1.30
|
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(0.25
|
)
|
|
$
|
0.16
|
|
|
$
|
1.29
|
|
|
$
|
1.29
|
|
|
$
|
(0.48
|
)
|
Cumulative effect of change in accounting
principle
(5)
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.14
|
|
|
$
|
1.29
|
|
|
$
|
1.29
|
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic per share amounts
|
|
|
43,971
|
|
|
|
43,877
|
|
|
|
44,465
|
|
|
|
45,713
|
|
|
|
45,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted per share amounts
|
|
|
43,971
|
|
|
|
44,129
|
|
|
|
44,812
|
|
|
|
46,002
|
|
|
|
45,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year
(1)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts and selected store data)
|
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
sales
(6)
|
|
$
|
340,545
|
|
|
$
|
320,188
|
|
|
$
|
296,159
|
|
|
$
|
270,812
|
|
|
$
|
271,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Store Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores (end of period)
|
|
|
1,349
|
|
|
|
1,332
|
|
|
|
1,277
|
|
|
|
1,134
|
|
|
|
1,114
|
|
Percentage increase (decrease) in comparable store net
sales
(7)
|
|
|
(3
|
)%
|
|
|
(1
|
)%
|
|
|
|
%
|
|
|
(1
|
)%
|
|
|
6
|
%
|
Balance Sheet Data (end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,520
|
|
|
$
|
20,169
|
|
|
$
|
17,964
|
|
|
$
|
56,229
|
|
|
$
|
36,982
|
|
Total assets
|
|
|
1,138,690
|
|
|
|
1,151,762
|
|
|
|
1,140,034
|
|
|
|
957,151
|
|
|
|
969,588
|
|
Total debt (including current maturities)
|
|
|
519,188
|
|
|
|
531,501
|
|
|
|
577,594
|
|
|
|
508,877
|
|
|
|
534,654
|
|
Stockholders equity
|
|
|
164,538
|
|
|
|
171,510
|
|
|
|
156,157
|
|
|
|
120,139
|
|
|
|
81,497
|
|
|
|
|
(1)
|
|
Our fiscal year consists of 52 or 53 weeks, ends on the
Sunday nearest to January 31 and is named for the calendar year
just ended. All fiscal years presented had 52 weeks except
fiscal 2006, which had 53 weeks.
|
|
(2)
|
|
As further discussed in Note 21 Legal Matters
in the notes to the audited consolidated financial statements
included in Item 8 of this Annual Report, we incurred
approximately $12.3 million and $25.7 million in
legal, accounting consultant and audit fees in fiscal 2007 and
fiscal 2006, respectively, for matters related to the fiscal
2006 Audit Committee-led investigation and the related
restatement of our consolidated financial statements in our
Annual Report on
Form 10-K
for the fiscal year ended January 29, 2006 filed
May 1, 2007 and completion of our delinquent SEC filings
for fiscal 2006.
|
|
(3)
|
|
Amounts relate to costs incurred in connection with the closure
of existing stores. During fiscal 2003, we incurred
$12.2 million associated with the reversal of the reserve
established under Emerging Issues Task Force (EITF)
No. 94-3
and the establishment of a new closed store reserve on the basis
of our change in exit strategy in accordance with Statement of
Financial Accounting Standards (SFAS) No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities
.
|
|
(4)
|
|
In fiscal 2006, we purchased all of our 7% senior
subordinated notes, repaid our
3
3
/
8
%
exchangeable notes and made a payment on termination of an
interest rate swap related to our 7% senior subordinated
notes, which resulted in an aggregate loss on debt retirement of
$19.5 million. The $1.6 million loss on debt
retirement in fiscal 2005 resulted from the write-off of certain
deferred financing fees associated with our former credit
facility, which was repaid. During fiscal 2004, we recorded a
loss on debt retirement of $1.0 million as a result of the
redemption of the $15.0 million remaining balance of our
12% senior notes. During fiscal 2003, we recorded a loss on
debt retirement of $49.5 million primarily due to the early
redemption of 94% of our 12% senior notes.
|
|
(5)
|
|
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R,
Share-Based Payment.
SFAS No. 123R sets accounting requirements for
share-based compensation to employees and requires
companies to recognize the grant-date fair value of stock
options and other equity-based compensation in the income
statement. The Company adopted SFAS No. 123R during
fiscal 2006 using the modified prospective method. In addition
to stock options and restricted stock, the Company granted
incentive units in fiscal 2005 under a long-term incentive plan
(the LTIP) for its senior executive officers, which
are classified as liability awards, and as such, the transition
rule under SFAS No. 123R requires that for an outstanding
instrument that previously was classified as a liability and
measured at intrinsic value, an entity should recognize the
liability that would have been recorded under the fair value
method at the date of adoption, net of any related tax effect,
as the cumulative effect of a change in accounting principle. As
of January 30, 2006, we recognized a cumulative effect of a
change in accounting principle of approximately
$1.0 million, net of $0.6 million tax benefit,
associated with the LTIP.
|
|
(6)
|
|
Represents sales to commercial accounts, including sales from
stores without commercial sales centers.
|
31
|
|
|
(7)
|
|
Comparable store net sales data is calculated based on the
change in net sales commencing after the time a new store has
been open 12 months or an acquired store has been owned by
the Company and open for 12 months. Therefore, sales for
the first 12 months a new store is open or an acquired
store has been owned are not included in the comparable store
calculation. Stores that have been relocated are included in the
comparable store sales calculations immediately.
|
|
(8)
|
|
Amount relates to the agreement in principle reached to settle a
securities class action lawsuit. See Note 21
Legal Matters and Note 22 Subsequent Events in
the notes to the audited consolidated financial statements
included in Item 8 of this Annual Report.
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of financial condition
and results of operations should be read in conjunction with
Selected Financial Data, our consolidated historical
financial statements and the notes to those statements that
appear elsewhere in this report. Our discussion contains
forward-looking statements based upon current expectations that
involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of
events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors,
including those set forth under Note Concerning Forward
Looking Information and Risk Factors elsewhere
in this report.
Merger
Agreement
On April 1, 2008, the Company entered into an Agreement and
Plan of Merger (the Merger Agreement) with
OReilly Automotive, Inc. (OReilly) and
an indirect wholly-owned subsidiary of OReilly pursuant to
which the Company is expected to become a wholly-owned
subsidiary of OReilly (the Acquisition).
In order to effectuate the Acquisition, OReilly has agreed
to commence an exchange offer (the Exchange Offer)
pursuant to which each share of the Companys common stock
tendered in the Exchange Offer will be exchanged for (a) a
number of shares of OReillys common stock equal to
the exchange ratio (as calculated below), plus
(b) $1.00 in cash (subject to possible reduction as
described below). Pursuant to the Merger Agreement, the
exchange ratio will equal $11.00 divided by the
average trading price of OReillys common stock
during the five consecutive trading days ending on and including
the second trading day prior to the closing of the Exchange
Offer; provided, that if such average trading price of
OReillys common stock is greater than $29.95 per
share, then the exchange ratio will be 0.3673, and if such
average trading price is less than $25.67 per share, then the
exchange ratio will be 0.4285. If such average trading price is
less than or equal to $21.00 per share, the Company may
terminate the Merger Agreement unless OReilly exercises
its option to issue an additional number of its shares or
increase the amount of cash to be paid such that the total value
of OReilly common stock and cash exchanged for each share
of the Companys common stock is at least equal to $10.00
(less any possible reduction of the cash component of the offer
price as described below).
Upon completion of the Exchange Offer, any remaining shares of
the Companys common stock will be acquired in a
second-step merger at the same price at which shares of the
Companys common stock were exchanged in the Exchange Offer.
The Acquisition is expected to be completed during the second
quarter of the Companys fiscal year ending
February 1, 2009 (fiscal 2008) and is subject
to regulatory review and customary closing conditions, including
that at least a majority of the Companys outstanding
shares of common stock be tendered in the Exchange Offer and the
expiration or termination of any waiting period (and any
extension thereof) under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
The Merger Agreement includes customary representations,
warranties and covenants by the Company, including covenants
(a) to cease immediately any discussions and negotiations
with respect to an alternate acquisition proposal, (b) not
to solicit any alternate acquisition proposal and, with certain
exceptions, not to enter into discussions concerning or furnish
information in connection with any alternate acquisition
proposal, and (c) subject to certain exceptions, for the
Companys Board of Directors not to withdraw or modify its
recommendation that the Companys stockholders tender
shares into the Exchange Offer. In addition, the Company has
agreed to use reasonable best efforts to obtain appropriate
waivers or consents under the Companys credit or debt
32
agreements and instruments if needed or if requested by
OReilly to remedy any default or event of default
thereunder that may arise after the date of the Merger Agreement
(the Credit Agreement Waivers). The $1.00 cash
component of the offer price for each share of the
Companys common stock tendered in the Exchange Offer will
be subject to reduction in the event that the Company pays more
than $3.0 million to its lenders in order to obtain any
Credit Agreement Waivers. The Company does not anticipate any
need to obtain any Credit Agreement Waivers prior to the
anticipated closing of the Exchange Offer.
The Merger Agreement contains certain termination rights for
both the Company and OReilly, including if the Exchange
Offer has not been consummated or if the expiration or
termination of any waiting period (and any extension thereof)
under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, has not
occurred, in either case on or before the date that is
180 days after the date of the Merger Agreement, and
provisions that permit termination in connection with the
exercise of the fiduciary duties of the Companys Board of
Directors with respect to superior offers. The Merger Agreement
further provides that upon termination of the Merger Agreement
under specified circumstances, the Company may be required to
pay OReilly a termination fee of $22.0 million.
In connection with the Acquisition, OReilly has received a
commitment letter from Lehman Commercial Paper Inc., Lehman
Brothers Inc., Lehman Brothers Commercial Bank, Bank of America,
N.A., and Banc of America Securities LLC to provide a
$1,200.0 million first lien senior secured revolving credit
facility, which OReilly is expected to use, in part, to
repay at the time of the closing of the Exchange Offer all
amounts outstanding and other amounts payable under the
Companys $350.0 million floating rate term loan
facility (the Term Loan Facility) and
$325.0 million senior secured revolving line of credit (the
Senior Credit Facility), following which such
Facilities will be terminated. Thus, although the consummation
of the Exchange Offer would result in an event of default and
the possible acceleration of indebtedness under those
Facilities, it is contemplated that those Facilities will be
repaid in full and cease to exist at the closing of the Exchange
Offer. If the Acquisition is completed as planned, the
Companys $100.0 million of
6
3
/
4
%
senior exchangeable notes (the
6
3
/
4
%
Notes) will remain outstanding. OReillys
acquisition of the Company and the closing of the Exchange Offer
are not conditioned upon the completion of, or availability of
funding under, its committed $1,200.0 million credit
facility.
Term Loan
Facility Financial Covenants
Our Term Loan Facility contains a maximum leverage ratio that we
do not believe at this time we will be able to satisfy beginning
in the first quarter of our fiscal year ending January 31,
2010 (fiscal 2009). In addition to having the
potential to cause a default under the Term Loan Facility at the
end of the first quarter of fiscal 2009, if we do not obtain a
waiver or amendment of that covenant prior to the completion of
our financial statements for the first quarter of fiscal 2008,
our belief that it is probable that this covenant will not be
satisfied for the first quarter of fiscal 2009 will cause us to
have to classify all of our indebtedness under the Term Loan
Facility and the Senior Credit Facility, as well as the
6
3
/
4
%
Notes, as current liabilities in our financial statements
beginning with our financial statements for the first quarter of
fiscal 2008. Furthermore, beginning with the second quarter of
fiscal 2008, we would be required to reduce (to twelve months)
the time period over which we amortize debt issuance costs and
debt discount increasing the interest costs we report in our
financial statements. The classification of all such
indebtedness as current liabilities and the acceleration of the
amortization of interest costs will not cause a default under
our borrowing agreements. However, any such classification could
have adverse consequences upon our relationships with, and the
credit terms upon which we do business with, our vendors,
although we expect such consequences, if any, to be limited due
to the expected closing of the Exchange Offer in the second
quarter of fiscal 2008. The Company does not expect to seek any
waivers or amendments under its credit facilities prior to the
closing of the Exchange Offer as these credit facilities will be
repaid and terminated upon closing of the Exchange Offer.
If the Exchange Offer were to fail to close, prior to the end of
the first quarter of fiscal 2009, we would seek to obtain a
waiver or amendment of certain covenants contained in the Term
Loan Facility, including the maximum leverage ratio covenant. No
assurance can be given that we would be able to obtain such a
waiver or amendment on terms that would be satisfactory to us.
Failure to comply with the financial covenants of the Term Loan
Facility would result in an event of default under the Term Loan
Facility after the first quarter of fiscal 2009, which could
result in possible acceleration of all of our indebtedness
thereunder, under the Senior Credit Facility and under the
33
indenture under which the
6
3
/
4
%
Notes were issued, all of which could have a material adverse
effect on us. See Factors Affecting Liquidity and Capital
Resources Debt Covenants below.
General
CSK Auto Corporation (CSK) is the largest specialty
retailer of automotive parts and accessories in the Western
United States and one of the largest such retailers of such
products in the entire country, based, in each case, on store
count. Headquartered in Phoenix, Arizona, CSK became a publicly
traded company in March 1998, and has continued to grow through
a combination of acquisitions and organic growth.
We compete in the U.S. automotive aftermarket industry and
sell replacement parts (excluding tires), accessories,
maintenance items, batteries and automotive fluids for cars and
light trucks. Our customers include people who work on their own
vehicles, the Do-it-Yourself (DIY) market, and
commercial installers who work on other peoples vehicles,
the Do-it-For-Me (DIFM) market. We believe that the
U.S. automotive aftermarket industry is characterized by
stable demand and is growing modestly because of increases in,
among other things, the age of vehicles in use and the number of
miles driven annually per vehicle.
We have the number one market position in 22 of the 32 major
markets in which we operate, based on store count. As of
February 3, 2008, we operated 1,349 stores in
22 states, with our principal concentration of stores in
the Western United States. Our stores are known by the following
four brand names (referred to collectively as CSK
Stores):
|
|
|
|
|
Checker Auto Parts, founded in 1969, with 487 stores in the
Southwestern, Rocky Mountain and Northern Plains states and
Hawaii;
|
|
|
|
Schucks Auto Supply, founded in 1917, with 222 stores in
the Pacific Northwest and Alaska;
|
|
|
|
Kragen Auto Parts, founded in 1947, with 504 stores primarily in
California; and
|
|
|
|
Murrays Discount Auto Stores, founded in 1972, with 136
stores in the Midwest.
|
In December 2005, we purchased all of the outstanding stock of
Murrays Inc. and its subsidiary, Murrays Discount
Auto Stores, Inc. (collectively herein,
Murrays). As of the acquisition date,
Murrays operated 110 automotive parts and accessories
retail stores in Michigan, Illinois, Ohio and
Indiana states in which the Company previously had
no significant market presence. The 110 acquired Murrays
stores, as well as new stores we open in our Midwest markets,
will retain the Murrays name. The Murrays
acquisition complemented our existing operations and expanded
our markets served from 19 to 22 states.
During fiscal 2007, we opened 38 stores, relocated 7 stores and
closed 28 stores (including the 7 stores closed upon
relocation), resulting in 17 net new stores.
See Strategic Review of the Business and Exploration of
Strategic Alternatives below.
Our fiscal year ends on the Sunday nearest to January 31 and is
named for the calendar year just ended. Occasionally this
results in a fiscal year that is 53 weeks long. When we
refer to a particular fiscal year we mean the following:
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Fiscal 2007 refers to the 52 weeks ended February 3,
2008;
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|
Fiscal 2006 refers to the 53 weeks ended February 4,
2007; and
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|
Fiscal 2005 refers to the 52 weeks ended January 29,
2006.
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Strategic
Review of the Business and Exploration of Strategic
Alternatives
On September 5, 2007, we announced that under the
leadership of our new President and Chief Executive Officer, we
had commenced a comprehensive strategic review of the Company
aimed at improving our profitability and restoring top line
growth.
As part of the initial strategic planning process, we made the
decision to close approximately 40 stores during fiscal 2008. We
performed an asset impairment review on the stores identified to
be closed in accordance with
34
SFAS No. 144,
Accounting for the Impairment of
Disposal of
Long-Lived
Assets,
and recorded a
non-cash
impairment charge of $1.2 million for leasehold assets and
store fixtures that will be sold or otherwise disposed of
significantly before the end of their originally estimated
useful lives. The impairment charge is included in operating and
administrative expenses in the accompanying consolidated
statement of operations.
The strategic review of the Company continued into the fourth
quarter of 2007. In order to focus our attention on our new
store locations and on improving our existing operations with
the greatest potential for success, we refined our fiscal 2008
plan to open 21 new stores, close 47 stores (including
relocations) and relocate 7 stores, resulting in approximately
19 net closed stores anticipated in fiscal 2008. All store
locations currently planned for closure in fiscal 2008 are
leased, and substantially all of these closures are expected to
occur near the end of a non-cancellable lease term, resulting in
minimal closed store costs. The costs of any remaining operating
lease commitments will be recognized in accordance with
SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities,
and as such will be expensed at
the fair value at the date we cease operating the store.
As part of the review of the business, our executive management
team also evaluated the current management structure and
eliminated approximately 160
non-sales
positions, primarily in the corporate and field administration
areas, reorganized the staffing in our corporate offices,
consolidated certain corporate functions, and eliminated several
vice president and other management positions during the third
and fourth quarters of fiscal 2007. A number of executives were
reassigned in order to leverage existing skills and experience
across the team in an effort to continue reducing operating
costs. During the third and fourth quarters of fiscal 2007, we
incurred $2.0 million in severance costs related to these
strategic personnel reductions, and as of February 3, 2008,
the remaining liability for employee severance costs was
approximately $0.9 million.
On December 12, 2007, the Company announced it was seeking
an amendment to its Term Loan Facility in order to minimize the
possibility that it would be unable to comply with the Term Loan
Facilitys fixed charge coverage and leverage ratio
covenants for the fourth quarter of fiscal 2007 and each of the
quarters of fiscal 2008. On December 18, 2007, the Company
entered into a fourth amendment to the Term Loan Facility as
discussed in more detail below under Other Significant
Events Term Loan Facility Amendments.
On December 18, 2007, the Company entered into a fourth
amendment to its Term Loan Facility in order to minimize the
possibility that Auto would be unable to satisfy the Term Loan
Agreements fixed charge coverage and leverage covenants
for the fourth quarter of fiscal 2007 and each of the quarters
of fiscal 2008. This amendment significantly increased the
interest rates payable on amounts borrowed under the Term Loan
Facility, provided the ability under certain circumstances to
pay a portion of the interest charges in kind and imposed
certain capital expenditure limitations.
On December 19, 2007, we announced that we were developing
initiatives intended to increase sales and profitability over
time; however, effective implementation of these initiatives
would require additional cost reductions and incremental
investment in the business to fund operational improvements and
to reduce the Companys current debt level. We also
announced that we were in the process of developing strategies
to raise new capital for the business and reduce our debt
burden, that we had engaged JPMorgan to assist us in these
efforts and that our engagement of JPMorgan also encompassed
acting as our advisor in connection with any divestitures of
assets, sale or merger transaction, or other capital markets or
business combination transaction.
In fiscal 2007, the Company experienced declines in net sales,
same store sales, gross profit and net income as reflected in
this Annual Report. Having recognized the trends that led to
these results and the need to obtain the fourth amendment to the
Term Loan Facility, in January 2008, the Companys Board of
Directors asked JPMorgan to develop and evaluate strategic
alternatives to preserve and maximize shareholder value. As part
of that process, more than 20 parties, including both strategic
parties and financial investors interested in control and
non-control transactions with the Company, were granted access
to non-public information about the Company.
On February 1, 2008, OReilly announced an unsolicited
proposal to acquire all of the outstanding shares of the Company
at $8 per share in cash. OReilly had not prior to that
date participated in the process described above. As discussed
below at Other Significant
Events Unsolicited Proposal and Stockholder
Rights Plan, on February 4, 2008, in response to
OReillys unsolicited proposal, we announced that we
had adopted a stockholder rights plan in order to maintain the
integrity of the strategic review process that our Board of
Directors was then
35
conducting. Subsequently, on February 7, 2008, we announced
that we had entered into a standstill agreement with
OReilly to share non-public information about the Company.
On April 1, 2008, the Company entered into the Merger
Agreement with OReilly and an indirect wholly-owned
subsidiary of OReilly pursuant to which the Company is
expected to become a wholly-owned subsidiary of OReilly.
See Merger Agreement above.
Other
Significant Events
Unsolicited
Proposal and Stockholder Rights Plan
On February 1, 2008, OReilly announced an unsolicited
proposal to acquire all of the outstanding shares of the Company
at $8 per share in cash. OReilly had not prior to that
date participated in the process described under the heading
Strategic Review of the Business and Exploration of
Strategic Alternatives above, although it subsequently
entered into a standstill agreement and has reviewed non-public
information about the Company.
On February 4, 2008, in response to the unsolicited
proposal made by OReilly, we issued a press release
announcing we had adopted a stockholder rights plan (the
Rights Plan) and entered into a Rights Agreement on
the same date with Mellon Investor Services LLC, as Rights
Agent. The Rights Plan was adopted in order to maintain the
integrity of the strategic review process that our Board of
Directors was then conducting.
Under the Rights Plan, one Right was issued for each
share of the Company common stock outstanding as of
February 14, 2008. The Rights will not become exercisable,
and separate certificates evidencing the Rights will not be
issued, unless the Rights are triggered. The Rights would be
triggered by, among other things, a person or group acquiring or
announcing an intention to acquire 10% or more of our common
stock, or upon the consummation of a transaction in which we are
not the surviving entity, the outstanding shares of our common
stock are exchanged for stock or assets of another person, or
50% or more of our consolidated assets or earning power are
sold. If a party exceeds the ownership thresholds and the Rights
are not redeemed, each Right will entitle the holder, other than
the triggering party, to purchase a number of shares of our
common stock having a value of twice the $45 exercise price.
Such an exercise would dilute the triggering partys
holdings in the Company.
The Rights will expire on February 3, 2009, unless the
Rights Plan is extended by our stockholders, in which case, the
Rights will expire on February 4, 2011 (unless earlier
redeemed or exchanged). Subject to certain exceptions, the
Rights are redeemable by action of our Board of Directors at a
nominal price per Right.
Management
Changes
Appointment of New President and Chief Executive Officer;
Appointment of New Board Chairman
On
June 8, 2007, we announced the selection of Lawrence N.
Mondry as our new President and Chief Executive Officer to
succeed our current Chief Executive Officer and Chairman of the
Board, Maynard Jenkins, who had previously announced his intent
to retire. On August 15, 2007, having completed the filing
of our remaining SEC filings for fiscal 2006, we announced
Mr. Jenkins retirement and concurrent resignation
from the Companys Board of Directors, and
Mr. Mondrys appointment to the President and Chief
Executive Officer positions and election to the Board of
Directors. Also on August 15, 2007, we announced that the
Board appointed our lead director, Charles K. Marquis, as our
non-executive Chairman of the Board.
New Executive Vice President of Finance and Chief Financial
Officer
On November 5, 2007, we announced
that James D. Constantine would be joining the Company as our
Executive Vice President of Finance and Chief Financial Officer.
Mr. Constantine commenced employment with the Company on
November 14, 2007. We had previously announced on
June 8, 2007 that our then Senior Vice President and Chief
Financial Officer since October 2005, James B. Riley, had
accepted another position in his home state of Ohio. After his
departure, Steven L. Korby, a partner with Tatum, LLC, who had
been serving as a consultant to the Company since July 2006,
served as our interim Chief Financial Officer.
New Senior Vice President of Finance and
Controller
On September 20, 2007, we
announced that Michael D. Bryk would be joining the Company as
our Senior Vice President of Finance and Controller.
Mr. Bryk commenced employment with the Company on
October 8, 2007. Mr. Bryk also serves as our principal
accounting officer.
36
New Executive Vice President
Merchandising
On August 15, 2007, we
announced that Brian K. Woods had joined the Company as
Executive Vice President Merchandising.
Securities
Class Action Litigation
On March 21, 2008, the lead plaintiff in the securities
class action litigation and the defendants (including the
Company) reached an agreement in principle to settle the case.
Pursuant to the agreement in principle, the settlement amount
will be $10.0 million in cash (which we expect will be paid
by our directors and officers liability insurance) and
$1.7 million in Company stock (to be contributed by the
Company and valued at the closing price of the Companys
stock on March 20, 2008). We would also pay interest on the
cash portion of the settlement at the rate of 5% per annum to
the extent that it is not deposited into the settlement escrow
account within 30 days of March 21, 2008. The
agreement in principle also includes certain corporate
governance and contracting policy terms that would apply so long
as we remain an independent company. The court has scheduled a
hearing to preliminarily approve the settlement on
April 22, 2008. In fiscal 2007, the Company recorded a
charge for the $11.7 million settlement, which is included
in accrued expenses and other current liabilities. The Company
had tendered a claim with its primary insurer, under its
Directors and Officers liability insurance policy, which
participated in the settlement negotiations and has agreed to
fund within its policy limits the $10.0 million cash
portion of the settlement agreement. Such insurer has also
agreed, pursuant to the policy, to reimburse the Company
$5.0 million for certain legal defense costs the Company
has incurred related to the securities class action litigation
described above and the shareholder derivative litigation and
SEC investigation described in Note 21 Legal
Matters in the notes to the audited consolidated financial
statements included in Item 8 of this Annual Report, the
majority of which was reimbursed in fiscal 2007. Such legal
costs were expensed as incurred by the Company and reported as a
component of investigation and restatement costs in the
accompanying Consolidated Statement of Operations. The Company
expects to recognize the insurance defense cost reimbursements
and settlement payments of $15.0 million (in the aggregate)
in results of operations in fiscal 2008 upon preliminary
approval by the court of the settlement, expected in the first
quarter of fiscal 2008. See Note 21 Legal
Matters and Note 22 Subsequent Events in
the notes to the audited consolidated financial statements
included in Item 8 of this Annual Report.
Fiscal
2006 Audit Committee Investigation and Restatement of the
Consolidated Financial Statements
Overview
In our 2005
10-K,
the
Companys consolidated financial statements for fiscal 2004
and 2003 and quarterly financial information for the first three
quarterly periods in fiscal 2005 and all of fiscal 2004 included
in Item 8, Financial Statements and Supplementary
Data, were restated to correct errors and irregularities
of the type identified in the Audit Committee-led investigation
and other accounting errors and irregularities identified by the
Company in the course of the restatement process, all as more
fully described in the Background section below.
The Audit Committee concluded that the errors and irregularities
were primarily the result of actions directed by certain
personnel and an ineffective control environment that, among
other things, permitted the following to occur:
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recording of improper accounting entries as directed by certain
personnel;
|
|
|
|
inappropriate override of, or interference with, existing
policies, procedures and internal controls;
|
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|
|
withholding of information from, and providing of improper
explanations and supporting documentation to, the Companys
Audit Committee and Board of Directors, as well as its internal
auditors and independent registered public accountants; and
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|
|
discouraging employees from raising accounting related concerns
and suppressing accounting related inquiries that were made.
|
In September 2006, upon the substantial conclusion of the Audit
Committee-led investigation, the Company announced the
departures of the Companys President and Chief Operating
Officer, Chief Administrative Officer (who, until October 2005,
served as the Companys Senior Vice President and Chief
Financial Officer) and several other individuals (including its
Controller) within the Companys Finance organization.
37
Management, with the assistance of numerous experienced
accounting consultants (other than its firm of independent
registered public accountants) that the Company had retained
near the onset of the investigation to assist the new Chief
Financial Officer with the restatement efforts, continued to
review the Companys accounting practices and identified
additional errors and irregularities, which were corrected in
the restatements.
Background
In the Companys 2004
10-K,
management concluded that the Company did not maintain effective
internal control over financial reporting as of January 30,
2005 due to the existence of material weaknesses as described in
the 2004
10-K.
The
plan for remediation at that time called for, among other
things, the Company to enhance staffing and capabilities in its
Finance organization. During fiscal 2005, we made several
enhancements to our Finance organization including the October
2005 hiring of a new Senior Vice President and Chief Financial
Officer. In the fourth quarter of fiscal 2005, new personnel in
our Finance organization raised questions regarding the
existence of inventory underlying certain general ledger account
balances and an internal audit of vendor allowances raised
additional concerns about the processing and collections of
vendor allowances. Managements review of these matters
continued into our fiscal 2005 year-end financial closing
process. In early March 2006, it became apparent that
inventories and vendor allowances were potentially misstated and
that the effect was potentially material to the Companys
previously issued consolidated financial statements. The Audit
Committee, acting through a Special Investigation Committee
appointed by the Audit Committee consisting of the Audit
Committee Chairman and the Companys designated Presiding
Director, retained independent legal counsel who, in turn,
retained a separate nationally recognized accounting firm (other
than the Companys independent registered public
accountants) to assist it in conducting an independent
investigation relative to accounting errors and irregularities,
relating primarily to the Companys historical accounting
for its inventories and vendor allowances.
On March 23, 2006, the Audit Committee concluded that, due
to accounting errors and irregularities then noted, the
Companys (i) fiscal 2004 consolidated financial
statements, as well as its consolidated financial statements for
fiscal years 2003, 2002 and 2001, (ii) selected
consolidated financial data for each of the five years in the
period ended January 30, 2005, (iii) interim financial
information for each of its quarters in fiscal 2003 and fiscal
2004 included in its 2004 Annual Report, and (iv) interim
financial statements included in its
Form 10-Qs
for the first three quarterly periods of fiscal 2005, should no
longer be relied upon. On March 27, 2006, the Company
announced that it would be postponing the release of its fourth
quarter and fiscal 2005 financial results pending the outcome of
the Audit Committee-led investigation; that it would be
restating historical financial statements; and that the
Companys consolidated financial statements for the prior
interim periods and fiscal years indicated above should no
longer be relied upon.
The initial and primary focus of the Audit Committee-led
investigation was the Companys accounting for inventory
and for vendor allowances associated with its merchandising
programs. However, the Audit Committee did not limit the scope
of the investigation in any respect, which was subsequently
broadened to encompass other potential concerns raised during
the course of the investigation. Throughout and upon completion
of the investigation, representatives of the Audit Committee and
its legal and accounting advisors shared the results of the
investigation with the Companys independent registered
public accounting firm and the SEC, which is conducting a formal
investigation of these matters. As noted above, the Company
continues to share information and believes it is cooperating
fully with the SEC in its formal investigation.
During and following the Audit Committee-led investigation, the
Companys Finance personnel (consisting primarily of the
Companys then new Chief Financial Officer and numerous
experienced finance/accounting consultants the Company had
retained near the onset of the investigation to assist the Chief
Financial Officer with the restatement efforts), assisted by the
Companys Internal Audit staff, conducted
follow-up
procedures to ensure that the information uncovered during the
investigation was complete, evaluated the initial accounting for
numerous transactions and reviewed the activity in accounts in
light of the newly available information to determine the
propriety of the initial record-keeping and accounting. In the
course of these
follow-up
procedures, the Company also identified a number of other
accounting errors and irregularities that were corrected in our
restated consolidated financial statements in our 2005
10-K.
38
The legal and accounting advisors to the Audit Committee, from
March through the end of September 2006, reviewed relevant
documentation and interviewed current and former officers and
employees of the Company. The investigation and restatement
process identified numerous instances of improperly supported
journal entries recorded to general ledger accounts, override of
Company policies and procedures, absence of appropriately
designed policies and procedures, misapplication of GAAP and
other ineffective controls. In addition, the investigation
identified evidence of both a tone among certain
senior executives of the Company that discouraged the raising of
accounting concerns and other behavior that was deemed to not be
acceptable by our disinterested directors (i.e., the five of our
directors, including the members of the Special Investigation
Committee, who are not present or former members of our
management) (hereinafter, the Disinterested
Directors).
On September 28, 2006, the Company announced the
substantial completion of the Audit Committee-led investigation,
and that the investigation had identified accounting errors and
irregularities that materially and improperly impacted various
inventory accounts, vendor allowance receivables, other accrual
accounts and related expense accounts. In addition, the Company
announced personnel changes and also announced its intent to
implement remedial measures in the areas of enhanced accounting
policies, internal controls and employee training.
Following the completion of the Audit Committee-led
investigation, the Board of Directors created a Remediation
Committee comprised of certain positions within key functional
areas of the Company and co-chaired by the General Counsel and
the Chief Financial Officer to develop a remediation plan to
address the types of matters identified during the
investigation. The remediation plan the Remediation Committee
has been working with reflects the input of the Disinterested
Directors. While many aspects of the remediation plan have been
implemented, other aspects of the plan are presently in the
development phase or scheduled for later implementation. This
remediation plan includes a comprehensive review, and
development or modification as appropriate, of various
components of the Companys compliance program, including
ethics and compliance training, hotline awareness and education,
corporate governance training, awareness of and education
relative to key codes and policies, as well as departmental
specific measures. See discussion under Managements
Report on Internal Control Over Financial Reporting
Plan for Remediation of Material Weaknesses in
Item 9A, Controls and Procedures.
The Audit Committee-led investigation and restatement process
resulted in legal, accounting consultant and audit expenses of
approximately $25.7 million in fiscal 2006. Legal,
accounting consultant and audit expenses relative to the
securities class action and shareholder derivative litigation,
regulatory investigations, completion of the restatement process
(relative to the fiscal 2005
10-K
filed
May 1, 2007) and completion of our fiscal 2006
delinquent filings continued into fiscal 2007 and totaled
approximately $12.3 million. We expect to continue to incur
legal expenses during fiscal 2008 related to the regulatory
investigations and securities class action litigation.
Debt
Refinancing
Our inability to timely file our periodic reports with the SEC
as a result of the need to restate our financial statements as
discussed above created potential default implications under all
of our debt instruments. As a result, in July 2006, we completed
a cash tender offer and consent solicitation for
$224.96 million of our then held 7% senior
subordinated notes (the 7% Notes) and repaid
all of the then held
3
3
/
8
% senior
exchangeable notes (the
3
3
/
8
% Notes)
upon the acceleration of their maturity. We used proceeds from
our $350.0 million Term Loan Facility, entered into in June
2006, to pay the tender offer consideration for the
7% Notes and to repay the
3
3
/
8
% Notes.
We also obtained the consent of the holders of a majority of the
outstanding
4
5
/
8
% senior
exchangeable notes (the
4
5
/
8
% Notes)
to enter into a supplemental indenture to the indenture under
which the
4
5
/
8
% Notes
were issued to waive any default arising from our filing delays,
increase the applicable coupon interest rate to
6
3
/
4
%,
and improve the exchange rate of the notes from
49.8473 shares of our common stock per $1,000 principal
amount of notes to 60.6061 shares of our common stock per
$1,000 principal amount of the notes (hereinafter, these notes
are referred to as the
6
3
/
4
% Notes).
Senior
Credit Facility Waivers
On June 11, 2007, we executed a third waiver to our
$325 million Senior Credit Facility with respect to the
stated time periods under the facility to deliver annual and
quarterly financial statements for fiscal 2006 and
39
quarterly financial statements for the first quarter of fiscal
2007 and the related periodic SEC reports for these periods,
which, subject to the specific terms and conditions of the
waiver, was designed to allow us until August 15, 2007 to
complete such filings. See Liquidity and Capital
Resources Senior Credit Facility
Revolving Line of Credit and Factors Affecting
Liquidity and Capital Resources Debt
Covenants. On August 10, 2007, we entered into a
fourth waiver to our Senior Credit Facility that extended the
deadline of the third waiver relating to the delivery thereunder
of our delinquent periodic SEC filings and related financial
statements. Upon the filing of the Quarterly Report for the
second quarter of fiscal 2007 on October 12, 2007, we had
filed all previously delinquent periodic SEC filings, and the
waiver of the filing deadlines described above terminated.
Term
Loan Facility Amendments
We have amended our Term Loan Facility four times. The terms of
the fourth amendment are discussed in greater detail below.
Included in the second amendment was a revision to the
definition of the term Leverage Ratio, which revised
it to exclude undrawn letters of credit, which had typically
been excluded from this calculation in our prior debt
agreements. The last three amendments each increased the maximum
leverage ratio for certain future quarterly periods to minimize
the possibility that we would be unable to comply with the
Facilitys leverage ratio covenants for such future
quarterly periods.
On December 18, 2007, we entered into the fourth amendment
to the Term Loan Facility and paid an amendment fee of
approximately $3.5 million. The amendment decreased the
minimum fixed charge coverage ratio from 1.40:1 to 1.25:1 for
the fourth quarter of fiscal 2007, 1.20:1 for the first quarter
of fiscal 2008, 1.15:1 for the second quarter of fiscal 2008,
and 1.20:1 for the third and fourth quarters of fiscal 2008. The
amendment also increased the maximum leverage ratios permitted
under the Facility from 4.00:1 to 5.30:1 for the fourth quarter
of fiscal 2007, from 3.85:1 to 5.80:1 for the first quarter of
fiscal 2008, from 3.75:1 to 6.00:1 for the second quarter of
fiscal 2008, from 3.50:1 to 5.75:1 for the third quarter of
fiscal 2008, and from 3.25:1 to 4.50:1 for the fourth quarter of
fiscal 2008.
The fourth amendment also increased the spreads used to
calculate the rate at which funds borrowed under the Term Loan
Facility accrue interest to 5.00%, 6.00% or 7.00%, in the case
of loans bearing interest based on the LIBOR rate, and 4.00%,
5.00% or 6.00%, in the case of loans bearing interest at a base
rate, in each case depending on our then-current corporate
ratings. At December 18, 2007, the applicable interest rate
under the Term Loan Facility became LIBOR plus 5%. As of
February 3, 2008, the applicable interest rate under the
Term Loan Facility was LIBOR plus 7% as our corporate credit
rating was lowered to B- by Standard & Poors on
January 23, 2008.
In addition to the covenant and interest rate changes described
above, the fourth amendment added a prepayment penalty with
respect to optional prepayments and mandatory prepayments
required in connection with debt and equity issuances, asset
sales and recovery events equal to 1% of any loans under the
Term Loan Facility that are prepaid prior to the second
anniversary of the fourth amendment. The amendment also added
the option, the availability of which depends on our
then-current corporate ratings, to pay in kind 50 basis
points per annum or 100 basis points per annum, depending
on our then-current corporate ratings, of any interest accruing
on and after January 8, 2008 by adding such amount to the
principal of the loans under the Term Loan Facility as of the
interest payment date on which such interest payment is due. The
amendment also added a limitation on capital expenditures by the
Company of $25 million for each of fiscal 2008 and fiscal
2009, provided that any portion of such amount not expended in
fiscal 2008 may be carried over for expenditure during the
first two quarters of fiscal 2009. See Factors Affecting
Liquidity and Capital Resources Debt Covenants.
Under the terms of the fourth amendment, the maximum leverage
ratio permitted in the first quarter of fiscal 2009 decreases
significantly to 3:25:1 to 1 from 5.75:1 in the third quarter of
fiscal 2008 and 4.50:1 in the fourth quarter of fiscal 2008.
Based on our current financial forecast, we do not expect to be
able to satisfy this covenant for the first quarter of fiscal
2009. If that continues to be the case, we would be in default
under the Term Loan Facility as of the end of the first quarter
of fiscal 2009 unless we first obtained a covenant waiver or an
amendment to revise that ratio to one we could satisfy.
40
Review of
Operations
The following discussion summarizes the significant factors
affecting operating results for fiscal 2007, 2006 and 2005. This
discussion and analysis should be read in conjunction with the
consolidated financial statements and notes to the consolidated
financial statements. References to years relate to fiscal years
rather than calendar years unless otherwise designated. Results
for the past three years expressed as a percentage of net sales
for the periods indicated were as follows:
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|
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|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 3,
|
|
February 4,
|
|
January 29,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
53.2
|
%
|
|
|
53.0
|
%
|
|
|
52.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
46.8
|
%
|
|
|
47.0
|
%
|
|
|
47.6
|
%
|
Other costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and administrative
|
|
|
43.4
|
%
|
|
|
41.3
|
%
|
|
|
39.6
|
%
|
Investigation and restatement costs
|
|
|
0.7
|
%
|
|
|
1.3
|
%
|
|
|
0.0
|
%
|
Securities class action settlement
|
|
|
0.6
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Store closing costs
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
2.0
|
%
|
|
|
4.3
|
%
|
|
|
7.8
|
%
|
Interest expense
|
|
|
2.9
|
%
|
|
|
2.6
|
%
|
|
|
2.0
|
%
|
Loss on debt retirement
|
|
|
0.0
|
%
|
|
|
1.0
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of
change in accounting principle
|
|
|
(0.9
|
)%
|
|
|
0.7
|
%
|
|
|
5.7
|
%
|
Income tax expense (benefit)
|
|
|
(0.3
|
)%
|
|
|
0.3
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(0.6
|
)%
|
|
|
0.4
|
%
|
|
|
3.4
|
%
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
0.0
|
%
|
|
|
(0.1
|
)%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(0.6
|
)%
|
|
|
0.3
|
%
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007 Compared with Fiscal 2006; Fiscal 2006 Compared with Fiscal
2005
Net
Sales
Net sales and sales data for these years were as follows (sales
$ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales and Sales Data
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Retail sales
|
|
$
|
1,511,102
|
|
|
$
|
1,587,588
|
|
|
$
|
1,355,126
|
|
Commercial sales
|
|
|
340,545
|
|
|
|
320,188
|
|
|
|
296,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,851,647
|
|
|
$
|
1,907,776
|
|
|
$
|
1,651,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales growth retail sales
|
|
|
(4.8
|
)%
|
|
|
17.2
|
%
|
|
|
2.0
|
%
|
Sales growth commercial sales
|
|
|
6.4
|
%
|
|
|
8.1
|
%
|
|
|
9.4
|
%
|
Sales growth comparable retail stores
|
|
|
(4.4
|
)%
|
|
|
(3.4
|
)%
|
|
|
(1.6
|
)%
|
Sales growth comparable commercial stores
|
|
|
5.8
|
%
|
|
|
7.7
|
%
|
|
|
8.1
|
%
|
Number of stores open (at end of fiscal year)
|
|
|
1,349
|
|
|
|
1,332
|
|
|
|
1,277
|
|
41
Retail sales represent sales to the DIY customer. Commercial
sales represent sales to commercial accounts, including such
sales from stores without commercial sales centers. We evaluate
comparable (or same-store) sales based on the change
in net sales commencing after the time a new store has been open
or an acquired store has been owned by the Company for
12 months. Therefore, sales for the first 12 months a
new store is open or an acquired store is owned are not included
in the comparable store calculation. Stores that have been
relocated are included in the comparable store sales
calculations immediately.
Net sales for fiscal 2007 decreased 2.9%, or $56.2 million,
compared to fiscal 2006. Net sales were $1,851.6 million in
fiscal 2007, compared to $1,907.8 in fiscal 2006. The decrease
in net sales was primarily due to one additional week of sales
in the 2006 fiscal year, which resulted in additional sales of
approximately $34.3 million, as well as a decrease in same
store sales, the effects of which were partially offset by sales
from 17 net new stores added during fiscal 2007. Total same
store sales declined by 2.7%. Same store retail sales, which
make up the majority of our sales, declined 4.4%, compared to a
3.4% decline in fiscal 2006. Same store commercial sales
increased 5.8%, compared to a 7.7% increase in fiscal 2006.
Commercial sales continue to increase due to our continued
emphasis on growing our commercial business as the commercial
market has a higher growth rate than the retail market. The
decline in total same store sales was due to a decline in
customer count of 5.7% (measured by the number of in-store
transactions in stores that have been opened more than one
year), which was partially offset by an increase in the average
transaction size of 3.2% (measured by dollars spent per sale
transaction). The Company believes that same store sales during
this period were adversely affected by new store
openings both of the Companys stores and our
competitors stores, and by persistent high gas prices and
the deterioration in general economic conditions.
Net sales for fiscal 2006 increased 15.5%, or
$256.5 million, to $1,907.8 million from
$1,651.3 million for fiscal 2005 due primarily to the full
year results of the Murrays stores acquired in December
2005, the increase of 55 net new stores and one additional
week in the 2006 fiscal year. Retail sales increased 17.2% in
fiscal 2006 as compared to fiscal 2005, while our commercial
sales increased 8.1% in fiscal 2006 as compared to fiscal 2005.
Our comparable store sales declined 1.5% in fiscal 2006 compared
to 2005, consisting of a 7.7% increase in same store commercial
sales offset by a decrease of 3.4% in same store retail sales.
Retail and commercial sales were impacted by a decline in
customer count of 5.4% (measured by the number of in-store
transactions in stores that have been opened more than one
year); however, that decline was offset by an increase in our
average transaction size of 4.2% (measured by dollars spent per
sale transaction) over fiscal 2005. The additional week in the
fourth quarter of fiscal 2006 yielded additional sales of
approximately $34.3 million.
Sales from the acquired Murrays stores contributed to our
overall increase in net sales for fiscal 2006 relative to fiscal
2005 but, as these stores were not acquired until
December 19, 2005, they had no impact on our comparable
sales results until December 19, 2006 (i.e., the one year
anniversary of our acquisition). The Company had anticipated
that Murrays existing store base would experience an
increase in net sales during fiscal 2006; in fact, net sales
declined. In addition, 14 new Murrays stores were opened
during fiscal 2006 and these stores fell short of targeted
sales. The Company believes the Murrays sales were
adversely impacted by, among other things, difficult economic
conditions in our Midwest markets as well as by a significant
influx of competitive new stores in the Chicago market area.
We believe our net sales in fiscal 2007 and fiscal 2006 were
negatively impacted by persistent high gas prices, particularly
in California, where many of our stores are located. The Company
also believes that comparable store sales in these periods were
adversely affected by new store openings both of CSK
Stores and competitors stores. During these periods, sales
in the Companys new stores have failed to increase at the
rate they have historically. Finally, we believe that our
financial performance since early fiscal 2006 has also been
negatively impacted by the distraction, uncertainty and
diversion of management and other resources associated with the
Audit Committee-led investigation, restatement process and
related matters, and the significant management changes that
were effected during this period. In response to the continuing
customer count decline and decreased comparable store retail
sales, the Company has been engaged in an ongoing effort to:
(1) review and refine our core product categories, such as
batteries, brakes, shocks, starters and alternators, to ensure
that we are meeting our customers expectations;
(2) add new product offerings as we deem appropriate to
give our customers additional reasons to shop our stores; and
(3) review our marketing programs, sales promotions, event
marketing and sports sponsorships to build customer
42
awareness and help drive store traffic. In addition, under the
leadership of our new President and Chief Executive Officer, we
have commenced a comprehensive strategic review of the Company
aimed at improving our profitability and restoring top line
growth. See discussion above at Strategic Review of the
Business and Exploration of Strategic Alternatives.
Gross
Profit
Gross profit consists primarily of net sales less the cost of
sales. Costs of sales includes the total cost of merchandise
sold including freight expenses associated with moving
merchandise inventories from our vendors to our distribution
centers and warehouses, vendor allowances and cash discounts on
payments to vendors, inventory shrinkage, warranty costs, costs
associated with purchasing and operating the distribution
centers and warehouses, and freight expense associated with
moving merchandise inventories from the distribution centers to
our retail stores. Gross profit as a percentage of net sales may
be affected by net sales volume, variations in our channel mix
and our product mix, price changes in response to competitive
factors, changes in our shrink expense, warranty expense and
warehousing and distribution costs, and fluctuations in
merchandise costs and vendor programs. Gross profit may not be
comparable to other companies as it does not include payroll,
occupancy, and depreciation costs for our retail locations.
Gross profit for fiscal 2007 decreased 3.2%, or
$29.1 million, compared to fiscal 2006. Gross profit was
$867.0 million, or 46.8% of net sales, for fiscal 2007, as
compared to $896.1 million, or 47.0% of net sales, for
fiscal 2006. The decrease in gross profit dollars was primarily
the result of the decline in sales and lower vendor allowances
partially offset by a reduction in shrink expense in fiscal
2007. The decrease in the gross profit percentage for fiscal
2007 as compared to fiscal 2006 was caused by a number of
factors, including sales mix and a higher level of clearance
activity in fiscal 2007 compared to fiscal 2006, higher
warehousing and distribution costs, higher warranty costs, and
an increase in commercial sales, which carry lower gross profit
percentages. These factors were partially offset by an increase
in the aforementioned reduction in shrink expense in fiscal 2007
as compared to fiscal 2006.
Gross profit was $896.1 million, or 47.0% of net sales, for
fiscal 2006 as compared to $786.6 million, or 47.6% of net
sales, for fiscal 2005. During fiscal 2006, our gross profit
dollars increased due to increased sales (primarily due to the
full year impact of the acquisition of Murrays). The gross
profit percentage fell 60 basis points as we experienced
declines in our comparable retail sales per store, which carry
higher margins than the shift to commercial sales. In addition,
the stores acquired from Murrays have historically had a
lower margin as their sales had a smaller percentage of
hard parts, which carry higher margins, thereby
further reducing the composite margin.
Operating
and Administrative Expenses
Operating and administrative expenses are comprised of store
payroll, store occupancy, advertising expenses, other store
expenses and general and administrative expenses, which include
salaries and related benefits of corporate employees,
administrative office occupancy expenses, data processing,
professional expenses and other related expenses.
Operating and administrative expenses were $804.3 million,
or 43.4% of net sales, in fiscal 2007, compared to
$788.4 million, or 41.3% of net sales, in fiscal 2006.
Operating and administrative expenses increased
$15.9 million primarily as a result of expenses associated
with the additional 17 net new stores added from
February 5, 2007 through February 3, 2008, a full year
of operating costs associated with the additional 55 net
new stores added in fiscal 2006, inflationary costs at existing
stores for such items as increased rent and other occupancy
related costs, $4.3 million in fees for accounting
contractors and auditing services, $1.5 million of accruals
for estimated costs of settling various regulatory compliance
matters, and the asset impairment charge of $1.2 million
and severance costs of $2.0 million resulting from the
strategic plan initiated in the third and fourth quarters of
fiscal 2007 discussed in Strategic Review of the Business
and Exploration of Strategic Alternatives above. These
factors were partially offset by higher costs in fiscal 2006 due
to the 53rd week included in fiscal 2006, as well as a
decrease in bonuses in fiscal 2007.
43
Operating and administrative expenses increased to
$788.4 million, or 41.3% of net sales for fiscal 2006,
compared to $653.5 million, or 39.6% of net sales, in
fiscal 2005. Operating expenses increased primarily as a result
of an additional 55 net new stores at higher rents, the
full year impact of the acquisition of the Murrays stores
in December 2005, and slight increases in payroll and employee
benefit related costs. The roll out of commercial sales centers
opening primarily in the Great Lakes and Chicago regions added
costs as they ramped up during the year. The 53rd week
included in fiscal 2006 was an additional contributor to the
increased costs.
Investigation
and Restatement Costs
The Audit Committee-led investigation and restatement process
and subsequent completion of our delinquent fiscal 2005 and 2006
SEC filings, our response to the related governmental
investigations, and the defense of the shareholder class action
and derivative lawsuits described in Note 21
Legal Matters in the notes to the audited consolidated financial
statements included in Item 8 of this Annual Report
resulted in legal, accounting consultant and audit expenses of
$12.3 million in fiscal 2007, compared to
$25.7 million incurred in fiscal 2006. Legal and audit
expenses have continued into fiscal 2008; however, we expect
these expenses will be of a lesser magnitude compared to those
incurred in fiscal 2007.
Store
Closing Costs
Store closing costs include amounts for new store closures,
revisions in estimates for stores currently in the closed store
reserve, accretion expense, and operating and other expenses.
Store closing costs in fiscal 2007 were $2.0 million
compared to $1.5 million for fiscal 2006. Costs increased
primarily due to an increase in the provision for store closing
costs, which was caused by an increase in the number of stores
closed during fiscal 2007 as compared to fiscal 2006.
Store closing costs in fiscal 2006 were $1.5 million
compared to $2.9 million for fiscal 2005. Costs in fiscal
2005 included revisions in the closed store estimates of
$1.5 million that did not recur in fiscal 2006.
Securities
Class Action Settlement
See Other Significant Events Securities Class
Action Litigation above.
Interest
Expense
Interest expense for fiscal 2007 increased to $54.2 million
from $48.8 million for fiscal 2006 primarily as a result of
the higher rates paid by us following our Term Loan Facility
amendments in fiscal 2007, a reduction in our credit rating and
our 2006 refinancing activities, which increased rates for the
second half of fiscal 2006. Our weighted average interest rate
for fiscal 2007 increased to approximately 10.94% as compared to
approximately 7.79% for fiscal 2006.
Interest expense for fiscal 2006 increased to $48.8 million
from $33.6 million for fiscal 2005 primarily as a result of
the higher rates paid by us following our refinancing activities
in fiscal 2006. Our inability to file our financial statements
in a timely manner resulted in the refinancing of substantially
all of our debt at significantly higher interest rates in fiscal
2006.
Loss
on Debt Retirement
During the second quarter of fiscal 2006, we recorded a
$19.5 million loss on debt retirement resulting from the
write-off of certain deferred financing fees associated with
debt that was extinguished in our refinancing and a
$10.4 million loss on termination of a related interest
swap associated with our $225 million of 7% Notes,
$224.96 million of which were purchased pursuant to a cash
tender offer and consent solicitation in July 2006 and the
balance of which were purchased by us later in fiscal 2006.
44
During the second quarter of fiscal 2005, we recorded a
$1.6 million loss on debt retirement resulting from the
write-off of certain deferred financing fees associated with our
former credit facility, which was repaid in full as part of a
refinancing completed in August 2005.
Income
Tax Expense (Benefit)
Income tax benefit for fiscal 2007 was $6.3 million,
compared to income tax expense of $5.0 million for fiscal
2006 (excluding the tax benefit allocated to the change in
accounting principle). Our effective tax rate was 36.1% in
fiscal 2007, compared to 40.8% in fiscal 2006. See
Note 13 Income Taxes in the notes to the
audited consolidated financial statements included in
Item 8 of this Annual Report.
Income tax expense (excluding the tax benefit allocated to the
change in accounting principle) for fiscal 2006 was
$5.0 million, compared to $37.2 million for fiscal
2005. This decrease was a reflection of significantly lower
pre-tax income in fiscal 2006. Our effective tax rate was 40.8%
in fiscal 2006 compared to 39.2% in fiscal 2005.
Net
Income (Loss)
In fiscal 2007, we had a net loss of $11.2 million, or a
net loss of $0.25 per diluted common share, compared to net
income of $6.3 million, or net income of $0.14 per diluted
common share, in fiscal 2006.
In fiscal 2006, net income decreased to $6.3 million, or
$0.14 per diluted common share, compared to net income of
$57.8 million, or $1.29 per diluted common share, in fiscal
2005.
Cumulative
Effect of Change in Accounting Principle
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123R,
Share-Based
Payment.
SFAS No. 123R sets accounting
requirements for share-based compensation to
employees and requires companies to recognize the grant-date
fair value of stock options and other equity-based compensation
in the income statement. We adopted SFAS No. 123R at
the beginning of fiscal 2006 using the modified prospective
method. In addition to stock options and restricted stock, the
Company granted incentive units in fiscal 2005 under a long-term
incentive plan (the LTIP) for its senior executive
officers, which are classified as liability awards, and as such,
the transition rule under SFAS No. 123R requires that
for an outstanding instrument that previously was classified as
a liability and measured at intrinsic value, an entity should
recognize the liability that would have been recorded under the
fair value method at the date of adoption, net of any related
tax effect, as the cumulative effect of a change in accounting
principle. At the beginning of fiscal 2006, we recognized a
cumulative effect of a change in accounting principle of
approximately $1.0 million, net of a $0.6 million tax
benefit, associated with the LTIP.
Liquidity
and Capital Resources
Debt is an important part of our overall capitalization. Our
outstanding debt balances (excluding capital leases) at the end
of fiscal 2007 and 2006 were $503.0 million and
$507.5 million, respectively. Our primary cash requirements
include working capital (primarily inventory), interest on our
debt and capital expenditures. As a result of the borrowing base
limitations of our Senior Credit Facility, at February 3,
2008, we had approximately $161.7 million of availability
under our Senior Credit Facility. However, the maximum leverage
covenant under our $350.0 million Term Loan Facility limits
the total amount of indebtedness we can have outstanding and, as
of February 3, 2008, would have only permitted additional
borrowings of approximately $110.9 million, regardless of
which facility they were borrowed under. The Term Loan Facility
was amended on October 10, 2007 to increase the maximum
leverage ratios permitted under the Facility, as described under
Debt Covenants below. The Term Loan Facility was
further amended on December 18, 2007 to, among other
things, modify the minimum fixed charge coverage ratios and the
maximum leverage ratios contained in the Facility for the fourth
quarter of fiscal 2007 and each of the quarters of fiscal 2008,
as described above under Other Significant
Events Term Loan Facility Amendments and under
Debt Covenants below.
45
We are required to make quarterly debt principal payments of
0.25% of the aggregate principal amount of the loans under our
Term Loan Facility beginning December 31, 2006. We paid
approximately $3.5 million in debt principal payments under
this Facility in fiscal 2007, and expect to pay approximately
$3.4 million in fiscal 2008. We are not required to make
debt principal payments on our Senior Credit Facility until
2010. Our
6
3
/
4
% Notes
become exchangeable if our common stock price exceeds $21.45 per
share for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the
preceding fiscal quarter. Such an exchange would require
repayment of the principal amount of the
6
3
/
4
% Notes
in cash and any premium in our common stock. If not exchangeable
sooner, the earliest date that the noteholders may require us to
repurchase the
6
3
/
4
% Notes
is December 15, 2010.
We intend to fund our cash requirements with cash flows from
operating activities, borrowings under our Senior Credit
Facility and short-term trade credit relating to payment terms
for merchandise inventory purchases. We believe these sources
should be sufficient to meet our cash needs for the foreseeable
future. However, if we become subject to significant judgments,
settlements or fines related to the matters discussed in
Item 3, Legal Proceedings or any other matters,
we could be required to make significant payments that could
materially and adversely affect our financial condition,
potentially impacting our credit ratings, our ability to access
the capital markets and our compliance with our debt covenants.
In fiscal 2006, we completed a tender offer for our
7% senior subordinated notes (7% Notes),
in which we repurchased $224.96 million of the
7% Notes, and we repaid all $125.0 million of our
3
3
/
8
% senior
exchangeable notes
(3
3
/
8
% Notes)
upon the acceleration of their maturity. We entered into the
$350.0 million Term Loan Facility, proceeds from which were
used to pay the tender offer consideration for the 7% Notes
and to repay the
3
3
/
8
% Notes
upon their acceleration. We also entered into a waiver with
respect to our Senior Credit Facility and a supplemental
indenture to the indenture under which our
6
3
/
4
% Notes
were originally issued. The supplemental indenture increased the
applicable coupon interest rate from
4
5
/
8
%
to
6
3
/
4
%,
and improved the exchange rate of the notes from
49.8473 shares of our common stock per $1,000 principal
amount of the notes to 60.6061 shares of our common stock
per $1,000 principal amount of the notes.
See the Factors Affecting Liquidity and Capital
Resources Debt Covenants section below for a
discussion of our compliance with debt covenants.
Term
Loan Facility
In June 2006, CSK Auto, Inc. (Auto), a wholly-owned
subsidiary of CSK Auto Corporation, entered into a
$350 million six-year Term Loan Facility so that it could
finance the purchase of approximately $225 million in
aggregate principal amount of its 7% Notes and the
repayment of $125 million of its
3
3
/
8
% Notes.
The loans under the Term Loan Facility (Term Loans)
bear interest at a base rate or the LIBOR rate, plus a margin
that fluctuates depending upon the Companys corporate
rating. At February 3, 2008, loans under the Term Loan
Facility bore interest at 11.625%. The Term Loans are guaranteed
by the Company and CSKAUTO.COM, Inc., a wholly owned subsidiary
of Auto. The Term Loans are secured by a second lien security
interest in certain assets, primarily inventory and receivables,
of Auto and the guarantors and by a first lien security interest
in substantially all of their other assets. The Term Loans call
for repayment in consecutive quarterly installments, which began
on December 31, 2006, in an amount equal to 0.25% of the
aggregate principal amount of the Term Loans, with the balance
payable in full on the sixth anniversary of the closing date,
June 30, 2012. Issuance costs incurred in fiscal 2006
associated with the Term Loan Facility were approximately
$10.7 million and are being amortized over the six-year
term of the facility.
On October 10, 2007, we entered into the third amendment to
the Term Loan Facility. An amendment fee of approximately
$0.9 million was paid in connection with this amendment and
the cost is being amortized over the remaining term of the Term
Loan Facility. The amendment increased the spreads used to
calculate the rate at which funds borrowed under the Term Loan
Facility accrue interest by either 0.25% or 0.50% and changed
the basis for determining the spread amount from the rating of
the Term Loans to the Companys corporate rating. Based on
the Companys corporate rating at the time of the
amendment, the interest rate on funds borrowed under the Term
Loan
46
Facility increased by 0.50% as a result of the amendment. The
amendment also altered certain covenant provisions, which were
subsequently amended by a fourth amendment to the Term Loan
Facility.
On December 18, 2007, we entered into a fourth amendment to
the Term Loan Facility. An amendment fee of approximately
$3.5 million was paid in connection with this amendment and
the cost is being amortized over the remaining term of the Term
Loan Facility. The amendment increased the spreads used to
calculate the rate at which funds borrowed under the Term Loan
Facility accrue interest to 5.00%, 6.00% or 7.00% in the case of
loans bearing interest based on the LIBOR rate, and 4.00%, 5.00%
or 6.00%, in the case of loans bearing interest at a base rate,
in each case depending on the Companys then-current
corporate ratings. At December 18, 2007, the applicable
interest rate under the Term Loan Facility became LIBOR plus 5%,
an increase of 1.25%, as a result of the amendment. The
amendment also modified the minimum fixed charge coverage ratios
and the maximum leverage ratios contained in the Term Loan
Facility for the fourth quarter of fiscal 2007 and each of the
quarters of fiscal 2008. See Factors Affecting Liquidity
and Capital Resources Debt Covenants below.
In addition to the covenant and interest rate changes, the
fourth amendment added a prepayment penalty with respect to
optional prepayments and mandatory prepayments required in
connection with debt and equity issuances, asset sales and
recovery events, equal to 1% of any loans under the Term Loan
Facility that are prepaid prior to the second anniversary of the
fourth amendment. The amendment also added the option, the
availability of which depends on the Companys then-current
corporate ratings, to pay in kind 50 basis points per annum
or 100 basis points per annum, depending on the
Companys then-current corporate ratings, of any interest
accruing on and after January 8, 2008 by adding such amount
to the principal of the loans under the Term Loan Facility as of
the interest payment date on which such interest payment is due.
The amendment also added a limitation on annual capital
expenditures by the Company of $25 million, which is less
than we have spent historically, for each of fiscal 2008 and
fiscal 2009, provided that any portion of such amount not
expended in fiscal 2008 may be carried over for expenditure
during the first two quarters of fiscal 2009. In fiscal 2008, we
expect to incur approximately $17.5 million of capital
expenditures, which will reflect the anticipated opening of
fewer stores than we have in prior years.
The Term Loan Facility contains, among other things, limitations
on liens, indebtedness, mergers, disposition of assets,
investments, payments in respect of capital stock, modifications
of material indebtedness, changes in fiscal year, transactions
with affiliates, lines of business and swap agreements. Auto is
also subject to financial covenants under the Term Loan Facility
measuring its performance against standards set for leverage and
fixed charge coverage. Under the maximum leverage covenant
(total debt to EBITDA) contained in the Term Loan Facility, as
amended on December 18, 2007 to increase the maximum
leverage ratios permitted under the Facility, at
February 3, 2008, we would have only been permitted to have
$110.9 million of additional debt outstanding, regardless
of which facility such debt was borrowed under. See
Factors Affecting Liquidity and Capital
Resources Debt Covenants below.
Senior
Credit Facility Revolving Line of
Credit
In July 2005, Auto entered into a $325 million Senior
Credit Facility that is guaranteed by the Company and
CSKAUTO.COM, Inc. Borrowings under the Senior Credit Facility
bear interest at a variable interest rate based on one of two
indices, either (i) LIBOR plus an applicable margin that
varies (1.25% to 1.75%) depending upon Autos average daily
availability under the agreement measured using certain
borrowing base tests, or (ii) the Alternate Base Rate (as
defined in the agreement). At February 3, 2008, loans under
the Senior Credit Facility bore interest at a weighted average
rate of 5.30%. The Senior Credit Facility matures in July 2010.
During the second quarter of fiscal 2006 and during fiscal 2007,
we entered into waivers under the Senior Credit Facility that
allowed us to delay filing certain periodic reports with the
SEC. Upon the filing of the Quarterly Report for the second
quarter of fiscal 2007 on October 12, 2007, we had filed
all previously delinquent periodic SEC filings, and the waiver
of the filing deadlines described above terminated.
Availability under the Senior Credit Facility is limited to the
lesser of the revolving commitment of $325.0 million and an
amount determined by a borrowing base limitation. The borrowing
base limitation is based upon a formula involving certain
percentages of eligible inventory and accounts receivable owned
by Auto. As a
47
result of the limitations imposed by the borrowing base formula,
at February 3, 2008, Auto could borrow up to
$161.7 million in addition to the $46.5 million
borrowed under the Senior Credit Facility at February 3,
2008 and the $29.4 million of letters of credit outstanding
under the Senior Credit Facility at that date. However, the
maximum leverage covenant of the Term Loan Facility described
above limits the total amount of indebtedness we can have
outstanding and, as of February 3, 2008, would have only
permitted approximately $110.9 million of additional
borrowings, regardless of which facility they were borrowed
under.
Loans under the Senior Credit Facility are collateralized by a
first priority security interest in certain of our assets,
primarily inventory and accounts receivable, and a second
priority security interest in certain of our other assets. The
Senior Credit Facility contains negative covenants and
restrictions on actions by Auto and its subsidiaries including,
without limitation, restrictions and limitations on
indebtedness, liens, guarantees, mergers, asset dispositions,
investments, loans, advances and acquisitions, payment of
dividends, transactions with affiliates, change in business
conducted, and certain prepayments and amendments of
indebtedness. In addition, Auto is, under certain circumstances
not applicable during fiscal 2007, subject to a minimum ratio of
consolidated earnings before interest, taxes, depreciation,
amortization and rent expense, or EBITDAR, to fixed charges (as
defined in the agreement, the Fixed Charge Coverage
Ratio) under a Senior Credit Facility financial
maintenance covenant. However, under the second waiver we
entered into during fiscal 2006 and under all subsequent
waivers, Auto was required to maintain a minimum 1:1 Fixed
Charge Coverage Ratio until the termination of such waivers. The
filing of the Quarterly Report for the second quarter of fiscal
2007 resulted in the termination of the requirement to maintain
the minimum 1:1 Fixed Charge Coverage Ratio imposed by these
waivers.
48
6
3
/
4
% Notes
We have $100.0 million of
6
3
/
4
% Notes
outstanding. The
6
3
/
4
% Notes
are exchangeable into cash and shares of our common stock. Upon
exchange of the
6
3
/
4
% Notes,
we will deliver cash equal to the lesser of the aggregate
principal amount of notes to be exchanged and our total exchange
obligation and, in the event our total exchange obligation
exceeds the aggregate principal amount of notes to be exchanged,
shares of our common stock in respect of that excess. The
following table sets forth key terms of the
6
3
/
4
% Notes:
|
|
|
|
Terms
|
|
|
6
3
/
4
% Notes
|
|
|
|
|
Interest Rate
|
|
|
6.75% per year until December 15, 2010; 6.50% thereafter
|
|
|
|
|
Exchange Rate
|
|
|
60.6061 shares per $1,000 principal (equivalent to an
initial exchange price of approximately $16.50 per share)
|
|
|
|
|
Maximum CSK shares exchangeable
|
|
|
6,060,610 common shares, subject to adjustment in certain
circumstances
|
|
|
|
|
Maturity date
|
|
|
December 15, 2025
|
|
|
|
|
Guaranteed by
|
|
|
CSK Auto Corporation and all of Autos present and future
domestic subsidiaries, jointly and severally, on a senior basis
|
|
|
|
|
Dates that the noteholders may require Auto to repurchase some
or all for cash at a repurchase price equal to 100% of the
principal amount of the notes being repurchased, plus any
accrued and unpaid interest
|
|
|
December 15, 2010, December 15, 2015, and December 15, 2020 or
following a fundamental change as described in the indenture
|
|
|
|
|
Issuance costs being amortized over a
5-year
period, corresponding to the first date the noteholders could
require repayment
|
|
|
$3.7 million
|
|
|
|
|
Auto will not be able to redeem notes
|
|
|
Prior to December 15, 2010
|
|
|
|
|
Auto may redeem for cash some or all of the notes
|
|
|
On or after December 15, 2010, upon at least 35 calendar
days notice
|
|
|
|
|
Redemption price
|
|
|
Equal to 100% of the principal amount plus any accrued and
unpaid interest and additional interest, if any, to, but not
including, the redemption date
|
|
|
|
|
Prior to their stated maturity, these Notes are exchangeable by
the holder only under the following circumstances:
|
|
|
|
|
During any fiscal quarter (and only during that fiscal quarter)
commencing after January 29, 2006, if the last reported
sale price of our common stock is greater than or equal to 130%
of the exchange price for at least 20 trading days in the
period of 30 consecutive trading days ending on the last trading
day of the preceding fiscal quarter;
|
|
|
|
If the
6
3
/
4
% Notes
have been called for redemption by Auto; or
|
|
|
|
Upon the occurrence of specified corporate transactions, such as
a change in control, as described in the indenture under which
the
6
3
/
4
% Notes
were issued.
|
49
If the
6
3
/
4
% Notes
become exchangeable, the corresponding debt will be reclassified
from long-term to current for as long as the notes remain
exchangeable.
We have entered into a registration rights agreement with
respect to the
6
3
/
4
% Notes
and the underlying shares of our common stock into which the
6
3
/
4
% Notes
are potentially exchangeable. Under its terms, as we failed to
meet certain filing and effectiveness deadlines with respect to
the registration of the
6
3
/
4
% Notes
and the underlying shares of our common stock, we were paying
additional interest of 50 basis points on the
6
3
/
4
% Notes
until the earlier of the date the
6
3
/
4
% Notes
were no longer outstanding or the date two years after the date
of their issuance. The latter condition was met during the
fourth quarter of fiscal 2007 and, accordingly, we are no longer
paying additional interest of 50 basis points on the
6
3
/
4
% Notes.
During the second quarter of fiscal 2006, we entered into a
supplemental indenture that increased the exchange rate of the
6
3
/
4
% Notes
from 49.8473 shares of our common stock per $1,000
principal amount of
6
3
/
4
% Notes
to 60.6061 shares of our common stock per $1,000 principal
amount of
6
3
/
4
% Notes.
We recorded the increase in the fair value of the exchange
option as a debt discount with a corresponding increase to
additional
paid-in-capital
in stockholders equity. The debt discount was
$7.7 million and is being amortized to interest expense
following the effective interest method to the first date the
noteholders could require repayment. Total amortization of the
debt discount was $1.6 million for the year ended
February 3, 2008.
Analysis
of Cash Flows
Operating
Activities
Net cash provided by operating activities was $54.1 million
in fiscal 2007, compared to $109.6 million during fiscal
2006, or a decrease of $55.5 million. The decrease in
operating cash flow was due to a decrease in net income of
$17.4 million, as well as a decrease in accounts payable.
Reduced cash inflow relative to these factors was partially
offset by an increase in cash provided by accounts receivable
collections related to vendor allowances and the timing of
prepaid expenses.
Net cash provided by operating activities decreased
$52.7 million in fiscal 2006 to $109.6 million,
compared to $162.3 million of cash provided by operating
activities in fiscal 2005. This decrease was primarily related
to the Audit Committee-led investigation and restatement related
professional fees of approximately $25.7 million, the
reduction in operating profit before investigation costs due to
the reduced operating performance and cash required to terminate
our interest rate swap. Partially offsetting these decreases was
an increase in accounts payable.
Investing
Activities
Net cash used in investing activities totaled $36.4 million
for fiscal 2007, compared to $43.6 million used during
fiscal 2006. The majority of the decrease is attributable to
$4.3 million in cash payments in fiscal 2006 related
to the Murrays acquisition and the purchase of a
Murrays franchise store in fiscal 2006. Also, our capital
expenditures were $2.7 million lower in fiscal 2007
compared to fiscal 2006 primarily because we opened fewer
stores in fiscal 2007.
Net cash used in investing activities totaled $43.6 million
for fiscal 2006, compared to $215.9 million used during
fiscal 2005, which included the acquisition of Murrays in
December 2005. In fiscal 2006, we paid the remaining costs
associated with the Murrays acquisition of approximately
$2.8 million, as well as approximately $1.5 million in
cash (plus assumed liabilities) for the acquisition of a
Murrays franchised store. Capital expenditures during
fiscal 2006 were slightly higher as a result of investments made
to support new store openings. In fiscal 2006, we opened or
relocated 72 stores and closed 17 stores (including eight
relocated stores), which resulted in 55 net new stores. New
stores are generally financed utilizing operating leases that
require capital expenditures for fixtures and store equipment.
New or relocated stores require approximately $136,000 per store
for leasehold improvements, and each new store, except for
relocated stores, requires an estimated investment in working
capital, principally for inventories, of approximately $300,000.
50
In December 2005, we acquired Murrays, and as of
January 29, 2006, we paid approximately
$177.6 million, net of $0.5 million cash acquired,
towards this acquisition (approximately $2.8 million was
recorded in accrued liabilities at February 4, 2007, for a
total acquisition cost of $180.9 million).
Financing
Activities
Net cash used in financing activities totaled $21.4 million
for fiscal 2007, compared to $63.8 million in fiscal 2006.
In fiscal 2007, we had net payments of $5.5 million under
our Senior Credit Facility compared to $42.0 million of net
payments in fiscal 2006. In addition, we paid $13.2 million
of debt issuance costs in fiscal 2006, compared to
$5.4 million of costs related to our Term Loan Facility
amendments in fiscal 2007. Payments of capital lease obligations
were $8.5 million in fiscal 2007 compared to
$10.3 million in fiscal 2006.
Net cash used in financing activities totaled $63.8 million
for fiscal 2006, compared to net cash provided of
$15.3 million in fiscal 2005. In fiscal 2006, we paid down
$42.0 million under our Senior Credit Facility and
$10.3 million for capital leases. In fiscal 2006, the
inability to file our periodic SEC reports necessitated that we
restructure a significant portion of our then outstanding debt
in June and July of 2006. We completed a tender offer in which
we repurchased approximately $225 million of our
7% Notes and repaid all $125 million of our
3
3
/
8
% Notes
upon the acceleration of their maturity. We also entered into
the $350 million Term Loan Facility, which was used to fund
such transactions.
Off-Balance
Sheet Arrangements and Contractual Obligations
We lease our office and warehouse facilities, all but one of our
retail stores and most of our vehicles and equipment. Certain of
the vehicles and equipment leases are classified as capital
leases and, accordingly, the asset and related obligation are
recorded on our balance sheet. However, substantially all of our
store leases are operating leases with private landlords and
provide for monthly rental payments based on a contractual
amount. The majority of these lease agreements are for base
lease periods ranging from 10 to 20 years, with three to
five renewal options of five years each. Certain store leases
also provide for contingent rentals based upon a percentage of
sales in excess of a stipulated minimum. We believe that the
long duration of our store leases offers security for our store
locations without the risks associated with real estate
ownership.
We have seller financing arrangements related to debt
established for stores in which we were the seller-lessee and
did not recover substantially all construction costs. In those
situations, we recorded our total cost in property plant and
equipment and amounts funded by the lessor as a debt obligation
on our balance sheet. Rental payments made to the lessor are
charged in part to interest expense and reduce the corresponding
debt based on amortization schedules.
Our contractual obligations under our capital and operating
leases as of February 3, 2008 were as follows
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligation
|
|
Total
|
|
|
Within 1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
After 5 Years
|
|
|
Long-term debt
|
|
$
|
502,971
|
|
|
$
|
50,551
|
|
|
$
|
103,043
|
|
|
$
|
338,004
|
|
|
$
|
11,373
|
|
Interest on long-term debt
|
|
|
221,519
|
|
|
|
52,171
|
|
|
|
97,871
|
|
|
|
62,838
|
|
|
|
8,639
|
|
Capital lease obligations
|
|
|
18,349
|
|
|
|
7,423
|
|
|
|
9,024
|
|
|
|
1,664
|
|
|
|
238
|
|
Operating lease
obligations
(1)
|
|
|
896,697
|
|
|
|
152,431
|
|
|
|
256,748
|
|
|
|
196,492
|
|
|
|
291,026
|
|
Other
(2)
|
|
|
40,997
|
|
|
|
19,277
|
|
|
|
19,712
|
|
|
|
870
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
1,680,533
|
|
|
$
|
281,853
|
|
|
$
|
486,398
|
|
|
$
|
599,868
|
|
|
$
|
312,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating lease obligations are not reduced to reflect sublease
income.
|
|
(2)
|
|
Includes service contracts and other obligations.
|
51
In addition, as of February 3, 2008, we have
$9.8 million of unrecognized income tax benefits as a
result of our adoption of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No, 109
(FIN 48), on February 5, 2007. We do
not expect these unrecognized income tax benefits to result in
cash payments over the next twelve months. Beyond the next year,
timing of any cash payments are uncertain.
We have contractual obligations for stores for which we closed
prior to the end of the lease term. We attempt to sublease
closed locations and reduce the remaining lease payments owed by
the estimated sublease income. We expect net cash outflows for
closed store locations as of fiscal 2007 year-end of
approximately $1.3 million during fiscal 2008. These future
cash outflows are expected to be funded from normal operating
cash flows. It is anticipated that approximately 47 stores in
fiscal 2008 will be closed or relocated. We anticipate that the
majority of these closures will occur near the end of the lease
terms, resulting in minimal closed store costs. As a result,
closed store expenses for these stores will principally relate
to the period costs of actually closing the stores and
transporting the Companys inventory, fixtures and other
assets we own in the store.
Factors
Affecting Liquidity and Capital Resources
Sales
Trends
Our business is somewhat seasonal in nature, with the highest
sales occurring in the months of June through October
(overlapping our second and third fiscal quarters). In addition,
our business is affected by weather conditions. While unusually
severe or inclement weather tends to reduce sales, as our
customers are more likely to defer elective maintenance during
such periods, extremely hot and cold temperatures tend to
enhance sales by causing auto parts to fail and sales of
seasonal products to increase. Higher gasoline prices, such as
we experienced during periods of fiscal 2007 and 2006, may also
adversely affect our revenues because our customers may defer
purchases of certain items as they use a higher percentage of
their income to pay for gasoline. Additionally, we believe that
our sales are impacted by general economic conditions, and that
our sales in fiscal 2007 were adversely affected by the
deterioration in general economic conditions.
Inflation
We do not believe our operations have been materially affected
by inflation. We believe that we will be able to mitigate the
effects of future merchandise cost increases principally through
economies of scale resulting from increased volumes of
purchases, selective forward buying and the use of alternative
suppliers and price increases. If we are not able to mitigate
the effects of future merchandise cost increases through these
or other measures, the fixed cost of our organic growth will
adversely affect our profitability. We also experience
inflationary increases in rent expense as some of our lease
agreements are adjusted based on changes in the consumer price
index.
Debt
Covenants
Certain of our debt agreements at February 3, 2008
contained negative covenants and restrictions on actions by us
and our subsidiaries including, without limitation, restrictions
and limitations on indebtedness, liens, guarantees, mergers,
asset dispositions, investments, loans, advances and
acquisitions, payment of dividends, transactions with
affiliates, change in business conducted, and certain
prepayments and amendments of indebtedness.
Auto is, under certain circumstances not applicable during the
year ended February 3, 2008, subject to a minimum ratio of
consolidated earnings before interest, taxes, depreciation,
amortization and rent expense, or EBITDAR, to fixed charges (as
defined in the agreement, the Fixed Charge Coverage
Ratio) under a Senior Credit Facility financial
maintenance covenant; however, under the second waiver we
entered into during the second quarter of fiscal 2006 and under
all subsequent waivers, Auto was required to maintain a minimum
1:1 Fixed Charge Coverage Ratio until the termination of such
waiver and all subsequent waivers. The filing of the Quarterly
Report for the second quarter of fiscal 2007 resulted in the
termination of the requirement to maintain the minimum
1:1 Fixed Charge Coverage Ratio imposed by these waivers.
For the twelve months ended February 3, 2008, we would have
been in compliance with this covenant had it been applicable.
52
The Term Loan Facility contains certain financial covenants, one
of which is the requirement of a minimum fixed charge coverage
ratio (as separately defined in the Term Loan Facility). At
February 3, 2008, the minimum fixed charge coverage ratio
was 1.25:1 for the fourth quarter of fiscal 2007, 1.20:1 for the
first quarter of fiscal 2008, 1.15:1 for the second quarter of
fiscal 2008, 1.20:1 for the third and fourth quarters of fiscal
2008, and 1.45:1 thereafter. For the twelve months ended
February 3, 2008, this ratio was 1.37:1. The ratios for
fiscal 2007 and 2008 reflect the December 18, 2007 fourth
amendment to the Term Loan Facility.
The Term Loan Facility also requires that a leverage ratio test
be met. The December 18, 2007 fourth amendment to the Term
Loan Facility increased the maximum leverage ratios permitted
under the Term Loan Facility for the fourth quarter of fiscal
2007 and for each of the quarters of fiscal 2008. The amendment
increased the maximum leverage ratios as of February 3,
2008 to 5.30:1 for the fourth quarter of fiscal 2007, 5.80:1 for
the first quarter of fiscal 2008, 6.00:1 for the second quarter
of fiscal 2008, 5.75:1 for the third quarter of fiscal 2008, and
4.50:1 for the fourth quarter of fiscal 2008, while leaving all
other ratios unchanged. The leverage ratios decline to 3.25:1
after the end of fiscal 2008 and further decline to 3.00:1 at
the end of our fiscal year ending January 31, 2010. As of
February 3, 2008, our actual leverage ratio was 4.37:1.
Based on our current financial forecast for fiscal 2008, we
believe we will remain in compliance with the financial
covenants of the Senior Credit Facility and Term Loan Facility
during fiscal 2008. A significant decline in our net sales or
gross margin from what is currently forecasted or anticipated
could limit the effectiveness of discretionary actions
management could take to maintain compliance with the financial
covenants in fiscal 2008. Although we do not expect such
significant declines to occur, if they did occur, we may seek to
obtain a covenant waiver or amendment from our lenders or seek a
refinancing, all of which we believe are viable options for the
Company should the Acquisition not occur. However, there can be
no assurances a waiver or amendment could be obtained or a
refinancing could be achieved.
The maximum leverage ratio permitted in the first quarter of
fiscal 2009 decreases significantly to 3.25:1 from 5.75:1 in the
third quarter of fiscal 2008 and 4.50:1 in the fourth quarter of
fiscal 2007. Based on our current financial forecast, we do not
expect to be able to satisfy this covenant for the first quarter
of fiscal 2009. If that continues to be the case, it would mean
that if we were unable to obtain a covenant waiver or an
amendment to revise that ratio to one we could satisfy, we would
be in default under the Term Loan Facility as of the end of the
first quarter of fiscal 2009. If we still expect that would be
the case at the end of the first quarter of fiscal 2008, we
would need to classify as a current liability all of our
outstanding indebtedness for monies borrowed under the Term Loan
Facility, the Senior Credit Facility and our
6
3
/
4
%
Notes as of May 4, 2008, meaning it could be anticipated to
become due within twelve months as a result of such default
at the end of the first quarter of fiscal 2009. Furthermore,
beginning with the second quarter of fiscal 2008, we would be
required to reduce (to twelve months) the time period over which
we amortize debt issuance costs and debt discount increasing the
interest costs we report in our financial statements.
The classification of all such indebtedness as current
liabilities and the acceleration of the amortization of interest
costs will not cause a default under our borrowing agreements.
However, any such classification could have adverse consequences
upon our relationships with, and the credit terms upon which we
do business with, our vendors, although we expect such
consequences, if any, to be limited due to the expected closing
of the Exchange Offer in the second quarter of fiscal 2008. See
Merger Agreement above.
If the Exchange Offer were to fail to close, prior to the end of
the first quarter of fiscal 2009, we would seek to obtain a
waiver or amendment of certain covenants contained in the Term
Loan Facility, including the maximum leverage ratio covenant. No
assurance can be given that we would be able to obtain such a
waiver or amendment on terms that would be satisfactory to us.
Failure to comply with the financial covenants of the Term Loan
Facility would result in an event of default under the Term Loan
Facility following the first quarter of fiscal 2009, which could
result in possible acceleration of all of our indebtedness
thereunder, under the Senior Credit Facility and under the
indenture under which the
6
3
/
4
%
Notes were issued, all of which could have a material adverse
effect on us.
Upon the occurrence and during the continuance of an event of
default under the Senior Credit Facility or the Term Loan
Facility, the lenders thereunder could elect to terminate the
commitments thereunder (in the case of the Senior Credit
Facility only), declare all amounts owing thereunder to be
immediately due and payable and exercise
53
the remedies of a secured party against the collateral granted
to them to secure such indebtedness. If the lenders under either
the Senior Credit Facility or the Term Loan Facility accelerate
the payment of the indebtedness due thereunder, we cannot be
assured that our assets would be sufficient to repay in full
such indebtedness, which is collateralized by substantially all
of our assets. At February 3, 2008, we were in compliance
with the covenants under all our debt agreements.
Credit
Ratings
As of the date of this filing, our corporate rating and our debt
ratings by the major debt rating agencies is shown below:
|
|
|
|
|
|
|
Moodys Rating
|
|
Standard & Poors
|
|
Corporate
|
|
B+1
|
|
B−
|
Term Loan Facility
|
|
Ba3
|
|
B−
|
6
3
/
4
% Notes
|
|
B3
|
|
CCC
|
With respect to Moodys, a rating of Baa or
above indicates an investment grade rating. A rating below
Baa is considered to have speculative elements. A
Ba ranking indicates an obligation that is judged to
have speculative elements and is subject to substantial credit
risk. A B rating from Moodys signifies an
obligation that is considered speculative and is subject to high
credit risk. The 1, 2 and 3
modifiers show the relative standing within a major category. A
1 indicates that an obligation ranks in the higher
end of the broad rating category, a 2 indicating a
mid-range ranking, and a 3 ranking at the lower end
of the category.
With respect to Standard & Poors, a rating of
BBB or above indicates an investment grade rating. A
rating below BBB indicates that the security has
significant speculative characteristics. A B rating
indicates that Standard and Poors believes the issuer has
the capacity to meet its financial commitment on the obligation,
but that adverse business, financial, or economic conditions
will likely impair the obligors capacity or willingness to
meet its financial commitment to the obligation. Standard and
Poors may modify its ratings with a + or a
− sign to show the obligors relative
standing within a major rating category.
Interest
Rates
Financial market risks relating to our operations result
primarily from changes in interest rates. Interest earned on our
cash equivalents as well as interest paid on our variable rate
debt are sensitive to changes in interest rates.
Under our current debt and capital lease agreements, as of
February 3, 2008, 76% of our outstanding debt and capital
leases was at variable interest rates and 24% of our outstanding
debt was at fixed interest rates. As of February 3, 2008,
with $392.1 million in variable rate debt outstanding, a 1%
change in the LIBOR rate to which this variable rate debt is
tied would result in a $3.9 million change in our annual
interest expense. This estimate assumes that our debt balance
remains constant for an annual period and the interest rate
change occurs at the beginning of the period. Our variable rate
debt relates to borrowings under our Senior Credit Facility and
Term Loan Facility, which are vulnerable to movements in the
LIBOR rate.
Critical
Accounting Matters
The preparation of our financial statements requires us to make
critical accounting estimates that affect the amounts reported
in those financial statements. We define a critical accounting
estimate as one that is both significant to the portrayal of our
financial condition and results of operations, and requires
managements most difficult, subjective or complex
judgments. Periodically throughout the fiscal year, we evaluate
our accounting estimates based on historical experience, current
results, future projections, and other relevant factors and make
adjustments as appropriate. The application of certain of these
policies requires significant judgments and estimates that can
affect the results of operations and the financial position of
the Company, as well as the related footnote disclosures. The
Company bases its estimates on historical experience and other
assumptions that it believes are most likely to occur. The
disclosures below note situations in which it is reasonably
likely or probable that future
54
financial results could be impacted by changes in these
estimates and assumptions. The term reasonably likely refers to
an occurrence that is more than remote but less than probable in
the judgment of management. The term probable refers to an
occurrence that is likely to occur in the judgment of management.
Inventory
Valuation
Inventories are valued at the lower of cost or market, cost
being determined utilizing the
First-in,
First-Out (FIFO) method. We maintain inventory in
stores, parts depots and distribution centers. A physical
inventory count is performed at each store, parts depot and
distribution center at least once during the fiscal year. Due to
the fact that we have numerous stores, parts depots and
distribution centers, physical inventory counts are performed
throughout the fiscal year. Typically, physical inventory counts
for the distribution centers are scheduled for later in the
fiscal year. At each balance sheet date, we adjust our inventory
carrying balances by an estimated allowance for inventory
shrinkage that has occurred since the most recent physical
inventory and an allowance for inventory obsolescence, each of
which is discussed in greater detail below.
|
|
|
|
|
We reduce the FIFO cost of our inventory for estimated loss due
to shrink since the most recent physical inventory. Shrink
estimates for each store are determined by dividing the shrink
loss based on the most recent physical inventory by the sales
for that store since its previous physical inventory. The
resulting percentage for each store is multiplied by the sales
for that store since the last physical inventory through
reporting period end. Shrink allowances for each parts depot and
distribution center are determined in a similar manner. The
shrink amount, based on the most recent physical inventory at
the parts depot or distribution center, is divided by the
inventory receipts at the location since the previous physical
inventory. The resulting percentage for each parts depot or
distribution center is multiplied by the receipts for that
location since the last physical inventory through the reporting
period end. We adjust shrink expense for differences between
physical counts and our accrual rates throughout the year in the
period the physical inventory adjustment is determined. Shrink
expense for the fiscal years ended 2007, 2006 and 2005 was
approximately $23.8 million, $31.6 million and
$28.8 million, respectively. As a percentage of cost of
goods sold, shrink expense for fiscal 2007, 2006, and 2005 was
2.4%, 3.1% and 3.3%, respectively. While the shrink accrual is
based on recent experience, it is an estimate and thus it is
probable that actual losses will be higher or lower than
estimated. Included in the shrink expense amounts above were
physical count accrual adjustments which increased (decreased)
shrink expense by approximately ($4.1) million,
$1.0 million and $1.2 million for fiscal 2007, 2006
and 2005, respectively. The decrease in physical count accrual
adjustments in fiscal 2007 resulted primarily from lower than
expected shrink expense in the Companys Phoenix
distribution center and the Murrays distribution center
acquired in December 2005. The distribution center accrual
adjustments were recorded in the fourth quarter of fiscal 2007
when the physical inventories were taken.
|
|
|
|
In certain instances, we retain the right to return obsolete and
excess merchandise inventory to our vendors. In situations where
we do not have a right to return, we record an allowance
representing an estimated loss for the difference between the
cost of any obsolete or excess inventory and the estimated
retail selling price. Inventory levels and gross margins earned
on all products are monitored monthly. On a quarterly basis, we
assess whether we expect to sell a significant amount of
inventory below cost and, if so, estimate and record an
allowance. The allowance for excess and obsolete inventory was
$2.2 million and $0.8 million at February 3, 2008
and February 4, 2007, respectively. It is reasonably likely
that market and other factors relative to the valuation of
inventory may change in the future, which could result in
increases or decreases to gross margins on the sale of
inventory.
|
Vendor
Allowances
Vendor allowances consist of vendor rebates, discounts and
allowances associated with our purchasing activities and
promotional activities with certain vendors. We recognize such
allowances as a reduction of our cost of inventory in accordance
with Emerging Issues Task Force (EITF)
Issue No.
02-16,
Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor
. Based on EITF
No. 02-16,
allowances provided by our vendors are presumed to be a
reduction in the costs of purchasing inventories (to be
recognized in inventory and cost of sales). Amounts earned are
based on written contracts with vendors.
55
Most of our vendor allowances are expressed in the inventory
purchase contract as a percentage of purchases. Our earning of
vendor allowances is based on the contract rate as applied to
actual product purchased from the vendor in the period the
product is received. Fixed dollar allowances not expressed in
terms of purchases are earned ratably over the vendor program
period, which is generally the calendar year. When a vendor
contract includes a volume minimum or volume incentive
provision, the allowance accrual rate is based upon our best
estimate of purchases using historical purchasing patterns and
sales forecasts as the basis for the estimate. Each quarter, the
volume-based accrual rates are re-evaluated using the actual
cumulative purchases and the expectation for the remainder of
the program year. Adjustments, if necessary, are made on a
quarterly basis. Certain of our vendor contracts have several
year terms, thus requiring recognition over an extended period.
Vendor allowances earned are recorded as a reduction of
inventory cost at the end of each of the Companys fiscal
quarters. Amounts earned for each vendor are expressed as a
percentage of that vendors purchases for the period and
multiplied by on-hand inventory balances by vendor. This vendor
capitalized allowance amount is adjusted as inventory levels
change for each vendor each period. In summary, allowances are
earned as product is received, recorded as a reduction in
inventory while the product is on hand, and are recognized as a
reduction to cost of sales when the corresponding inventory is
sold.
We enter into hundreds of contracts with vendors each year that
contain allowance provisions. Contractual disputes and
misunderstandings can occur with vendors with respect to
specific aspects of our program that could result in adjustments
to allowances we earn. We adjust our vendor allowance
recognition for disputes when the disputed amount is probable
and reasonably estimable. Based on historical experience, we
also consider in our estimated recognition that processing
errors and other transactional adjustments will likely be
identified upon reconciliation of amounts earned with vendors.
We do not believe it is reasonably likely that such adjustments
will have a material impact on future results of operations.
Warranty
We or the vendors supplying our products provide our customers
with limited warranties on certain products ranging from
30 days to lifetime warranties. Our warranty exposure is
analyzed on a vendor by vendor basis using the master vendor
agreements in place at the time the product was sold to the
customer. Some of our vendors provide us no protection for
warranty; however, in many cases, the vendors are responsible
for warranty claims and provide us a credit at cost for warranty
items we process on behalf of the vendor. In other cases, our
vendors provide us a negotiated warranty allowance as agreed to
in the vendor contract. These allowances are negotiated to
approximate the estimated amount of warranty exposure on the
product purchased by us from our vendors. Typically, the
allowances are based on a percentage of each product we purchase
and are collected as an off invoice deduction on the
vendors invoice. Warranty costs relating to merchandise
sold under warranty not covered by vendors or exceeding the
allowances provided by the vendor are estimated and recorded as
warranty liabilities at the time of sale and are based on
historical experience and recent trends. This liability is
recorded as a component of accrued expenses. Quarterly, we
assess the adequacy of our recorded warranty liability and
adjust the liability and cost of sales as necessary based on the
previous six month history of customer warranty returns and
vendor allowances. We believe a six month period of warranty
return history is appropriate as substantially all warranty
returns are made within six months of the original purchase date.
The following table reflects the changes in our warranty
reserves ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Warranty reserves, beginning of period
|
|
$
|
3,908
|
|
|
$
|
2,580
|
|
|
$
|
2,918
|
|
Provision for warranty
|
|
|
6,233
|
|
|
|
3,428
|
|
|
|
963
|
|
Allowances from vendors
|
|
|
5,006
|
|
|
|
6,067
|
|
|
|
5,841
|
|
Reserves utilized
|
|
|
(10,555
|
)
|
|
|
(8,167
|
)
|
|
|
(7,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserves, end of period
|
|
$
|
4,592
|
|
|
$
|
3,908
|
|
|
$
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The Companys warranty reserves increased by approximately
$0.7 million in fiscal 2007, compared to fiscal 2006. We
entered into new agreements with certain of our vendors. In
exchange for lower merchandise costs from these vendors, we
agreed to be responsible for returns from our customers. This
resulted in a reduction of allowances from vendors and an
increase in inventory destroyed. We also generally experienced a
higher level of merchandise that was destroyed in fiscal 2007.
This is the key input into our historical estimation methodology
which resulted in an increase in the provision for warranty
expense in fiscal 2007.
The Companys warranty reserves increased by approximately
$1.3 million in fiscal 2006, compared to fiscal 2005. In
fiscal 2006, the warranty provision increased by approximately
$2.5 million, primarily as a result of an increase in sales
volume over fiscal 2005 due to the acquisition of Murrays
in the fourth quarter of fiscal 2005.
We expect our actual warranty costs to differ from our estimates
and it is reasonably likely that the difference could be
significant. A 10% change in estimated warranty liability would
have affected our operating profit by approximately
$0.5 million for the fiscal year ended February 3,
2008.
Income
Taxes
We adopted FIN 48 at the beginning of fiscal 2007. At
February 3, 2008, our unrecognized tax benefits totaled
approximately $9.8 million. The total amount of
unrecognized benefits which, if recognized, would favorably
affect the effective income tax rate in future periods is
approximately $3.2 million.
We have recorded deferred tax assets of approximately
$37.5 million as of February 3, 2008, reflecting the
benefit of federal and state net operating loss
(NOL) carryforwards approximating
$103.4 million and $27.2 million, respectively. These
carryforwards will expire beginning in 2021 and 2008,
respectively. Realization is dependent on generating sufficient
taxable income in the respective jurisdictions prior to
expiration of the loss carryforwards.
Due to ownership changes from market trading in our common
stock, we believe we had a statutory ownership
changes in January 2008, as defined under
Section 382 of the Internal Revenue Code (Section
382). When a company undergoes such an ownership change,
Section 382 limits the companys future ability to
utilize any NOL generated before the ownership change and, in
certain circumstances, subsequently recognized
built-in losses and deduction, if any, existing as
of the date the ownership change. Accordingly, our annual use of
our federal and state NOLs that existed as of the date of the
ownership change is limited to approximately $11.3 million.
We had a prior Section 382 ownership change; however the
Section 382 annual limitation arising from such ownership
change was less restrictive than the one created by the
January 2008 ownership change. We believe that we will be
able to fully utilize our pre-January 2008 NOLs and other
tax attributes in the future other than as noted below. Our
ability to utilize any new NOL arising after January 2008
is not affected by this 382 limitation.
Although realization is not assured, management believes it is
more likely than not that all the deferred tax assets will be
realized with the exception of a portion of the state net
operating losses, for which management has determined that a
valuation allowance in the amount of $0.1 million is
necessary at February 3, 2008.
Legal
Matters
We currently and from time to time are involved in litigation
incidental to the conduct of our business, including but not
limited to asbestos and similar product liability claims, slip
and fall and other general liability claims, discrimination and
other employment claims, vendor disputes, and miscellaneous
environmental and real estate claims. The damages claimed in
some of this litigation are substantial. Based on an internal
review, we accrue reserves using our best estimate of the
probable and reasonably estimable contingent liabilities. We do
not currently believe that any of these legal claims incidental
to the conduct of our business, individually or in the
aggregate, will result in liabilities material to our
consolidated financial position, results of operations or cash
flows. However, if our estimates related to these contingent
liabilities are incorrect, the future results of operations for
any particular fiscal quarter or year could be materially
adversely affected.
57
In addition to the litigation that is incidental to our
business, we are also subject to the other litigation and the
governmental investigations that are described in
Note 21 Legal Matters in the notes to the
audited consolidated financial statements included in
Item 8 of this Annual Report. Although certain of these
matters are in their early stages and we cannot predict their
outcome, an adverse outcome in any of them could have a material
adverse effect on our consolidated results of operations,
financial position or cash flows.
Self-Insurance
Reserves
The Company purchases third-party insurance for workers
compensation, automobile, product and general liability claims
that exceed a certain dollar threshold. However, the Company is
responsible for the payment of claims under these insured
limits. In estimating the obligation associated with reported
claims and incurred but not reported (IBNR) claims,
we utilize independent actuaries. These actuaries utilize
historical data to project the future development of reported
claims and estimate IBNR claims. Loss estimates are adjusted
based upon actual claims settlements and reported claims. The
independent actuaries make a significant number of estimates and
assumptions in determining the cost to settle claims. We obtain
updated loss projections each year from our actuary and adjust
our recorded liability to reflect the current projections. The
updated loss projections consider new claims and developments
associated with existing claims for each open policy period. As
certain claims can take years to settle, we have multiple policy
periods open at any point in time.
Although we do not expect the amounts ultimately paid to differ
significantly from our estimates, it is reasonably likely that
self-insurance costs could differ from the historical trends and
actuarial assumptions. For example, in fiscal 2007, 2006 and
2005, we recorded increases (decreases) to expense from changes
in estimates related to prior year open policy periods of
($1.1) million, $0.6 million and $0.2 million,
respectively. Our self-insurance reserves approximated
$24.7 million and $23.5 million at February 3,
2008 and February 4, 2007, respectively, and are included
with current liabilities in the accompanying consolidated
balance sheets. A 10% change in our self-insurance reserves
would have affected our operating profit by approximately
$2.5 million for the fiscal year ended February 3,
2008.
Store
Closing Costs
On an on-going basis, store locations are reviewed and analyzed
based on several factors including market saturation, store
profitability, and store size and format. In addition, we
analyze sales trends, geographical and competitive factors to
determine the viability and future profitability of our store
locations. If a store location does not meet our required
performance criteria, it is considered for closure. As a result
of past acquisitions, we have closed numerous locations due to
store overlap with previously existing store locations.
We account for the costs of closed stores in accordance with
SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities.
Under SFAS No. 146,
the fair value of future costs of operating lease commitments
for a closed store are recorded as a liability at the date we
cease operating the store. Fair value of the liability is the
present value of future cash flows discounted by a
credit-adjusted risk free rate. Accretion expense represents
interest on our recorded closed store liabilities and is
calculated by using the same credit adjusted risk free rate used
to discount the cash flows. In addition, SFAS No. 146
also requires that the amount of remaining lease payments owed
be reduced by estimated sublease income (but not to an amount
less than zero). Sublease income in excess of costs associated
with the lease is recognized as it is earned and included as a
reduction to operating and administrative expense in the
accompanying financial statements.
The allowance for store closing costs is included in accrued
expenses and other long-term liabilities in our accompanying
financial statements and represents the discounted value of the
following future net cash outflows related to closed stores:
(1) future rents and other contractual expenses to be paid
over the remaining terms of the lease agreements for the stores
(net of estimated sublease income); (2) lease commissions
associated with obtaining store subleases. Certain operating
expenses related to closed stores, such as utilities and
repairs, are expensed as incurred and we do not incur employee
termination costs when stores are closed. In addition, we
expense as incurred and report as store closing costs operating
expenses we incur when closing as store. These expenses include
temporary labor and transportation costs for inventory, fixtures
and other assets owned in the store being closed.
58
There are several significant assumptions that underlie the
estimates inherent in the closed store reserve. These
assumptions include: (1) real estate broker estimates for
vacancy periods and estimated sublease rates based on the
brokers experience and expertise and (2) estimates
for occupancy expenses based on historical averages which, in
the case of real estate taxes, are subject to changes in the
future if increased or decreased by taxing authorities.
Accordingly, we continuously review these assumptions and revise
the reserve as necessary.
In addition, there are certain assumptions that are sensitive to
general economic deviations and it is reasonably likely changes
could produce actual results significantly different from
managements original estimates. These assumptions may be
revised due to the following factors: (1) national or
regional economic conditions that can shorten or lengthen
vacancy periods; (2) changes in neighborhoods surrounding
store locations resulting in longer than anticipated vacancy
periods; (3) changing subtenant needs resulting in
functional obsolescence of store locations; and
(4) subtenant defaults or bankruptcies resulting in vacant
properties. Historically, the Company has recorded revisions in
estimates to the closed store reserve that have resulted from
these factors. These revisions usually result from overall
longer vacancy periods on store locations and realized sublease
rates lower than originally anticipated.
The following tabular presentation provides detailed information
regarding our SFAS No. 146 store closing costs ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
SFAS No. 146 liability balance, beginning of year
|
|
$
|
4,911
|
|
|
$
|
7,033
|
|
|
$
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 146 provision for contractual obligations,
net of estimated sublease income for stores closed during the
period
|
|
|
1,754
|
|
|
|
258
|
|
|
|
246
|
|
Revisions in SFAS No. 146 estimates
|
|
|
(474
|
)
|
|
|
112
|
|
|
|
1,505
|
|
Accretion
|
|
|
231
|
|
|
|
306
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 146 store closing costs expensed in the period
|
|
|
1,511
|
|
|
|
676
|
|
|
|
2,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments Murrays
Discount Auto Stores
|
|
|
|
|
|
|
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations, net of sublease recoveries
|
|
|
(2,333
|
)
|
|
|
(2,383
|
)
|
|
|
(2,235
|
)
|
Sublease commissions and buyouts
|
|
|
(1,062
|
)
|
|
|
(415
|
)
|
|
|
(1,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
(3,395
|
)
|
|
|
(2,798
|
)
|
|
|
(3,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 146 liability balance, end of year
|
|
$
|
3,027
|
|
|
$
|
4,911
|
|
|
$
|
7,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store closing costs incurred during the periods are comprised of
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
SFAS No. 146 store closing costs expensed in the period
|
|
$
|
1,511
|
|
|
$
|
676
|
|
|
$
|
2,171
|
|
Period costs related to closed stores
|
|
|
472
|
|
|
|
811
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total store closing costs
|
|
$
|
1,983
|
|
|
$
|
1,487
|
|
|
$
|
2,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2007, we recorded the following:
(1) $1.8 million in SFAS No. 146 charges
associated with fiscal 2007 store closures with contractual
lease obligations remaining at the closure date;
(2) $0.5 million reduction in expense resulting from
revisions in SFAS No. 146 estimates, primarily as a
result of increases in sublease rent and buyouts of certain
store leases at a cost less than the recorded liability of these
closed stores; and (3) $0.2 million associated with
accretion expense relating to the discounting of closed store
liabilities. In addition, we incurred
59
$0.5 million of other operating expenses such as store
closing expenses and utilities, repairs and maintenance costs
related to closed stores that are expensed as incurred.
During fiscal 2006, we recorded the following:
(1) $0.3 million in SFAS No. 146 charges
associated with fiscal 2006 store closures for stores with
contractual lease obligations remaining at the closure date;
(2) $0.1 million of expense resulting from revisions
in SFAS No. 146 estimates; (3) $0.3 million
associated with accretion expense relating to the discounting of
closed store liabilities. In addition, we incurred
$0.8 million of other operating expenses such as store
closing expenses and utilities, repairs and maintenance costs
related to closed stores that are expensed as incurred.
During fiscal 2005, we recorded the following:
(1) $0.2 million in SFAS No. 146 charges
associated with fiscal 2005 store closures for stores with
contractual lease obligations remaining at the closure date;
(2) $1.5 million of expense resulting from revisions
in SFAS No. 146 estimates, primarily related to stores
that were subleased and became vacant as well as rent increases
in master lease agreements; (3) $0.4 million
associated with accretion expense relating to the discounting of
closed store liabilities. In addition, we incurred
$0.7 million of other operating expenses such as store
closing expenses and utilities, repairs and maintenance costs
related to closed stores that are expensed as incurred.
At February 3, 2008, the Companys $3.0 million
liability for store closing costs consisted of ($ in thousands):
|
|
|
|
|
Future contractual commitments for rent and occupancy expenses
|
|
$
|
19,938
|
|
Estimated sublease income, net of sublease commissions
|
|
|
(16,458
|
)
|
Accretion expense to be recognized in future periods
|
|
|
(453
|
)
|
|
|
|
|
|
Total liability for store closing costs
|
|
$
|
3,027
|
|
|
|
|
|
|
We expect net cash outflows for closed locations included in the
fiscal 2007 year-end liability to be approximately
$1.3 million during fiscal 2008. Of these net outflows,
approximately $6.9 million relates to rent and occupancy
expenses. These expenses are expected to be offset by estimated
sublease income of $5.6 million. The expected accretion to
be expensed in fiscal 2008 on the liability as of the end of
fiscal 2007 is approximately $0.2 million. The cash flow
amounts above only relate to contractual commitments and do not
include period expenses incurred when a store is closed and also
the period costs incurred related to closed stores.
Valuation
of Long-lived Assets
We evaluate the carrying value of long-lived assets whenever
events or changes in circumstances indicate that a potential
impairment has occurred. A potential impairment has occurred if
the projected future undiscounted cash flows are less than the
carrying value of the asset(s). The estimate of cash flows
includes managements assumptions of cash inflows and
outflows directly resulting from the use of that asset in
operations. When a potential impairment has occurred, an
impairment write-down is recorded if the carrying value of the
long-lived asset exceeds its fair value. Our impairment analyses
contain estimates due to the inherently judgmental nature of
forecasting long-term estimated cash flows and determining the
ultimate useful lives and fair values of the assets. Actual
results could differ from these estimates, which could
materially impact our impairment assessment.
Goodwill
Impairment
As disclosed in the consolidated financial statements, we have
as of February 3, 2008 unamortized goodwill in the amount
of $224.9 million. In accordance with the provisions of
SFAS No. 142,
Goodwill and Other Intangible
Assets
, we perform an annual impairment test of goodwill.
Our test as of February 3, 2008 resulted in no impairment
being identified. However, the process of evaluating goodwill
for impairment involves the determination of the fair value of
our Company. Inherent in such fair value determinations are
certain judgments and estimates, including the interpretation of
economic indicators and market valuations and assumptions about
our strategic plans. To the extent that our strategic plans
change, or that economic and market conditions worsen, it is
possible that our conclusion regarding goodwill impairment could
change and which could result in a material effect on our
financial position or results of operations; however, an
impairment charge would not affect our cash flows.
60
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued FIN 48,
Accounting for
Uncertainty in Income Taxes
. The interpretation clarifies
the accounting for uncertainty in income taxes recognized in the
Companys financial statements in accordance with Statement
of Financial Accounting Standards (SFAS)
No. 109,
Accounting for Income Taxes.
The Company
adopted FIN 48 on February 5, 2007. See
Note 13 Income Taxes to the consolidated
financial statements included in Item 8 of Part II of
this Annual Report for a discussion of the impact of FIN 48.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140
. This statement simplifies accounting
for certain hybrid instruments currently governed by
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, by allowing fair value remeasurement
of hybrid instruments that contain an embedded derivative that
otherwise would require bifurcation. SFAS No. 155 also
eliminates the guidance in SFAS No. 133 Implementation
Issue No. D1,
Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets
, which provides
such beneficial interests are not subject to
SFAS No. 133. SFAS No. 155 amends
SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities a Replacement of FASB Statement
No. 125
, by eliminating the restriction on passive
derivative instruments that a qualifying special-purpose entity
may hold. Effective February 5, 2007, the Company adopted
SFAS No. 155, which did not affect its financial
condition, results of operations or cash flows.
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140
.
SFAS No. 156 amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities
, with respect to the
accounting for separately recognized servicing assets and
servicing liabilities. SFAS No. 156 is effective for
fiscal years beginning after September 15, 2006. Effective
February 5, 2007, the Company adopted
SFAS No. 156, which did not affect its financial
condition, results of operations or cash flows.
In June 2006, the FASB ratified the consensus reached by the
EITF on Issue No.
06-3,
How
Taxes Collected from Customers and Remitted to Governmental
Authorities Should be Presented in the Income Statement (That
Is, Gross versus Net Presentation)
, that was effective for
fiscal years beginning after December 15, 2006. The Company
presents sales net of sales taxes in its consolidated statement
of operations and the adoption of this EITF issue did not affect
its financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which clarifies the definition
of fair value, establishes a framework for measuring fair value
within GAAP and expands the disclosures regarding fair value
measurements. In February 2008, the FASB issued a staff position
that delays the effective date of SFAS No. 157 for all
nonfinancial assets and liabilities except for those recognized
or disclosed at least annually. Except for the delay for
nonfinancial assets and liabilities, SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007 and interim periods within such years. The Company does not
expect the adoption of SFAS No. 157 to have a material
impact on its financial condition, results of operations or cash
flows.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
, which permits entities to choose to measure
many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the impact of SFAS No. 159.
On December 4, 2007, the FASB issued
SFAS No. 141R,
Business Combinations
, which
establishes how an acquiring company recognizes and measures
acquired assets, liabilities, goodwill and minority interest. It
also defines how an acquirer should account for a gain from a
bargain purchase and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination.
SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. Early adoption is not permitted.
The Company will be required to apply the provisions of
SFAS No. 141R to any future business combinations
consummated after its effective date.
61
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
,
which provides guidance and establishes amended accounting and
reporting standards for a parent companys noncontrolling
interest in a subsidiary. SFAS No. 160 is effective
for fiscal years beginning on or after December 15, 2008.
The Company does not expect the adoption of
SFAS No. 160 to have a material impact on its
financial condition, results of operations or cash flows.
In December 2007, the SEC staff issued Staff Accounting Bulletin
(SAB) 110,
Share-Based Payment
, which amends
SAB 107,
Share-Based Payment
, to permit public
companies, under certain circumstances, to use the simplified
method in SAB 107 for employee option grants after
December 31, 2007. Use of the simplified method after
December 2007 is permitted only for companies whose historical
data about their employees exercise behavior does not
provide a reasonable basis for estimating the expected term of
the options. Based on the significant restrictions on employee
trading during the restatement periods, the Company has not
experienced regular employee exercise behavior since the
implementation of SFAS No. 123R on January 20,
2006. The Company expects to continue to use the simplified
method as allowed under SAB 110.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Financial market risks relating to our operations result
primarily from changes in interest rates. We hold no securities
for purposes of trading. Our cash and cash equivalents
representing bank deposits at February 3, 2008 are not
restricted as to withdrawal. Interest earned on our cash
equivalents as well as interest paid on our variable rate debt
are sensitive to changes in interest rates.
Our variable rate debt relates to borrowings under our Senior
Credit Facility and our Term Loan Facility that was entered into
in June of 2006, which are subject to changes in the LIBOR rate.
Our variable and fixed rate debt and corresponding effective
interest rates at February 3, 2008 consisted of the
following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Fixed or
|
|
|
Balance
|
|
|
Interest Rate
|
|
Variable
|
|
Term loan facility matures June 2011
|
|
$
|
345,647
|
|
|
11.63%
|
|
Variable
|
Senior credit facility matures July 2010
|
|
|
46,500
|
|
|
5.30%
|
|
Variable
|
6
3
/
4
% senior
exchangeable notes mature December
|
|
|
|
|
|
|
|
|
2025 $94,635 carrying value
|
|
|
100,000
|
|
|
6.75%
|
|
Fixed
|
Discount on
6
3
/
4
% senior
exchangeable notes (EITF
|
|
|
|
|
|
|
|
|
No. 06-6
accounting adjustment)
|
|
|
(5,365
|
)
|
|
|
|
Fixed
|
Seller financing arrangements
|
|
|
16,189
|
|
|
Various
|
|
Fixed
|
Capital leases
|
|
|
16,217
|
|
|
Various
|
|
Fixed
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
519,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 3, 2008, of our outstanding debt and capital
leases, 76% was at variable interest rates and 24% was at fixed
interest rates. As of February 3, 2008, with
$392.1 million in variable rate debt outstanding, a 1%
change in the LIBOR rate to which this variable rate debt is
tied would result in a $3.9 million change in our annual
interest expense. This estimate assumes that our debt balance
remains constant for an annual period and the interest rate
change occurs at the beginning of the period.
62
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of CSK Auto Corporation:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of CSK Auto
Corporation and its subsidiaries at February 3, 2008 and
February 4, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
February 3, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedules listed in the
index appearing under Item 15(a)(2), present fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. Also in our opinion, the Company did not maintain,
in all material respects, effective internal control over
financial reporting as of February 3, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) because of material weaknesses in
internal control over financial reporting existing as of that
date related to 1) resources, and policies and procedures
to ensure proper and consistent application of accounting
principles generally accepted in the United States of America,
1a) financial reporting, 2) accounting for inventory,
3) accounting for vendor allowances and 4) accounting
for certain accrued expenses. A material weakness is a
deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or
detected on a timely basis. The material weaknesses referred to
above are described in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A.
We considered these material weaknesses in determining the
nature, timing, and extent of audit tests applied in our audit
of the February 3, 2008 consolidated financial statements
and our opinion regarding the effectiveness of the
Companys internal control over financial reporting does
not affect our opinion on those consolidated financial
statements. The Companys management is responsible for
these financial statements and financial statement schedules,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting included in
managements report referred to above. Our responsibility
is to express opinions on these financial statements, on the
financial statement schedules, and on the Companys
internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 1, the Company entered into an
Agreement and Plan of Merger on April 1, 2008 whereby the
Company would become a subsidiary of OReilly Automotive,
Inc. The merger is subject to, among other things, regulatory
review and at least a majority of the Companys outstanding
shares of common stock being tendered to complete the exchange
offer. As discussed in Note 1, although consummation of the
exchange offer would result in an event of default and the
possible acceleration of indebtedness under the Companys
revolving and term loan borrowing facilities, management expects
borrowings under these facilities will be repaid in full and the
facilities will cease to exist at the closing of the exchange
offer. Also as discussed in Note 1, in the event the merger is
not consummated and if an amendment or waiver of financial
covenants set forth in the term loan facility for periods
subsequent to February 1, 2009 is not obtained, it is
probable the Company will not be in compliance with such
covenants for periods subsequent to February 1, 2009.
63
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in fiscal 2006.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Phoenix, Arizona
April 17, 2008
64
CSK AUTO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net sales
|
|
$
|
1,851,647
|
|
|
$
|
1,907,776
|
|
|
$
|
1,651,285
|
|
Cost of sales
|
|
|
984,649
|
|
|
|
1,011,712
|
|
|
|
864,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
866,998
|
|
|
|
896,064
|
|
|
|
786,611
|
|
Other costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and administrative
|
|
|
804,265
|
|
|
|
788,400
|
|
|
|
653,471
|
|
Investigation and restatement costs
|
|
|
12,348
|
|
|
|
25,739
|
|
|
|
|
|
Securities class action settlement
|
|
|
11,700
|
|
|
|
|
|
|
|
|
|
Store closing costs
|
|
|
1,983
|
|
|
|
1,487
|
|
|
|
2,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
36,702
|
|
|
|
80,438
|
|
|
|
130,237
|
|
Interest expense
|
|
|
54,163
|
|
|
|
48,767
|
|
|
|
33,599
|
|
Loss on debt retirement
|
|
|
|
|
|
|
19,450
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of
change in accounting principle
|
|
|
(17,461
|
)
|
|
|
12,221
|
|
|
|
95,038
|
|
Income tax expense (benefit)
|
|
|
(6,309
|
)
|
|
|
4,991
|
|
|
|
37,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(11,152
|
)
|
|
|
7,230
|
|
|
|
57,790
|
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
|
|
|
|
(966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,152
|
)
|
|
$
|
6,264
|
|
|
$
|
57,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(0.25
|
)
|
|
$
|
0.16
|
|
|
$
|
1.30
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.14
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts
|
|
|
43,971,417
|
|
|
|
43,876,533
|
|
|
|
44,465,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(0.25
|
)
|
|
$
|
0.16
|
|
|
$
|
1.29
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.14
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts
|
|
|
43,971,417
|
|
|
|
44,129,278
|
|
|
|
44,812,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
CSK AUTO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
16,520
|
|
|
$
|
20,169
|
|
Receivables, net
|
|
|
37,322
|
|
|
|
43,898
|
|
Inventories
|
|
|
494,651
|
|
|
|
502,787
|
|
Deferred income taxes
|
|
|
50,649
|
|
|
|
46,500
|
|
Prepaid expenses and other current assets
|
|
|
35,842
|
|
|
|
31,585
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
634,984
|
|
|
|
644,939
|
|
Property and equipment, net
|
|
|
165,115
|
|
|
|
174,409
|
|
Intangibles, net
|
|
|
63,020
|
|
|
|
67,507
|
|
Goodwill
|
|
|
224,937
|
|
|
|
224,937
|
|
Deferred income taxes
|
|
|
15,380
|
|
|
|
4,200
|
|
Other assets, net
|
|
|
35,254
|
|
|
|
35,770
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,138,690
|
|
|
$
|
1,151,762
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
236,879
|
|
|
$
|
260,146
|
|
Accrued payroll and related expenses
|
|
|
57,593
|
|
|
|
60,306
|
|
Accrued expenses and other current liabilities
|
|
|
107,211
|
|
|
|
81,569
|
|
Current maturities of long-term debt
|
|
|
50,551
|
|
|
|
56,098
|
|
Current maturities of capital lease obligations
|
|
|
6,351
|
|
|
|
8,761
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
458,585
|
|
|
|
466,880
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
452,420
|
|
|
|
451,367
|
|
Obligations under capital leases
|
|
|
9,866
|
|
|
|
15,275
|
|
Other liabilities
|
|
|
53,281
|
|
|
|
46,730
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
515,567
|
|
|
|
513,372
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 90,000,000 shares
authorized, 44,030,644 and 43,950,751 shares issued and
outstanding at February 3, 2008 and February 4, 2007,
respectively
|
|
|
440
|
|
|
|
440
|
|
Additional paid-in capital
|
|
|
438,092
|
|
|
|
433,912
|
|
Accumulated deficit
|
|
|
(273,994
|
)
|
|
|
(262,842
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
164,538
|
|
|
|
171,510
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,138,690
|
|
|
$
|
1,151,762
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
CSK AUTO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,152
|
)
|
|
$
|
6,264
|
|
|
$
|
57,790
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization on property and equipment
|
|
|
40,668
|
|
|
|
40,645
|
|
|
|
36,628
|
|
Amortization of other items
|
|
|
5,513
|
|
|
|
7,585
|
|
|
|
4,231
|
|
Amortization of debt discount and deferred financing costs
|
|
|
5,701
|
|
|
|
4,539
|
|
|
|
2,161
|
|
Stock-based compensation expense
|
|
|
2,779
|
|
|
|
4,972
|
|
|
|
571
|
|
Tax benefit relating to exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
231
|
|
Write downs of property, equipment and other assets
|
|
|
4,459
|
|
|
|
3,354
|
|
|
|
2,145
|
|
Loss on debt retirement
|
|
|
|
|
|
|
8,496
|
|
|
|
1,600
|
|
Deferred income taxes
|
|
|
(6,593
|
)
|
|
|
3,771
|
|
|
|
36,008
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
8,126
|
|
|
|
(13,412
|
)
|
|
|
6,747
|
|
Inventories
|
|
|
8,136
|
|
|
|
3,652
|
|
|
|
(23,588
|
)
|
Prepaid expenses and other current assets
|
|
|
(4,257
|
)
|
|
|
(11,538
|
)
|
|
|
7,616
|
|
Accounts payable
|
|
|
(23,267
|
)
|
|
|
51,639
|
|
|
|
17,329
|
|
Accrued payroll, accrued expenses and other current liabilities
|
|
|
23,816
|
|
|
|
4,838
|
|
|
|
9,987
|
|
Other operating activities
|
|
|
185
|
|
|
|
(5,165
|
)
|
|
|
2,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
54,114
|
|
|
|
109,640
|
|
|
|
162,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(34,772
|
)
|
|
|
(37,529
|
)
|
|
|
(36,775
|
)
|
Business acquisitions, net of cash acquired
|
|
|
|
|
|
|
(4,292
|
)
|
|
|
(177,658
|
)
|
Other investing activities
|
|
|
(1,623
|
)
|
|
|
(1,778
|
)
|
|
|
(1,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(36,395
|
)
|
|
|
(43,599
|
)
|
|
|
(215,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under senior credit facility term loan
|
|
|
|
|
|
|
|
|
|
|
(252,450
|
)
|
Borrowings under senior credit facility line of
credit
|
|
|
258,300
|
|
|
|
84,800
|
|
|
|
230,300
|
|
Payments under senior credit facility line of credit
|
|
|
(263,800
|
)
|
|
|
(126,800
|
)
|
|
|
(136,300
|
)
|
Borrowings under term loan facility
|
|
|
|
|
|
|
350,000
|
|
|
|
|
|
Payments under term loan facility
|
|
|
(3,478
|
)
|
|
|
(875
|
)
|
|
|
|
|
Payment of debt financing costs
|
|
|
(5,376
|
)
|
|
|
(13,166
|
)
|
|
|
(9,612
|
)
|
Proceeds from issuance of 4.625% exchangeable notes
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Proceeds from issuance of 3.375% exchangeable notes
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
Retirement of 3.375% exchangeable notes
|
|
|
|
|
|
|
(125,000
|
)
|
|
|
|
|
Retirement of 7% senior notes
|
|
|
|
|
|
|
(225,000
|
)
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(8,513
|
)
|
|
|
(10,301
|
)
|
|
|
(10,893
|
)
|
Proceeds from seller financing arrangements
|
|
|
2,145
|
|
|
|
428
|
|
|
|
3,164
|
|
Payments on seller financing arrangements
|
|
|
(685
|
)
|
|
|
(484
|
)
|
|
|
(381
|
)
|
Proceeds from repayment of stockholder receivable
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Proceeds from exercise of stock options
|
|
|
443
|
|
|
|
1,196
|
|
|
|
1,130
|
|
Purchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(25,029
|
)
|
Net proceeds from termination of common stock call option and
warrants
|
|
|
|
|
|
|
1,555
|
|
|
|
|
|
Premium on common stock call option
|
|
|
|
|
|
|
|
|
|
|
(26,992
|
)
|
Premium from common stock warrants
|
|
|
|
|
|
|
|
|
|
|
17,820
|
|
Other financing activities
|
|
|
(404
|
)
|
|
|
(189
|
)
|
|
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(21,368
|
)
|
|
|
(63,836
|
)
|
|
|
15,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(3,649
|
)
|
|
|
2,205
|
|
|
|
(38,265
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
20,169
|
|
|
|
17,964
|
|
|
|
56,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
16,520
|
|
|
$
|
20,169
|
|
|
$
|
17,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
67
CSK AUTO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
SUPPLEMENTAL
DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 3,
|
|
February 4,
|
|
January 29,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
48,426
|
|
|
$
|
40,066
|
|
|
$
|
25,351
|
|
Income taxes
|
|
|
2,987
|
|
|
|
56
|
|
|
|
98
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets acquired under capital leases
|
|
$
|
1,326
|
|
|
$
|
6,731
|
|
|
$
|
3,905
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
68
CSK AUTO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stockholder
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
|
Balances at January 30, 2005
|
|
|
45,116,301
|
|
|
$
|
451
|
|
|
$
|
447,612
|
|
|
$
|
(10
|
)
|
|
$
|
(1,018
|
)
|
|
$
|
(326,896
|
)
|
|
$
|
120,139
|
|
Repurchase and retirement of common stock
|
|
|
(1,409,300
|
)
|
|
|
(14
|
)
|
|
|
(25,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,029
|
)
|
Restricted stock
|
|
|
17,731
|
|
|
|
|
|
|
|
1,159
|
|
|
|
|
|
|
|
(1,288
|
)
|
|
|
|
|
|
|
(129
|
)
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
|
|
|
|
|
|
571
|
|
Recovery of stockholder receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Exercise of options
|
|
|
105,590
|
|
|
|
1
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,130
|
|
Tax benefit relating to stock option exercises
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
Compensation expense, stock options
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Warrants and call options, net of tax
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,790
|
|
|
|
57,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 29, 2006
|
|
|
43,830,322
|
|
|
|
438
|
|
|
|
426,560
|
|
|
|
|
|
|
|
(1,735
|
)
|
|
|
(269,106
|
)
|
|
|
156,157
|
|
Restricted stock
|
|
|
28,466
|
|
|
|
1
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
Adoption of SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
(1,735
|
)
|
|
|
|
|
|
|
1,735
|
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
|
91,963
|
|
|
|
1
|
|
|
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,196
|
|
Compensation expense, stock-based awards
|
|
|
|
|
|
|
|
|
|
|
3,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,048
|
|
Warrants and call options, net of tax
|
|
|
|
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390
|
|
Discount on senior exchangeable notes, net of tax
|
|
|
|
|
|
|
|
|
|
|
4,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,675
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,264
|
|
|
|
6,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 4, 2007
|
|
|
43,950,751
|
|
|
|
440
|
|
|
|
433,912
|
|
|
|
|
|
|
|
|
|
|
|
(262,842
|
)
|
|
|
171,510
|
|
Restricted stock
|
|
|
34,010
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(221
|
)
|
Exercise of options
|
|
|
45,883
|
|
|
|
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443
|
|
Compensation expense, stock-based awards
|
|
|
|
|
|
|
|
|
|
|
3,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,958
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,152
|
)
|
|
|
(11,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 3, 2008
|
|
|
44,030,644
|
|
|
$
|
440
|
|
|
$
|
438,092
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(273,994
|
)
|
|
$
|
164,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
69
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
CSK Auto Corporation is a holding company. At February 3,
2008, CSK Auto Corporation had no business activity other than
its investment in CSK Auto, Inc. (Auto), a
wholly-owned subsidiary. On a consolidated basis, CSK Auto
Corporation and its subsidiaries are referred to herein as the
Company.
Auto is a specialty retailer of automotive aftermarket parts and
accessories. As of February 3, 2008, the Company operated
1,349 stores in 22 states, with its principal concentration
of stores in the Western United States. The Companys
stores are known by the following four brand names (referred to
collectively as CSK Stores):
|
|
|
|
|
Checker Auto Parts, founded in 1969, with 487 stores in the
Southwestern, Rocky Mountain and Northern Plains states and
Hawaii;
|
|
|
|
Schucks Auto Supply, founded in 1917, with 222 stores in
the Pacific Northwest and Alaska;
|
|
|
|
Kragen Auto Parts, founded in 1947, with 504 stores primarily in
California; and
|
|
|
|
Murrays Discount Auto Stores, founded in 1972, with 136
stores in the Midwest.
|
In December 2005, the Company purchased all of the outstanding
stock of Murrays Inc. and its subsidiary, Murrays
Discount Auto Stores, Inc. (collectively herein,
Murrays). The Murrays legal corporate
entities were merged into Auto in fiscal 2006. As of the
acquisition date, Murrays operated 110 automotive parts
and accessories retail stores in Michigan, Illinois, Ohio and
Indiana states in which the Company previously had
no significant market presence.
|
|
Note 1
|
Merger
Agreement and Matters Related to the Companys
Indebtedness
|
Merger
Agreement
On April 1, 2008, the Company entered into an Agreement and
Plan of Merger (the Merger Agreement) with
OReilly Automotive, Inc. (OReilly) and
an indirect wholly-owned subsidiary of OReilly pursuant to
which the Company is expected to become a wholly-owned
subsidiary of OReilly (the Acquisition).
In order to effectuate the Acquisition, OReilly has agreed
to commence an exchange offer (the Exchange Offer)
pursuant to which each share of the Companys common stock
tendered in the Exchange Offer will be exchanged for (a) a
number of shares of OReillys common stock equal to
the exchange ratio (as calculated below), plus
(b) $1.00 in cash (subject to possible reduction as
described below). Pursuant to the Merger Agreement, the
exchange ratio will equal $11.00 divided by the
average trading price of OReillys common stock
during the five consecutive trading days ending on and including
the second trading day prior to the closing of the Exchange
Offer; provided, that if such average trading price of
OReillys common stock is greater than $29.95 per
share, then the exchange ratio will be 0.3673, and if such
average trading price is less than $25.67 per share, then the
exchange ratio will be 0.4285. If such average trading price is
less than or equal to $21.00 per share, the Company may
terminate the Merger Agreement unless OReilly exercises
its option to issue an additional number of its shares or
increase the amount of cash to be paid such that the total value
of OReilly common stock and cash exchanged for each share
of the Companys common stock is at least equal to $10.00
(less any possible reduction of the cash component of the offer
price as described below).
Upon completion of the Exchange Offer, any remaining shares of
the Companys common stock will be acquired in a
second-step merger at the same price at which shares of the
Companys common stock were exchanged in the Exchange Offer.
The Acquisition is expected to be completed during the second
quarter of the Companys fiscal year ending
February 1, 2009 (fiscal 2008) and is subject
to regulatory review and customary closing conditions, including
that at least a majority of the Companys outstanding
shares of common stock be tendered in the Exchange Offer and
70
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the expiration or termination of any waiting period (and any
extension thereof) under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
The Merger Agreement includes customary representations,
warranties and covenants by the Company, including covenants
(a) to cease immediately any discussions and negotiations
with respect to an alternate acquisition proposal, (b) not
to solicit any alternate acquisition proposal and, with certain
exceptions, not to enter into discussions concerning or furnish
information in connection with any alternate acquisition
proposal, and (c) subject to certain exceptions, for the
Companys Board of Directors not to withdraw or modify its
recommendation that the Companys stockholders tender
shares into the Exchange Offer. In addition, the Company has
agreed to use reasonable best efforts to obtain appropriate
waivers or consents under the Companys credit or debt
agreements and instruments if needed or if requested by
OReilly to remedy any default or event of default
thereunder that may arise after the date of the Merger Agreement
(the Credit Agreement Waivers). The $1.00 cash
component of the offer price for each share of the
Companys common stock tendered in the Exchange Offer will
be subject to reduction in the event that the Company pays more
than $3.0 million to its lenders in order to obtain any
Credit Agreement Waivers. The Company does not anticipate any
need to obtain any Credit Agreement Waivers prior to the
anticipated closing of the Exchange Offer.
The Merger Agreement contains certain termination rights for
both the Company and OReilly, including if the Exchange
Offer has not been consummated or if the expiration or
termination of any waiting period (and any extension thereof)
under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, has not
occurred, in either case on or before the date that is
180 days after the date of the Merger Agreement, and
provisions that permit termination in connection with the
exercise of the fiduciary duties of the Companys Board of
Directors with respect to superior offers. The Merger Agreement
further provides that upon termination of the Merger Agreement
under specified circumstances, the Company may be required to
pay OReilly a termination fee of $22.0 million.
In connection with the Acquisition, it is anticipated that
OReilly will repay at the time of the closing of the
Exchange Offer all amounts outstanding and other amounts payable
under the Companys $350.0 million term loan facility
(the Term Loan Facility) and $325.0 million
senior secured revolving line of credit (the Senior Credit
Facility). Thus, although the consummation of the Exchange
Offer would result in an event of default and the possible
acceleration of indebtedness under those Facilities, it is
contemplated that those Facilities will be repaid in full and
cease to exist at the closing of the Exchange Offer. If the
Acquisition is completed as planned, the Companys
$100.0 million of
6
3
/
4
% senior
exchangeable notes
(6
3
/
4
% Notes)
will remain outstanding.
Term
Loan Facility Financial Covenants
The Companys Term Loan Facility contains a maximum
leverage ratio that it does not believe at this time it will be
able to satisfy beginning in the first quarter of the
Companys fiscal year ending January 30, 2010
(fiscal 2009). In addition to having the potential
to cause a default under the Term Loan Facility at the end of
the first quarter of fiscal 2009, if the Company does not obtain
a waiver or amendment of that covenant prior to the completion
of its financial statements for the first quarter of fiscal
2008, the Companys belief that it is probable that this
covenant will not be satisfied for the first quarter of fiscal
2009 will cause it to have to classify all of its indebtedness
under the Term Loan Facility and the Senior Credit Facility, as
well as the
6
3
/
4
%
Notes, as current liabilities in its financial statements
beginning with its financial statements for the first quarter of
fiscal 2008. Furthermore, beginning with the second quarter of
fiscal 2008, the Company would be required to reduce (to twelve
months) the time period over which it amortizes debt issuance
costs and debt discount increasing the interest costs it reports
in its financial statements. The classification of all such
indebtedness as current liabilities and the acceleration of the
amortization of interest costs will not cause a default under
the Companys borrowing agreements. However, any such
classification could have adverse consequences upon its
relationships with, and the credit terms upon which it does
business with, its vendors, although the Company expects such
consequences, if any, to be limited due to the expected closing
of the Exchange Offer in the second quarter of fiscal 2008.
71
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company does not expect to seek waivers or amendments under
its credit facilities prior to the closing of the Exchange Offer
as these credit facilities are expected to be repaid and
terminated upon the closing of the Exchange Offer.
If the Exchange Offer were to fail to close, prior to the end of
the first quarter of fiscal 2009, the Company would seek to
obtain a waiver or amendment of certain covenants contained in
the Term Loan Facility, including the maximum leverage ratio
covenant. No assurance can be given that the Company would be
able to obtain such a waiver or amendment on terms that would be
satisfactory to the Company. Failure to comply with the
financial covenants of the Term Loan Facility would result in an
event of default under the Term Loan Facility, which could
result in possible acceleration of all of its indebtedness
thereunder, under the Senior Credit Facility and under the
indenture under which the
6
3
/
4
%
were issued, all of which could have a material adverse effect
on the Company.
|
|
Note 2
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
CSK Auto Corporation and all of its wholly-owned subsidiaries
for all years presented. There are no less than wholly-owned
subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Basis
of Presentation
As more fully explained in Note 10 Long-Term
Debt, the Company has fully and unconditionally guaranteed bank
borrowings by Auto. CSKAUTO.COM (the Subsidiary
Guarantor) has also jointly and severally guaranteed such
debt on a full and unconditional basis. CSK Auto Corporation is
a holding company and has no other direct subsidiaries or
independent assets or operations. The Subsidiary Guarantor is a
minor subsidiary and has no significant independent operations.
Summarized financial statements and other disclosures concerning
each of Auto and the Subsidiary Guarantor are not presented
because management believes that they are not material to
investors. The consolidated amounts in the accompanying
financial statements are representative of the combined
guarantors and issuer.
The Company reports its financial information as one reportable
segment under Statement of Financial Accounting Standards
(SFAS) No. 131,
Disclosures about Segments
of Enterprises and Related Information
, as its operating
segments are its individual stores which meet the criteria for
aggregation into one reportable segment set forth in
SFAS No. 131.
Fiscal
Year
The Companys fiscal year ends on the Sunday nearest to
January 31 and is named for the calendar year just ended.
Occasionally this results in a fiscal year that is 53 weeks
long. References to a particular fiscal year are defined as
follows:
|
|
|
|
|
Fiscal 2007 refers to the 52 weeks ended February 3,
2008;
|
|
|
|
Fiscal 2006 refers to the 53 weeks ended February 4,
2007; and
|
|
|
|
Fiscal 2005 refers to the 52 weeks ended January 29,
2006.
|
Cash
Equivalents
Cash equivalents consist of highly liquid investments with
maturities of three months or less when purchased.
72
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
Due to their short-term nature, the carrying value of the
Companys cash and cash equivalents, receivables and
short-term borrowings approximate fair value. The fair values of
long-term debt and derivative financial instruments are
disclosed in Note 17 Fair Value of Financial
Instruments.
Derivative
Financial Instruments
The Companys fixed to floating interest rate swap
agreement was accounted for in accordance with
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, as amended, and was recorded on the
balance sheet at its fair value. Changes in the fair value of
the swap and the hedged item were recognized in earnings. The
swap met the criteria to assume no hedge ineffectiveness. The
fair value of the swap was determined from current market
prices. During the second quarter of fiscal 2006, the Company
terminated the swap agreement in connection with the completion
of its fiscal 2006 tender offer for the $225 million of
7% senior subordinated notes. See Note 11
Derivative Financial Instruments.
Receivables
Receivables are primarily comprised of amounts due from vendors
for rebates or allowances and amounts due from commercial sales
customers. The Company records an estimated provision for bad
debts for commercial customers based on a percentage of sales
and reviews the allowance quarterly for adequacy. Specific
accounts are written off against the allowance when management
determines the account is uncollectible.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and
cash equivalents and trade receivables. Historically, the
Company has not experienced any loss of its cash and cash
equivalents due to such concentration of credit risk.
The Company does not hold collateral to secure payment of its
trade accounts receivable. However, management performs ongoing
credit evaluations of its customers financial condition
and provides an allowance for estimated potential losses.
Exposure to credit loss is limited to the carrying amount.
Inventory
Valuation
Inventories are valued at the lower of cost or market, cost
being determined utilizing the
First-in,
First-Out (FIFO) method. At each balance sheet date,
the Company adjusts its inventory carrying balances by an
estimated allowance for inventory shrinkage that has occurred
since the most recent physical inventory and an allowance for
inventory obsolescence.
A physical inventory count is performed at each store, parts
depot and distribution center at least once during the fiscal
year. Shrink allowances for each store are determined by
dividing the shrinkage loss, based on the most recent physical
inventory, by the sales for that store since its previous
physical inventory. The percentage for each store is multiplied
by the sales for that store since the last physical inventory
through current period-end. Shrink allowances for each parts
depot and distribution center are determined in a similar
manner. The shrink amount, based on the most recent physical
inventory at the parts depot or distribution center, is divided
by the inventory receipts at the location since the previous
physical inventory. The percentage for each parts depot or
distribution center is multiplied by the receipts for that
location since the last physical inventory through current
period-end.
The Company capitalizes purchasing, storage and handling costs
into inventory. The amount capitalized into inventory consists
of both direct and indirect costs. Direct costs represent most
of the costs capitalized as they
73
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
include the cost centers that comprise all of the costs of the
Companys distribution centers and warehouses. The Company
also capitalizes vendor allowances into inventory as described
below under
Vendor Allowances.
Property
and Equipment
Property and equipment, including purchased software, are
recorded at cost. Depreciation and amortization are computed for
financial reporting purposes utilizing the straight-line method
over the estimated useful lives of the related assets, which
range from 3 to 25 years, or for leasehold improvements and
property under capital leases, the shorter of the lease term or
the economic life. Maintenance and repairs are charged to
earnings when incurred. When property and equipment is retired
or sold, the net book value of the asset, reduced by any
proceeds, is charged to gain or loss. For stores in which the
Company is a seller-lessee and does not recover substantially
all construction costs, the Company records the costs in
property and equipment, and amounts funded by the lessor are
recorded as a debt obligation in the accompanying consolidated
balance sheets.
Internal
Software Development Costs
Certain internal software development costs are capitalized and
amortized over the life of the related software. Amounts
capitalized during fiscal 2007, 2006 and 2005 were
$1.6 million, $1.8 million and $1.5 million,
respectively. Accumulated amortization as of February 3,
2008 and February 4, 2007 was $5.6 million and
$4.7 million, respectively.
Goodwill
and Other Intangible Assets
In accordance with SFAS No. 142,
Goodwill and Other
Intangible Assets
, goodwill is no longer amortized, but
instead is assessed for impairment at least annually. Other
intangible assets consist of: (1) leasehold interests
representing the net present value of the excess of the fair
rental value over the respective contractual rent of facilities
under operating leases acquired in business combinations;
(2) trade names and trademarks; and (3) customer
relationship intangibles. Amortization expense is computed on a
straight-line basis over the respective life of the intangibles.
See Note 8 Goodwill and Other Intangible Assets
for the impact of this amortization on the statement of
operations.
Impairment
of Other Long-Lived Assets
Long-lived assets and identifiable intangible assets to be held
and used or disposed of are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In the event assets
are impaired; losses are recognized based on the excess carrying
amount over the estimated fair value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or
the fair market value less selling costs.
Lease
Obligations
The Company leases all but one of its store locations in
addition to its distribution centers, office space and most
vehicles and equipment. At the inception of the lease, the
Company evaluates each agreement to determine whether the lease
will be accounted for as an operating or capital lease. The term
of the lease used for this evaluation includes renewal option
periods only in instances in which the exercise of the renewal
option can be reasonably assured and failure to exercise such
option would result in an economic penalty. Certain leases
contain rent escalation clauses and rent holidays, which are
recorded on a straight-line basis over the lease term with the
difference between the rent paid and the straight-line rent
recorded as a deferred rent liability. Lease incentive payments
received from landlords are recorded as deferred rent
liabilities and are amortized on a straight-line basis
74
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over the lease term as a reduction in rent. Certain leases
contain provisions that require additional rental payments based
upon a specified sales volume, which are accrued as the
liabilities are incurred.
Self-Insurance
Reserves
The Company purchases third-party insurance for workers
compensation, automobile, product and general liability claims
that exceed a certain dollar threshold. However, the Company is
responsible for the payment of claims under these insured
limits. In estimating the obligation associated with reported
claims and incurred but not reported (IBNR) claims,
the Company utilizes independent actuaries. These actuaries
utilize historical data to project the future development of
reported claims and estimate IBNR claims. Loss estimates are
adjusted based upon actual claims settlements and reported
claims. Although the Company does not expect the amounts
ultimately paid to differ significantly from its estimates,
self-insurance reserves could be affected if future claim
experience differs significantly from the historical trends and
actuarial assumptions. The Companys self-insurance
reserves approximated $24.7 million and $23.5 million
at February 3, 2008 and February 4, 2007,
respectively, and are included with current liabilities in the
accompanying consolidated balance sheets.
Revenue
Recognition
The Company recognizes sales upon the delivery of products to
its customers, which generally occurs at the retail store
locations. For certain commercial customers, the Company also
delivers products to customer locations. All retail and
commercial sales are final upon delivery of products. However,
as a convenience to the customer and as typical of most
retailers, the Company will accept merchandise returns. The
Company generally limits the period of time within which
products may be returned to 60 days and requires returns to
be accompanied by original packaging and a sales receipt. The
Company records an estimate for sales returns based on
historical experience and records this estimate as a reduction
of net sales.
The Company recognizes as sales the fair value of recyclable
auto parts it receives as consideration from customers that
purchase a new auto part. The Company refers to a recyclable
auto part, which may or may not have been purchased from its
stores, as a core. The Company returns these cores
to vendors for cash consideration or to settle an obligation to
return a given number of cores to vendors in situations where
the Company does not pay for the core component of the inventory
acquisition costs. The Company charges customers who purchase a
new auto part a specified amount for a core, which exceeds the
value of the core, and refunds to customers that same amount if
a used core is returned at the point of sale of the new part or
upon returning the used part to the store at a later date. If
the customer does not return a core at the point of sale, the
amount charged to the customer which exceeds the value of the
new core is also recognized as sales but is subject to a right
of return at the point of sale and included in the sales return
allowance for merchandise returns described above.
The Company occasionally sponsors mail-in rebate programs to
stimulate sales of particular products. At any one time, the
Company may have several of these programs in effect. The
Company estimates, based on historical experience, the amount of
rebates that will be paid to customers and reduces net sales for
the expected rebate at the time of sale of the product subject
to the rebate. Estimates are adjusted to actual redemptions at
conclusion of the redemption period.
75
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cost
of Sales and Operating and Administrative Expenses
The following summarizes the types of costs the Company reports
in cost of sales as compared to the costs the Company reports in
operating and administrative expenses:
|
|
|
|
Cost of Sales
|
|
|
Operating and Administrative Expenses
|
Total cost of merchandise sold including:
Freight expenses associated with moving merchandise inventories from the Companys vendors to its distribution centers and warehouses;
Vendor allowances;
Cash discounts on payments to vendors;
Inventory shrinkage;
Warranty costs;
Costs associated with purchasing and operating the distribution centers and warehouses, including payroll and benefit costs, occupancy costs and depreciation; and
Freight expenses associated with moving merchandise inventories from the distribution centers to the Companys retail stores.
|
|
|
Payroll and benefit costs for retail and corporate employees, including share-based compensation;
Occupancy costs of retail and corporate facilities;
Depreciation related to retail and corporate assets;
Advertising;
Self-insurance costs, excluding those related to the distribution network;
Professional services; and
Other administrative costs, such as data processing, credit card service fees and supplies.
|
|
|
|
|
Vendor
Allowances
The Company recognizes allowances associated with purchasing and
promotional activities as a reduction of the cost of inventory
in accordance with Emerging Issues Task Force (EITF)
No. 02-16,
Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor.
Based on EITF
No. 02-16,
allowances provided by the Companys vendors are presumed
to be a reduction in the costs of purchasing inventories (to be
recognized in inventory and cost of sales). Amounts recognized
are based on written contracts with vendors.
The Company enters into hundreds of contracts with vendors each
year that contain allowance provisions. Contractual disputes and
misunderstandings may occur with vendors for specific aspects of
a vendors program that could result in adjustments to
allowances the Company earns. The Company adjusts its vendor
allowance recognition for disputes when the disputed amount is
probable and reasonably estimable. Based on historical
experience, the Company also considers in its estimated
recognition that processing errors and other transactional
adjustments will likely be identified upon reconciliation of
amounts earned with vendors. The Company does not believe it is
reasonably likely that such adjustments will have a material
impact on future results of operations.
The Company records the earning of the total vendor allowances
by taking the contract rate and applying it to actual product
purchased from the vendor in the period in which product is
received. Fixed dollar allowances not expressed in terms of
volume of purchases are earned ratably over the vendor program
period, which is generally the calendar year. When a vendor
contract includes a volume minimum or volume incentive
provision, the allowance
76
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accrual rate is estimated based upon the Companys best
estimate of purchases based on historical purchasing patterns
and sales forecasts. Each quarter, the volume estimates and
volume-based accrual rates are re-evaluated based on the actual
cumulative purchases and the expectation for the remainder of
the vendor program year. Adjustments, if necessary, are made on
a quarterly basis. Certain of the Companys vendor
contracts have several year terms, thus requiring recognition
over an extended period.
Vendor allowances earned are recorded as a reduction of
inventory cost at the end of each of the Companys fiscal
quarters. Amounts earned for each vendor are expressed as a
percentage of that vendors purchases for the period and
multiplied by on-hand balances by vendor. This vendor
capitalized allowance amount is adjusted as inventory levels
change for each vendor each period. In summary, allowances are
earned as product is received, recorded as a reduction in
inventory cost while the product is on hand, and recognized as a
reduction to cost of sales when the corresponding inventory is
sold.
Warranty
The Company or the vendors supplying its products provide the
Companys customers limited warranties on certain products
that range from 30 days to lifetime warranties. In most
cases, the Companys vendors are responsible for warranty
claims. Warranty costs relating to merchandise sold under
warranty not covered by vendors are estimated and recorded as
warranty obligations at the time of sale based on historical
experience and recent trends. These obligations are recorded as
a component of accrued expenses. On a quarterly basis, the
Company assesses the adequacy of its recorded warranty liability
and adjusts the liability and cost of sales as necessary.
The following table reflects the changes in the Companys
warranty reserves ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Warranty reserves, beginning of period
|
|
$
|
3,908
|
|
|
$
|
2,580
|
|
|
$
|
2,918
|
|
Provision for warranty
|
|
|
6,233
|
|
|
|
3,428
|
|
|
|
963
|
|
Allowances from vendors
|
|
|
5,006
|
|
|
|
6,067
|
|
|
|
5,841
|
|
Reserves utilized
|
|
|
(10,555
|
)
|
|
|
(8,167
|
)
|
|
|
(7,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserves, end of period
|
|
$
|
4,592
|
|
|
$
|
3,908
|
|
|
$
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys warranty reserves increased by approximately
$0.7 million in fiscal 2007, compared to fiscal 2006. The
Company entered into new agreements with certain of its vendors.
In exchange for lower merchandise costs from these vendors, the
Company agreed to be responsible for returns from its customers.
This resulted in a reduction of allowances from vendors and an
increase in inventory destroyed. The Company also generally
experienced a higher level of merchandise that was destroyed in
fiscal 2007. This is the key input into the Companys
historical estimation methodology which resulted in an increase
in the provision for warranty expense in fiscal 2007.
The Companys warranty reserves increased by approximately
$1.3 million in fiscal 2006, compared to fiscal 2005. In
fiscal 2006, the warranty provision increased by approximately
$2.5 million, primarily as a result of an increase in sales
volume over fiscal 2005 due to the acquisition of Murrays
in the fourth quarter of fiscal 2005.
77
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Store
Closing Costs
If a store location does not meet the Companys required
performance criteria, it is considered for closure, even if the
Company is contractually committed for future rental costs. The
Company provides a discounted allowance for estimated lease
costs to be incurred subsequent to store closure. The Company
establishes this allowance based on an assessment of market
conditions for rents and include assumptions for vacancy periods
and sublease rentals. Operating costs associated with closed
stores are expensed when incurred.
There are several significant assumptions that underlie the
estimates inherent in the closed store reserve, including:
(1) real estate broker estimates for vacancy periods and
estimated sublease rates based on the brokers experience
and expertise, and (2) estimates for occupancy expenses
based on historical averages and, in the case of real estate
taxes, are subject to changes by taxing authorities.
Accordingly, the Company continuously reviews these assumptions
and revises the reserve as necessary.
In addition, there are certain assumptions that are sensitive to
deviations and could produce actual results significantly
different from managements original estimates. These
assumptions may be revised due to the following issues:
(1) national or regional economic conditions that can
shorten or lengthen vacancy periods; (2) changes in
neighborhoods surrounding store locations resulting in longer
than anticipated vacancy periods; (3) changing subtenant
needs resulting in functional obsolescence of store locations;
and (4) subtenant defaults or bankruptcies resulting in
vacant properties. Historically, the Company has recorded
revisions in estimates to the closed store reserve that have
resulted from these issues. These revisions usually result from
overall longer vacancy periods on store locations and realized
sublease rates lower than originally anticipated.
Stock-Based
Compensation
Effective January 30, 2006, the Company adopted
SFAS No. 123R,
Share-Based Payment
, using the
modified-prospective method and began recognizing compensation
expense for its share-based compensation plans based on the fair
value of the awards. Share-based payments include stock option
grants, restricted stock and a share-based compensation plan
under the Companys long-term incentive plan (the
LTIP). Prior to January 30, 2006, the Company
accounted for its stock-based compensation plans as prescribed
by Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to Employees
. In
accordance with the modified-prospective transition method of
SFAS No. 123R, the Company has not restated prior
periods.
Stock
Options
SFAS No. 123R requires share-based compensation
expense recognized since January 30, 2006 to be based on
the following: a) grant date fair value estimated in
accordance with the original provisions of
SFAS No. 123,
Accounting for Stock-Based
Compensation
, for unvested options granted prior to the
adoption date; and b) grant date fair value estimated in
accordance with the provisions of SFAS No. 123R for
unvested options granted subsequent to the adoption date. The
Company uses the Black-Scholes option-pricing model to value all
options, and the straight-line method to amortize this fair
value as compensation cost over the requisite service period.
Total share-based compensation expense included in operating and
administrative expense in the accompanying consolidated
statements of operations for the fiscal year ended
February 4, 2007 was approximately $2.0 million for
the unvested options granted prior to the adoption date as well
as stock options granted during fiscal 2006. Additionally, the
Company recognized $2.9 million in stock based compensation
related to stock options for fiscal 2007. The remaining
unrecognized compensation cost related to unvested stock options
as of February 3, 2008 (net of estimated forfeitures) was
$5.6 million and the weighted-average period of time over
which this cost will be recognized is 2.5 years. Also in
fiscal 2007 and 2006, the Company extended the expiration dates
on certain stock options due to expire during a period in which
the Company prohibited option exercises due to delays in the
Company filing certain periodic reports with the Securities and
Exchange Commission (SEC) that required the
78
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company suspend use of the relevant
Form S-8
registration statements, resulting in approximately
$0.1 million and $0.4 million, respectively, in
operating and administrative expense. A summary of the
Companys stock option activity and weighted average
exercise price is provided under Note 14
Stock-Based Compensation and Other Employee Benefit Plans.
The fair value of each stock option grant is estimated on the
date of the grant using the Black-Scholes model and is based on
the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2007
|
|
2006
|
|
2005
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Risk free interest rate
|
|
|
4.03% - 5.13%
|
|
|
|
4.45%
|
|
|
|
3.86% - 4.40%
|
|
Expected life of options
|
|
|
4.5 years
|
|
|
|
4.5 years
|
|
|
|
6 years
|
|
Expected volatility
|
|
|
31% - 38%
|
|
|
|
38.03%
|
|
|
|
25% - 33%
|
|
Dividend Yield
The Company has not made any
dividend payments nor does it have plans to pay dividends in the
foreseeable future. An increase in the dividend yield will
decrease compensation expense.
Risk-Free Interest Rate
This is the
U.S. Treasury rate for the date of the grant having a term
equal to the expected life of the option. An increase in the
risk-free interest rate will increase compensation expense.
Expected Life
This is the period of time over
which the options granted are expected to remain outstanding and
is based on the mid-point option term under Staff Accounting
Bulletin No. 107,
Share Based Payment
.
Expected Volatility
The Company uses actual
historical changes in the closing market price of its stock to
calculate volatility based on the expected life of the option as
it is managements belief that this is the best indicator
of future volatility. An increase in the expected volatility
will increase compensation expense.
Under SFAS No. 123R forfeitures are estimated at the
time of valuation and reduce expense ratably over the vesting
period. This estimate is adjusted periodically based on the
extent to which actual forfeitures differ, or are expected to
differ, from the previous estimate.
Restricted
Stock
The Company has in effect a performance incentive plan for the
Companys senior management under which the Company awards
shares of restricted stock that vest equally over a three-year
period. Shares are forfeited when an employee ceases employment.
For accounting purposes, restricted stock is valued at the grant
date fair value of the common stock. The Companys
accounting for restricted stock was not affected by the adoption
of SFAS No. 123R. At January 29, 2006, the
Company had $1.7 million of deferred compensation costs
related to unvested restricted stock included in
stockholders equity. In accordance with
SFAS No. 123R, the deferred compensation balance of
$1.7 million as of January 29, 2006 was reclassified
to additional paid-in capital. Total share-based compensation
expense for restricted stock included in operating and
administrative expense in the accompanying consolidated
statements of operations for fiscal 2007, 2006 and 2005 was
approximately $1.0 million, $0.6 million and
$0.6 million, respectively. The remaining unrecognized
compensation cost related to unvested awards as of
February 3, 2008 was $2.6 million, and the
weighted-average period of time over which this cost will be
recognized is approximately 2.4 years. A summary of the
Companys restricted stock activity and weighted average
grant date price is provided under Note 14
Stock-Based Compensation and Other Employee Benefit Plans.
79
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Term
Incentive Plan
In fiscal 2005, the Compensation Committee of the Companys
Board of Directors adopted the CSK Auto Corporation LTIP. See
Note 14 Stock-Based Compensation and Other
Employee Benefit Plans. For accounting purposes, the awards
granted under the LTIP are considered to be service-based, cash
settled stock appreciation rights (SARs). The award
is classified as a liability as the LTIP requires the units to
be paid in cash. The Company does not have the option to pay the
participant in any other form. While the amount of cash, if any,
that will ultimately be received by the participant is not known
until the end of the measuring period, the only condition that
determines whether the award is vested is whether the employee
is still employed by the Company (i.e., completes the required
service) at the payment date. Since the amount of cash to be
received by the participant is indeterminate at the grant date,
SARs are subject to variable plan accounting treatment prior to
adoption of SFAS No. 123R whereby the intrinsic value
of the award is recognized each period (multiplied by the
related percentage of service rendered). FASB Interpretation
No. 28,
Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans
(FIN 28) requires that the compensation
cost for such awards be recognized over the service period for
each separately vesting tranche of award as though the award
were, in substance, multiple awards.
The Company concluded that, for purposes of initial recognition,
the initial award date occurred on June 28, 2005, as both
the number of units that each initial participant was entitled
to and the exercise price were known by such initial
participants at that date. However, since the Companys
stock price did not exceed $20 per share at any time from the
measurement date through the end of fiscal 2005, no compensation
cost was recognized, and no pro-forma expense for this award is
reflected in the SFAS No. 123 disclosures.
The LTIP units are classified as a liability award under
SFAS No. 123R, and as such, must be measured at fair
value at the grant date and recognized as compensation cost over
the service period in accordance with FIN 28. The modified
prospective transition rules under SFAS No. 123R
require that for an outstanding instrument that previously was
classified as a liability and measured at intrinsic value, an
entity should recognize the effect of initially measuring the
liability at its fair value, net of any related tax effect, as
the cumulative effect of a change in accounting principle. At
the beginning of fiscal 2006, the Company recorded
$1.0 million, net of $0.6 million income tax benefit,
as a cumulative effect of a change in accounting principle for
the LTIP fair value liability under SFAS No. 123R upon
adoption. For the fiscal year ended February 4, 2007, the
Company recognized $0.3 million of expense related to the
LTIP units. For the year ended February 3, 2008, the
Company reduced the liability for the LTIP units by
$1.2 million, as a result of the decrease in market price
based on the decline in the Companys stock price when
compared to the previous fiscal year end. At February 3,
2008, the Company had recorded a liability of $0.8 million
related to LTIP units and had $0.4 million of unrecognized
compensation cost related to LTIP units. As a liability based
instrument, the LTIP awards will be remeasured at each balance
sheet date, such that the net compensation expense recorded over
the full four-year vesting period of the LTIP units will equal
the cash payments, if any, made by the Company to the LTIP
participants.
Total stock-based compensation expense included in operating and
administrative expenses in the Companys statement of
operations for the years ended February 3, 2008 and
February 4, 2007 was $2.8 million and
$3.4 million, respectively, and the Company recognized a
corresponding income tax benefit for these years of
approximately $1.1 million and $1.4 million,
respectively. In addition, the Company incurred
$1.6 million ($1.0 million net of income tax benefit)
of transition expense upon adoption of SFAS No. 123R,
which is shown as a cumulative effect of a change in accounting
principle.
80
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to options
granted under the Companys stock plans for the fiscal year
ended January 29, 2006 (in thousands, except per share
data):
|
|
|
|
|
Net income as reported
|
|
$
|
57,790
|
|
Add: Stock-based employee compensation expense in reported net
income, net of related income taxes
|
|
|
351
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related income taxes
|
|
|
(4,535
|
)
|
|
|
|
|
|
Net income pro forma
|
|
$
|
53,606
|
|
|
|
|
|
|
Earnings per share basic:
|
|
|
|
|
As reported
|
|
$
|
1.30
|
|
Pro forma
|
|
$
|
1.21
|
|
Earnings per share diluted:
|
|
|
|
|
As reported
|
|
$
|
1.29
|
|
Pro forma
|
|
$
|
1.20
|
|
As reported shares:
|
|
|
|
|
Basic
|
|
|
44,465
|
|
Diluted
|
|
|
44,812
|
|
Pro forma shares used in calculation:
|
|
|
|
|
Basic
|
|
|
44,465
|
|
Diluted
|
|
|
44,823
|
|
SFAS No. 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow rather than as an operating
cash flow. This requirement reduces net operating cash flows and
increases net financing cash flows in periods after adoption.
While the Company cannot estimate what those amounts will be in
the future (because they depend on when employees exercise stock
options and the current market price), the amount of operating
cash flows recognized for such excess tax deductions for stock
option exercises was $0.2 million in fiscal 2005. There
were no excess tax benefits recorded in fiscal 2007 or fiscal
2006.
In November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP)
FAS No. 123R-3,
Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards
. This FSP requires an entity
to follow either the transition guidance for the additional
paid-in-capital
pool as prescribed in SFAS No. 123R, or the
alternative method as described in the FSP. An entity that
adopts SFAS No. 123R using the modified prospective
application transition method may make a one-time election to
adopt the transition method described in this FSP. The Company
elected to calculate the additional
paid-in-capital
pool as prescribed in the FSP (referred to as the
short-cut method) effective with its adoption of
SFAS No. 123R.
Advertising
Advertising costs are expensed as incurred. In accordance with
EITF
No. 02-16,
cooperative advertising arrangements are considered a reduction
of product costs, unless the Company is specifically required to
substantiate costs incurred to the vendor and does so in the
normal course of business. Advertising expense for fiscal 2007,
2006 and 2005 totaled $50.2 million, $55.7 million and
$50.4 million, respectively.
81
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preopening
Costs
Preopening expenses, which consist primarily of payroll and
occupancy costs, are expensed as incurred.
Income
Taxes
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts (temporary
differences) at each year-end based on enacted tax laws and
statutory rates applicable to the period in which the temporary
differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. Income tax
expense includes both taxes payable for the period and the
change during the period in deferred tax assets and liabilities.
Income tax expense reflects the Companys best estimates
and assumptions regarding, among other things, the level of
future taxable income, interpretation of the tax laws, and tax
planning. Future changes in tax laws, changes in projected
levels of taxable income, and tax planning could affect the
effective tax rate and tax balances recorded.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109,
Accounting for Income Taxes
.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Company adopted the
provisions of FIN 48 on February 5, 2007. The adoption
of FIN 48 resulted in no cumulative effect adjustment to
retained earnings.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Legal
Matters
The Company currently and from time to time is involved in
litigation incidental to the conduct of its business, including
but not limited to asbestos and similar product liability
claims, slips and falls and other general liability claims,
discrimination and employment claims, vendor disputes, and
miscellaneous environmental and real estate claims. The damages
claimed in some of this litigation are substantial. Based on an
internal review, the Company accrues reserves using its best
estimate of the probable and reasonably estimable contingent
liabilities. The Company does not currently believe that any of
these legal claims incidental to the conduct of its business,
individually or in the aggregate, will result in liabilities
material to its consolidated financial position, results of
operations or cash flows. However, if the Companys
estimates related to these contingent liabilities are incorrect,
the future results of operations for any particular fiscal
quarter or year could be materially adversely affected.
In addition to the litigation that is incidental to the
Companys business, the Company is also subject to the
other litigation and governmental investigations described in
Note 21 Legal Matters. Although certain of
these matters are in their early stages and the Company cannot
predict their outcome, an adverse outcome in any of them could
have a material adverse effect on the Companys results of
operations, financial position or cash flows.
82
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3
|
Recent
Accounting Pronouncements
|
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). The interpretation clarifies the
accounting for uncertainty in income taxes recognized in the
Companys financial statements in accordance with
SFAS No. 109,
Accounting for Income Taxes.
The
Company adopted FIN 48 on February 5, 2007. See
Note 13 Income Taxes for a discussion of the
impact of FIN 48.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140
. This statement simplifies accounting
for certain hybrid instruments currently governed by
SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, by allowing fair value remeasurement
of hybrid instruments that contain an embedded derivative that
otherwise would require bifurcation. SFAS No. 155 also
eliminates the guidance in SFAS No. 133 Implementation
Issue No. D1,
Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets
, which provides
such beneficial interests are not subject to
SFAS No. 133. SFAS No. 155 amends
SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities a Replacement of FASB Statement
No. 125
, by eliminating the restriction on passive
derivative instruments that a qualifying special-purpose entity
may hold. Effective February 5, 2007, the Company adopted
SFAS No. 155, which did not affect its financial
condition, results of operations or cash flows.
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140
.
SFAS No. 156 amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities
, with respect to the
accounting for separately recognized servicing assets and
servicing liabilities. SFAS No. 156 is effective for
fiscal years beginning after September 15, 2006. Effective
February 5, 2007, the Company adopted
SFAS No. 156, which did not affect its financial
condition, results of operations or cash flows.
In June 2006, the FASB ratified the consensus reached by the
EITF on
Issue No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income
Statement (That Is, Gross versus Net Presentation)
, that was
effective for fiscal years beginning after December 15,
2006. The Company presents sales net of sales taxes in its
consolidated statement of operations and the adoption of this
EITF issue did not affect its financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which clarifies the definition
of fair value, establishes a framework for measuring fair value
within GAAP and expands the disclosures regarding fair value
measurements. In February 2008, the FASB issued a staff position
that delays the effective date of SFAS No. 157 for all
nonfinancial assets and liabilities except for those recognized
or disclosed at least annually. Except for the delay for
nonfinancial assets and liabilities, SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007 and interim periods within such years. The Company does not
expect the adoption of SFAS No. 157 to have a material
impact on its financial condition, results of operations or cash
flows.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
, which permits entities to choose to measure
many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the impact of SFAS No. 159.
On December 4, 2007, the FASB issued
SFAS No. 141R,
Business Combinations
, which
establishes how an acquiring company recognizes and measures
acquired assets, liabilities, goodwill and minority interest. It
also defines how an acquirer should account for a gain from a
bargain purchase and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination.
SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. Early adoption is
83
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
not permitted. The Company will be required to apply the
provisions of SFAS No. 141R to any future business
combinations consummated after its effective date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
,
which provides guidance and establishes amended accounting and
reporting standards for a parent companys noncontrolling
interest in a subsidiary. SFAS No. 160 is effective
for fiscal years beginning on or after December 15, 2008.
The Company does not expect the adoption of
SFAS No. 160 to have a material impact on its
financial condition, results of operations or cash flows.
In December 2007, the SEC staff issued Staff Accounting Bulletin
(SAB) 110,
Share-Based Payment
, which amends
SAB 107,
Share-Based Payment
, to permit public
companies, under certain circumstances, to use the simplified
method in SAB 107 for employee option grants after
December 31, 2007. Use of the simplified method after
December 2007 is permitted only for companies whose historical
data about their employees exercise behavior does not
provide a reasonable basis for estimating the expected term of
the options. Based on the significant restrictions on employee
trading during the restatement periods (see
Note 21 Legal Matters), the Company has not
experienced regular employee exercise behavior since the
implementation of SFAS No. 123R on January 20,
2006. The Company expects to continue to use the simplified
method as allowed under SAB 110.
Accounts receivable consist of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
Amounts due under vendor allowance programs
|
|
$
|
14,660
|
|
|
$
|
24,122
|
|
Trade receivables from commercial and other customers
|
|
|
19,618
|
|
|
|
17,175
|
|
Landlord, subtenant receivables and other
|
|
|
3,422
|
|
|
|
2,994
|
|
|
|
|
|
|
|
|
|
|
Gross receivables
|
|
|
37,700
|
|
|
|
44,291
|
|
Allowance for doubtful accounts
|
|
|
(378
|
)
|
|
|
(393
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
37,322
|
|
|
$
|
43,898
|
|
|
|
|
|
|
|
|
|
|
Amounts to be paid or credited to the Company by vendors are
reflected as receivables. Pursuant to contract terms, the
Company has the right to offset certain vendor receivables
against corresponding accounts payable, thus minimizing the risk
of non-collection of these receivables.
Inventories are valued at the lower of cost or market, cost
being determined utilizing the
First-in,
First-Out (FIFO) method. At each balance sheet date,
the Company adjusts its inventory carrying balances by an
allowance for inventory shrinkage that has occurred since the
most recent physical inventory and an allowance for inventory
obsolescence, each of which is discussed in greater detail below.
|
|
|
|
|
The Company reduces the FIFO carrying value of its inventory for
estimated loss due to shrinkage since the most recent physical
inventory. Shrinkage expense for fiscal 2007, 2006 and 2005 was
approximately $23.8 million, $31.6 million and
$28.8 million, respectively. While the shrinkage accrual is
based on recent experience, there is a risk that actual losses
may be higher or lower than expected.
|
|
|
|
In certain instances, the Company retains the right to return
obsolete and excess merchandise inventory to its vendors. In
situations where the Company does not have a right to return,
the Company records an allowance representing an estimated loss
for the difference between the cost of any obsolete or excess
inventory and the
|
84
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
estimated retail selling price. Inventory levels and margins
earned on all products are monitored monthly. On a quarterly
basis, the Company assesses whether it expects to sell any
significant amount of inventory below cost and, if so, estimates
and records an allowance.
|
At each balance sheet reporting date, the Company also adjusts
its inventory carrying balances by the capitalization of certain
operating and overhead administrative costs associated with
purchasing and handling of inventory and estimates of vendor
allowances that remain in ending inventory. The components of
ending inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
FIFO Cost
|
|
$
|
540,094
|
|
|
$
|
562,405
|
|
Overhead costs
|
|
|
29,848
|
|
|
|
28,725
|
|
Vendor allowances
|
|
|
(60,067
|
)
|
|
|
(69,469
|
)
|
Shrinkage
|
|
|
(13,030
|
)
|
|
|
(18,116
|
)
|
Obsolescence
|
|
|
(2,194
|
)
|
|
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
494,651
|
|
|
$
|
502,787
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6
|
Property
and Equipment
|
Property and equipment are comprised of the following ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Estimated Useful Life
|
|
|
Land
|
|
$
|
348
|
|
|
$
|
348
|
|
|
|
|
|
Buildings
|
|
|
18,221
|
|
|
|
15,251
|
|
|
|
15 - 25 years
|
|
Leasehold improvements
|
|
|
165,380
|
|
|
|
159,070
|
|
|
|
Shorter of lease term or useful life
|
|
Furniture, fixtures and equipment
|
|
|
182,172
|
|
|
|
168,845
|
|
|
|
3 - 10 years
|
|
Property under capital leases
|
|
|
55,417
|
|
|
|
97,974
|
|
|
|
5 - 15 years or life of lease
|
|
Purchased software
|
|
|
12,725
|
|
|
|
10,829
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434,263
|
|
|
|
452,317
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(269,148
|
)
|
|
|
(277,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
165,115
|
|
|
$
|
174,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for property and equipment, including
amortization of capital leases, totaled $40.7 million,
$40.6 million and $36.6 million for fiscal 2007,
fiscal 2006, and fiscal 2005, respectively. Accumulated
amortization of property under capital leases totaled
$38.6 million and $73.1 million at February 3,
2008 and February 4, 2007, respectively.
The Company evaluates the carrying value of long-lived assets on
an annual basis to determine whether events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable and an impairment loss should be recognized.
Such evaluation is based on the expected utilization of the
related asset and the corresponding useful life.
85
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7
|
Business
Acquisition
|
On December 19, 2005, the Company acquired all of the
outstanding stock of Murrays, a private company
headquartered in Belleville, Michigan, that operated 110
automotive parts and accessories retail stores in Michigan,
Illinois, Ohio and Indiana. The purchase price was
$180.9 million. As of January 29, 2006,
$2.8 million of the purchase price was recorded in other
accrued liabilities, of which all was paid during fiscal 2007.
The Murrays acquisition complemented the Companys
existing operations and expanded the Companys markets
served from 19 to 22 states. The acquisition was
funded from borrowings under a $325.0 million senior
secured asset-based revolving credit facility and from the
issuance of the
6
3
/
4
% senior
exchangeable notes. See Note 8 Goodwill and
Other Intangible Assets.
This transaction has been accounted for in accordance with
SFAS No. 141,
Business Combinations
, and
accordingly the financial position and results of operations
have been included in the Companys operations since the
date of acquisition. In accordance with SFAS No. 141,
the purchase price was allocated to the fair value of the assets
acquired and liabilities assumed, including identifiable
intangible assets. The allocation of purchase price resulted in
an inventory fair value adjustment of $2.8 million, which
was expensed to cost of sales in fiscal 2005 and 2006
corresponding to the periods in which the inventory was sold.
The excess of purchase price over the fair value of net assets
acquired resulted in $104.5 million of non-tax deductible
goodwill primarily related to the anticipated future earnings
and cash flows of the Murrays retail stores, as well as
cost reductions management expects as a result of integrating
administrative functions (including operations, finance, human
resources, purchasing and information technology). Of the
$59.1 million of identifiable intangible assets,
$49.4 million was assigned to Murrays trade name and
trademarks (with a life of 30 years), $9.3 million was
assigned to leasehold interests (with an average life of
17 years) and $0.4 million was assigned to customer
relationships (with a life of 10 years). In addition, the
Company recorded a $7.5 million liability for leasehold
interests for operating leases that had rental commitments in
excess of current market conditions (with an average life of
18 years).
86
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The final purchase price allocation recorded in fiscal 2005 was
as follows ($ in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
480
|
|
Receivables
|
|
|
2,963
|
|
Inventories
|
|
|
51,363
|
|
Deferred income taxes
|
|
|
3,628
|
|
Prepaids and other assets
|
|
|
2,872
|
|
|
|
|
|
|
|
|
|
61,306
|
|
Property and equipment
|
|
|
20,041
|
|
Trade name and trademarks
|
|
|
49,400
|
|
Customer relationships
|
|
|
370
|
|
Leasehold interests
|
|
|
9,324
|
|
Goodwill
|
|
|
104,541
|
|
Other long-term assets
|
|
|
65
|
|
|
|
|
|
|
Total assets acquired
|
|
|
245,047
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
36,494
|
|
Unfavorable leasehold interests
|
|
|
7,482
|
|
Deferred income taxes
|
|
|
19,320
|
|
Other liabilities
|
|
|
804
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
64,100
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
180,947
|
|
|
|
|
|
|
Employee termination and relocation costs have been recorded in
the above purchase price allocation. As of the acquisition date,
the Company began to formulate a plan to terminate or relocate
certain Murrays employees. The Company has finalized the
appropriate staffing levels in Murrays departments
(including operations, finance, human resources, purchasing and
information technology) and the experience levels required to
perform certain general and administrative functions, and paid
approximately $1.2 million in severance and relocation
costs in fiscal 2006. The Company did not close any
Murrays stores as a result of the acquisition.
In August 2006, the Company purchased a franchised Murrays
store for approximately $1.8 million. Net of liabilities
assumed, the Company paid approximately $1.5 million in
cash and recorded $1.4 million in goodwill.
|
|
Note 8
|
Goodwill
and Other Intangible Assets
|
The Company completed its annual goodwill impairment test as of
February 3, 2008, the last day of the fiscal year, and
determined that no impairment of goodwill existed. Under
SFAS No. 142, the Companys stores, including the
Murrays stores acquired in fiscal 2005, are considered
components with similar economic characteristics which can be
aggregated into one reporting unit for goodwill impairment
testing.
The Companys intangible assets, excluding goodwill,
consist of favorable leasehold interests, license agreement,
trade names and trademarks, and customer relationship
intangibles resulting from business acquisitions. Amortization
expense related to intangible assets is computed on a
straight-line basis over the respective useful lives. Leasehold
interests associated with store closures are written off at the
time of closure.
In August 2006, the Company purchased a franchised Murrays
store which resulted in $1.4 million of goodwill. See
Note 7 Business Acquisition.
87
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Of the $59.1 million of identifiable intangible assets
resulting from the fiscal 2005 acquisition of Murrays,
$49.4 million was assigned to Murrays trade name and
trademarks (with a life of 30 years), $9.3 million was
assigned to leasehold interests asset (with an average life of
17 years) and $0.4 million was assigned to customer
relationships (with a life of 10 years). The excess
purchase price over identifiable tangible and intangible assets
was approximately $104.5 million, which was recorded as
goodwill. See Note 7 Business Acquisition.
The changes in intangible assets, including goodwill, for fiscal
2007 are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
Value as of
|
|
|
|
|
|
|
|
|
|
|
|
Value as of
|
|
|
|
February 4,
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
|
2007
|
|
|
Additions
|
|
|
Amortization
|
|
|
Adjustments
|
|
|
2008
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold interests
|
|
$
|
28,655
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,772
|
)
|
|
$
|
26,883
|
|
Accumulated amortization
|
|
|
(12,162
|
)
|
|
|
|
|
|
|
(1,877
|
)
|
|
|
1,471
|
|
|
|
(12,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,493
|
|
|
|
|
|
|
|
(1,877
|
)
|
|
|
(301
|
)
|
|
|
14,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License agreement
|
|
|
4,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,417
|
|
Accumulated amortization
|
|
|
(1,274
|
)
|
|
|
|
|
|
|
(631
|
)
|
|
|
|
|
|
|
(1,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,143
|
|
|
|
|
|
|
|
(631
|
)
|
|
|
|
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and trademarks
|
|
|
49,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,400
|
|
Accumulated amortization
|
|
|
(1,858
|
)
|
|
|
|
|
|
|
(1,642
|
)
|
|
|
|
|
|
|
(3,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,542
|
|
|
|
|
|
|
|
(1,642
|
)
|
|
|
|
|
|
|
45,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
Accumulated amortization
|
|
|
(41
|
)
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangibles, net
|
|
|
67,507
|
|
|
|
|
|
|
|
(4,186
|
)
|
|
|
(301
|
)
|
|
|
63,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
224,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
292,444
|
|
|
$
|
|
|
|
$
|
(4,186
|
)
|
|
$
|
(301
|
)
|
|
$
|
287,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets totaled
$4.2 million, $4.3 million and $2.1 million for
fiscal 2007, fiscal 2006, and fiscal 2005, respectively.
Accumulated amortization of intangible assets totaled
$18.0 million and $15.3 million at February 3,
2008 and February 4, 2007, respectively.
Estimated amortization expense relating to intangible assets for
the next five years is listed below ($ in thousands):
|
|
|
|
|
Fiscal 2008
|
|
$
|
3,993
|
|
Fiscal 2009
|
|
|
3,800
|
|
Fiscal 2010
|
|
|
3,666
|
|
Fiscal 2011
|
|
|
3,521
|
|
Fiscal 2012
|
|
|
2,729
|
|
Thereafter
|
|
|
45,311
|
|
|
|
|
|
|
|
|
$
|
63,020
|
|
|
|
|
|
|
88
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 9
|
Store
Closing Costs
|
On an on-going basis, store locations are reviewed and analyzed
based on several factors including market saturation, store
profitability, and store size and format. In addition, the
Company analyzes sales trends, geographical and competitive
factors to determine the viability and future profitability of
its store locations. If a store location does not meet the
Companys required performance criteria, it is considered
for closure. As a result of past acquisitions, the Company has
closed numerous stores due to overlap with previously existing
store locations.
The Company accounts for the costs of closed stores in
accordance with SFAS No. 146,
Accounting for Costs
Associated with Exit or Disposal Activities
. Under
SFAS No. 146, the fair value of future costs of
operating lease commitments for closed stores are recorded as a
liability at the date the Company ceases operating the store.
Fair value of the liability is the present value of future cash
flows discounted by a credit-adjusted risk free rate. Accretion
expense represents interest on the Companys recorded
closed store liabilities and is calculated by using the same
credit-adjusted risk free rate used to discount the cash flows.
In addition, SFAS No. 146 also requires that the
amount of remaining lease payments owed be reduced by estimated
sublease income (but not to an amount less than zero). Sublease
income in excess of costs associated with the lease is
recognized as it is earned and included as a reduction to
operating and administrative expenses in the accompanying
financial statements.
The allowance for store closing costs is included in accrued
expenses and other long-term liabilities in the accompanying
financial statements and represents the discounted value of the
following future net cash outflows related to closed stores:
(1) future rents and other contractual expenses to be paid
over the remaining terms of the lease agreements for the stores
(net of estimated sublease income) and (2) lease
commissions associated with obtaining store subleases. Certain
operating expenses related to closed stores, such as utilities
and repairs, are expensed as incurred and the Company does not
incur employee termination costs when stores are closed. In
addition, the Company expenses as incurred and reports as store
closing costs operating expenses it incurs when closing a store.
These expenses include temporary labor and transportation costs
for inventory, fixtures and other assets owned in the store
being closed.
The following tabular presentation provides detailed information
regarding the Companys SFAS No. 146 store
closing costs ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
SFAS No. 146 liability balance, beginning of year
|
|
$
|
4,911
|
|
|
$
|
7,033
|
|
|
$
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 146 provision for contractual obligations,
net of estimated sublease income for stores closed during the
period
|
|
|
1,754
|
|
|
|
258
|
|
|
|
246
|
|
Revisions in SFAS No. 146 estimates
|
|
|
(474
|
)
|
|
|
112
|
|
|
|
1,505
|
|
Accretion
|
|
|
231
|
|
|
|
306
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 146 store closing costs expensed in the period
|
|
|
1,511
|
|
|
|
676
|
|
|
|
2,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments Murrays
Discount Auto Stores
|
|
|
|
|
|
|
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations, net of sublease recoveries
|
|
|
(2,333
|
)
|
|
|
(2,383
|
)
|
|
|
(2,235
|
)
|
Sublease commissions and buyouts
|
|
|
(1,062
|
)
|
|
|
(415
|
)
|
|
|
(1,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
(3,395
|
)
|
|
|
(2,798
|
)
|
|
|
(3,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 146 liability balance, end of year
|
|
$
|
3,027
|
|
|
$
|
4,911
|
|
|
$
|
7,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Store closing costs incurred during the periods are comprised of
($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
SFAS No. 146 store closing costs expensed in the period
|
|
$
|
1,511
|
|
|
$
|
676
|
|
|
$
|
2,171
|
|
Period costs related to closed stores
|
|
|
472
|
|
|
|
811
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total store closing costs
|
|
$
|
1,983
|
|
|
$
|
1,487
|
|
|
$
|
2,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2007, the Company recorded the following:
(1) $1.8 million in SFAS No. 146 charges
associated with fiscal 2007 store closures for stores with
contractual lease obligations remaining at the closure date;
(2) $0.5 million reduction in expense resulting from
revisions in SFAS No. 146 estimates, primarily as a
result of increases in sublease rent and buyouts of certain
store leases at a cost less than the recorded liability for
these closed stores; and (3) $0.2 million associated
with accretion expense relating to the discounting of closed
store liabilities. In addition, the Company incurred
$0.5 million of other operating expenses such as store
closing expenses and utilities, repairs and maintenance costs
related to closed stores that are expensed as incurred.
The $1.8 million SFAS No. 146 provision described
above includes costs for the five Pay N Save stores the Company
closed during fiscal 2007. The Company previously operated five
value concept retail stores under the Pay N Save brand name in
the Phoenix, Arizona metropolitan area. The Pay N Save concept
provided the Company with the ability to experiment with new
products to determine the level of customer demand before
committing to purchase and offer the products in the CSK stores.
As a part of its continuing review of store results, the Company
made the decision to close the Pay N Save stores. All stores
were closed during the fiscal year ending February 3, 2008.
During fiscal 2006, the Company recorded the following:
(1) $0.3 million in SFAS No. 146 charges
associated with fiscal 2006 store closures for stores with
contractual lease obligations remaining at the closure date;
(2) $0.1 million of expense resulting from revisions
in SFAS No. 146 estimates; and
(3) $0.3 million associated with accretion expense
relating to the discounting of closed store liabilities. In
addition, the Company incurred $0.8 million of other
operating expenses such as store closing expenses and utilities,
repairs and maintenance costs related to closed stores that are
expensed as incurred.
During fiscal 2005, the Company recorded the following:
(1) $0.2 million in SFAS No. 146 charges
associated with fiscal 2005 store closures for stores with
contractual lease obligations remaining at the closure date;
(2) $1.5 million of expense resulting from revisions
in SFAS No. 146 estimates, primarily related to stores
that were subleased and became vacant as well as rent increases
in master lease agreements; and (3) $0.4 million
associated with accretion expense relating to the discounting of
closed store liabilities. In addition, the Company incurred
$0.7 million of other operating expenses such as store
closing expenses and utilities, repairs and maintenance costs
related to closed stores that are expensed as incurred.
At February 3, 2008, the Companys $3.0 million
liability for store closing costs consisted of ($ in thousands):
|
|
|
|
|
Future contractual commitments for rent and occupancy expenses
|
|
$
|
19,938
|
|
Estimated sublease income, net of sublease commissions
|
|
|
(16,458
|
)
|
Accretion expense to be recognized in future periods
|
|
|
(453
|
)
|
|
|
|
|
|
Total liability for store closing costs
|
|
$
|
3,027
|
|
|
|
|
|
|
Stores are included in the liability for store closing costs
when a store is closed with a remaining contractual obligation
under a lease agreement. Stores that are closed at the end of a
contractual lease period are not included in the Companys
liability for store closing costs. It is the Companys
practice to sublease or attempt to sublease any
90
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
vacant locations for which it maintains a contractual lease
obligation. Locations are removed from the liability for store
closing costs when the contractual lease agreement has expired
or is terminated through early buyout.
Location activity for stores and service centers included in the
liability for store closing costs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 3,
|
|
February 4,
|
|
January 29,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Number of closed locations, beginning of period
|
|
|
175
|
|
|
|
183
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Locations added during the period
|
|
|
7
|
|
|
|
9
|
|
|
|
5
|
|
Locations removed during the period
|
|
|
(34
|
)
|
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net locations added (removed) during the period
|
|
|
(27
|
)
|
|
|
(8
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of closed locations, end of period
|
|
|
148
|
|
|
|
175
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 3, 2008, 148 locations were included in the
allowance for store closing costs, consisting of 97 store
locations and 51 service centers. Of the store locations, 14
locations were vacant and 83 locations were subleased. Of the
service centers, 3 were vacant and 48 were subleased.
Approximately 63 locations included in the liability at the end
of fiscal 2007 have contractual lease terms that expire in
fiscal 2008.
Overview
Outstanding debt, excluding capital leases, is as follows ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
Term loan facility
|
|
$
|
345,647
|
|
|
$
|
349,125
|
|
Senior credit facility
|
|
|
46,500
|
|
|
|
52,000
|
|
6
3
/
4
% senior
exchangeable
notes
(1)
|
|
|
94,635
|
|
|
|
93,061
|
|
Seller financing arrangements
|
|
|
16,189
|
|
|
|
13,279
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
502,971
|
|
|
|
507,465
|
|
Less: Current portion of term loan facility
|
|
|
3,444
|
|
|
|
3,478
|
|
Senior credit facility
|
|
|
46,500
|
|
|
|
52,000
|
|
Current maturities of seller
financing arrangements
|
|
|
607
|
|
|
|
620
|
|
|
|
|
|
|
|
|
|
|
Total debt (non-current)
|
|
$
|
452,420
|
|
|
$
|
451,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Carrying balance reduced by discount of $5.4 million and
$6.9 million at February 3, 2008 and February 4, 2007,
respectively, in accordance with EITF
No. 06-6.
|
Term
Loan Facility
In the second quarter of fiscal 2006, Auto entered into a
$350.0 million term loan facility (Term Loan
Facility). The loans under the Term Loan Facility
(Term Loans) bear interest at a base rate or the
LIBOR rate, plus a margin that fluctuates depending upon the
Companys corporate rating. At February 3, 2008, loans
under the Term Loan Facility bore interest at 11.625%. The Term
Loans are guaranteed by the Company and CSKAUTO.COM, Inc., a
wholly owned subsidiary of Auto. The Term Loans are secured by a
second lien security interest in certain assets,
91
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
primarily inventory and receivables, of Auto and the guarantors
and by a first lien security interest in substantially all of
their other assets. The Term Loans call for repayment in
consecutive quarterly installments, which began on
December 31, 2006, in an amount equal to 0.25% of the
aggregate principal amount of the Term Loans, with the balance
payable in full on June 30, 2012 which is the sixth
anniversary of the closing date. Issuance costs incurred in
fiscal 2006 associated with the Term Loan Facility were
approximately $10.7 million and are being amortized over
the six-year term of the facility.
On October 10, 2007, the Company entered into the third
amendment to the Term Loan Facility. An amendment fee of
approximately $0.9 million was paid in connection with this
amendment and the cost is being amortized over the remaining
term of the Term Loan Facility. The amendment increased the
spreads used to calculate the rate at which funds borrowed under
the Term Loan Facility accrue interest by either 0.25% or 0.50%
and changed the basis for determining the spread amount from the
rating of the Term Loans to the Companys corporate rating.
Based on the Companys corporate rating at the time of the
amendment, the interest rate on funds borrowed under the Term
Loan Facility increased by 0.50% as a result of the amendment.
The amendment also altered certain covenant provisions, which
were subsequently amended by a fourth amendment to the Term Loan
Facility.
On December 18, 2007, the Company entered into a fourth
amendment to the Term Loan Facility. An amendment fee of
approximately $3.5 million was paid in connection with this
amendment and the cost is being amortized over the remaining
term of the Term Loan Facility. The amendment increased the
spreads used to calculate the rate at which funds borrowed under
the Facility accrue interest to 5.00%, 6.00% or 7.00% in the
case of loans bearing interest based on the LIBOR rate, and
4.00%, 5.00% or 6.00%, in the case of loans bearing interest at
a base rate, in each case depending on the Companys
then-current corporate ratings. At December 18, 2007, the
applicable interest rate under the Facility became LIBOR plus
5%, an increase of 1.25%, as a result of the amendment. The
amendment also modified the minimum fixed charge coverage ratios
and the maximum leverage ratios contained in the Term Loan
Facility for the fourth quarter of fiscal 2007 and each of the
quarters of fiscal 2008.
In addition to the covenant and interest rate changes, the
fourth amendment added a prepayment penalty with respect to
optional prepayments and mandatory prepayments required in
connection with debt and equity issuances, asset sales and
recovery events, equal to 1% of any loans under the Term Loan
Facility that are prepaid prior to the second anniversary of the
fourth amendment. The amendment also added the option, the
availability of which depends on the Companys then-current
corporate ratings, to pay in kind 50 basis points per annum
or 100 basis points per annum, depending on the
Companys then-current corporate ratings, of any interest
accruing on and after January 8, 2008 by adding such amount
to the principal of the loans under the Term Loan Facility as of
the interest payment date on which such interest payment is due.
The amendment also added a limitation on annual capital
expenditures by the Company of $25 million for each of
fiscal 2008 and fiscal 2009, which is less than the Company has
spent historically, provided that any portion of such amount not
expended in fiscal 2008 may be carried over for expenditure
during the first two quarters of fiscal 2009.
The Term Loan Facility contains, among other things, limitations
on liens, indebtedness, mergers, disposition of assets,
investments, payments in respect of capital stock, modifications
of material indebtedness, changes in fiscal year, transactions
with affiliates, lines of business, and swap agreements. Auto is
also subject to financial covenants under the Term Loan Facility
measuring its performance against standards set for leverage and
fixed charge coverage. Under the maximum leverage covenant
(total debt to EBITDA) contained in the Term Loan Facility, as
amended on December 18, 2007 to increase the maximum
leverage ratios permitted under the Facility, at
February 3, 2008, the Company would have only been
permitted to have $110.9 million of additional debt
outstanding, regardless of which facility such debt was borrowed
under.
92
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Senior
Credit Facility Revolving Line of
Credit
At February 3, 2008 and February 4, 2007, Auto had a
$325.0 million senior secured revolving line of credit
(Senior Credit Facility). Auto is the borrower under
the agreement, and it is guaranteed by the Company and
CSKAUTO.COM, Inc. Borrowings under the Senior Credit Facility
bear interest at a variable interest rate based on one of two
indices, either (i) LIBOR plus an applicable margin that
varies (1.25% to 1.75%) depending upon Autos average daily
availability under the agreement measured using certain
borrowing base tests, or (ii) the Alternate Base Rate (as
defined in the agreement). At February 3, 2008, loans under
the Senior Credit Facility bore interest at a weighted average
rate of 5.30%. The Senior Credit Facility matures in July 2010.
During the second quarter of fiscal 2006 and during fiscal 2007,
the Company entered into several waivers under the Senior Credit
Facility that allowed it to delay filing certain periodic
reports with the SEC. Upon the filing of the Quarterly Report
for the second quarter of fiscal 2007 on October 12, 2007,
the Company had filed all previously delinquent periodic SEC
filings, and the waiver of the filing deadlines described above
terminated.
Availability under the Senior Credit Facility is limited to the
lesser of the revolving commitment of $325.0 million and an
amount determined by a borrowing base limitation. The borrowing
base limitation is based upon a formula involving certain
percentages of eligible inventory and accounts receivable owned
by Auto. As a result of the limitations imposed by the borrowing
base formula, at February 3, 2008, Auto could borrow up to
$161.7 million in addition to the $46.5 million
borrowed under the Senior Credit Facility at February 3,
2008 and the $29.4 million of stand-by letters of credit
outstanding under the Senior Credit Facility at that date.
However, the maximum leverage covenant of the Term Loan Facility
described above limits the total amount of indebtedness the
Company can have outstanding and, as of February 3, 2008,
would have only permitted approximately $110.9 million of
additional borrowings, regardless of which facility they were
borrowed under.
Loans under the Senior Credit Facility are collateralized by a
first priority security interest in certain of the
Companys assets, primarily inventory and accounts
receivable, and a second priority security interest in certain
of the Companys other assets. The Senior Credit Facility
contains negative covenants and restrictions on actions by Auto
and its subsidiaries including, without limitation, restrictions
and limitations on indebtedness, liens, guarantees, mergers,
asset dispositions, investments, loans, advances and
acquisitions, payment of dividends, transactions with
affiliates, change in business conducted, and certain
prepayments and amendments of indebtedness. In addition, Auto
is, under certain circumstances not applicable for the year
ended February 3, 2008, subject to a minimum ratio of
consolidated earnings before interest, taxes, depreciation,
amortization and rent expense, or EBITDAR, to fixed charges (as
defined in the agreement, the Fixed Charge Coverage
Ratio) under a Senior Credit Facility financial
maintenance covenant. However, under the second waiver the
Company entered into during fiscal 2006 and under all subsequent
waivers, Auto was required to maintain a minimum 1:1 Fixed
Charge Coverage Ratio imposed by such waivers until the
termination of such waivers. The filing of the Quarterly Report
for the second quarter of fiscal 2007 resulted in the
termination of the requirement to maintain the minimum 1:1 Fixed
Charge Coverage Ratio imposed by these waivers.
6
3
/
4
% Notes
The Company has $100.0 million of
6
3
/
4
% senior
exchangeable notes
(6
3
/
4
% Notes)
outstanding. In June 2006, the Company commenced a cash tender
offer and consent solicitation with respect to its then
$100.0 million of
4
5
/
8
% senior
exchangeable notes
(4
5
/
8
% Notes)
as a result of the Companys inability to timely file its
fiscal 2005 consolidated financial statements with the SEC as a
result of both the Audit Committee-led investigation and the
need to restate its financial statements. The Company did not
purchase any notes in the tender offer because holders of a
majority of the outstanding
4
5
/
8
% Notes
did not tender in the offer prior to its expiration date. The
Company later obtained the consent of the holders of a majority
of the
4
5
/
8
% Notes
to enter into a supplemental indenture to the indenture under
which the
4
5
/
8
% Notes
were originally issued that (i) waived any default arising
from Autos failure to file certain financial information
with the Trustee for the notes, (ii) exempted Auto from
compliance with the
93
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SEC filing covenants in the indenture until June 30, 2007,
(iii) increased the interest rate of the notes to
6
3
/
4
%
per year until December 15, 2010 and
6
1
/
2
%
per year thereafter, and (iv) increased the exchange rate
of the notes from 49.8473 shares of the Companys
common stock per $1,000 principal amount of notes to
60.6061 shares of the Companys common stock per
$1,000 principal amount of notes. All other terms of the
indenture are unchanged. Costs associated with the tender offer
and supplemental indenture were approximately $0.5 million
and were recognized in operating and administrative expenses in
the second quarter of fiscal 2006. Under the registration rights
agreement (see below), additional interest of 25 basis
points began to accrue on the
6
3
/
4
% Notes
in March 2006 and increased to 50 basis points in June
2006. In total, the Company incurred approximately
$1.5 million in additional interest expense in fiscal 2006
related to the increase in the coupon interest rate to
6
3
/
4
%
and the additional interest expense under the registration
rights agreement.
Also, in accordance with EITF
No. 06-6,
Debtors Accounting for a Modification (or Exchange) of
Convertible Debt Instruments
, the changes to the
6
3
/
4
% Notes
were recorded in fiscal 2006 as a modification, not an
extinguishment, of the debt. The Company recorded the increase
in the fair value of the exchange option as a debt discount with
a corresponding increase to additional
paid-in-capital
in stockholders equity. The debt discount was
$7.7 million and is being amortized to interest expense
following the interest method to the first date the noteholders
could require repayment. Total amortization on the debt discount
was $0.8 million for the year ended February 4, 2007
and $1.6 million for the year ended February 3, 2008.
The
6
3
/
4
% Notes
are exchangeable into cash and shares of the Companys
common stock. Upon exchange of the
6
3
/
4
% Notes,
the Company will deliver cash equal to the lesser of the
aggregate principal amount of notes to be exchanged and the
Companys total exchange obligation and, in the event the
Companys total exchange obligation
94
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exceeds the aggregate principal amount of notes to be exchanged,
shares of the Companys common stock in respect of that
excess. The following table sets forth key terms of the
6
3
/
4
% Notes:
|
|
|
|
Terms
|
|
|
6
3
/
4
% Notes
|
Interest Rate
|
|
|
6.75% per year until December 15, 2010; 6.50% thereafter
|
|
|
|
|
Exchange Rate
|
|
|
60.6061 shares per $1,000 principal (equivalent to an
initial exchange price of approximately $16.50 per share)
|
|
|
|
|
Maximum CSK shares exchangeable
|
|
|
6,060,610 common shares, subject to adjustment in certain
circumstances
|
|
|
|
|
Maturity date
|
|
|
December 15, 2025
|
|
|
|
|
Guaranteed by
|
|
|
CSK Auto Corporation and all of Autos present and future
domestic subsidiaries, jointly and severally, on a senior basis
|
|
|
|
|
Dates that the noteholders may require Auto to repurchase some
or all for cash at a repurchase price equal to 100% of the
principal amount of the notes being repurchased, plus any
accrued and unpaid interest
|
|
|
December 15, 2010, December 15, 2015, and December 15, 2020 or
following a fundamental change as described in the indenture
|
|
|
|
|
Issuance costs being amortized over a
5-year
period, corresponding to the first date the noteholders could
require repayment
|
|
|
$3.7 million
|
|
|
|
|
Auto will not be able to redeem notes
|
|
|
Prior to December 15, 2010
|
|
|
|
|
Auto may redeem for cash some or all of the notes
|
|
|
On or after December 15, 2010, upon at least 35 calendar
days notice
|
|
|
|
|
Redemption price
|
|
|
Equal to 100% of the principal amount plus any accrued and
unpaid interest and additional interest, if any, to, but not
including, the redemption date
|
|
|
|
|
Prior to their stated maturity, the
6
3
/
4
% Notes
are exchangeable by the holder only under the following
circumstances:
|
|
|
|
|
During any fiscal quarter (and only during that fiscal quarter)
commencing after January 29, 2006, if the last reported
sale price of the Companys common stock is greater than or
equal to 130% of the exchange price for at least 20 trading days
in the period of 30 consecutive trading days ending on the last
trading day of the preceding fiscal quarter;
|
|
|
|
If the
6
3
/
4
% Notes
have been called for redemption by Auto; or
|
95
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Upon the occurrence of specified corporate transactions, such as
a change in control, as described in the indenture under which
the
6
3
/
4
% Notes
were issued.
|
If the
6
3
/
4
% Notes
become exchangeable, the corresponding debt will be reclassified
from long-term to current for as long as the notes remain
exchangeable.
EITF
No. 00-19,
Accounting
for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock
,
provides guidance for distinguishing between permanent equity,
temporary equity, and assets and liabilities. The embedded
exchange feature in the
6
3
/
4
% Notes
provides for the issuance of common shares to the extent the
Companys exchange obligation exceeds the debt principal.
The share exchange feature and the embedded put options and call
options in the debt instrument meet the requirements of EITF
No. 00-19
to be accounted for as equity instruments. As such, the share
exchange feature and the embedded options have not been
accounted for as derivatives (which would be marked to market
each reporting period). In the event the
6
3
/
4
% Notes
are exchanged, the exchange will be accounted for in a similar
manner to a conversion with no gain or loss, as the cash payment
of principal reduces the liability equal to the face amount of
the
6
3
/
4
% Notes
recorded at the time of their issuance. Any accrued interest on
the debt will not be paid separately upon an exchange and will
be reclassified to equity. Incremental net shares for the
6
3
/
4
% Notes
exchange feature were not included in the diluted earnings per
share calculation for the year ended February 3, 2008,
since the Companys average common stock price did not
exceed $16.50 per share for this period.
The Company entered into a registration rights agreement with
respect to the
6
3
/
4
% Notes
and the underlying shares of its common stock into which the
6
3
/
4
% Notes
are potentially exchangeable. Under its terms, as the Company
failed to meet certain filing and effectiveness deadlines with
respect to the registration of the
6
3
/
4
% Notes
and the underlying shares of its common stock, the Company was
paying additional interest of 50 basis points on the
6
3
/
4
% Notes
until the earlier of the date the
6
3
/
4
% Notes
were no longer outstanding or the date two years after the date
of their issuance. The latter condition was met during the
fourth quarter of fiscal 2007 and, accordingly, the Company is
no longer paying additional interest of 50 basis points on
the
6
3
/
4
% Notes.
3
3
/
8
% Notes
and 7% Notes
The Companys inability to timely file its fiscal 2005
consolidated financial statements with the SEC as a result of
both the Audit Committee-led investigation and the need to
restate its financial statements created potential default
implications under the Companys borrowing agreements. As a
result, in fiscal 2006, the Company completed a tender offer for
its 7% senior subordinated notes
(7% Notes), in which the Company repurchased
$224.96 million of the 7% Notes, and the Company
repaid all $125.0 million of its
3
3
/
8
% senior
exchangeable notes
(3
3
/
8
% Notes)
upon the acceleration of their maturity using proceeds from the
Companys $350.0 million Term Loan Facility.
Unamortized deferred financing fees relating to the
7% Notes at the time of purchase were $4.5 million and
costs associated with the tender offer were $0.6 million
both of which were recognized as a loss on debt retirement
during the second quarter of fiscal 2006. Unamortized deferred
financing fees at the time of repayment of the
3
3
/
8
% Notes
were $4.0 million and costs were approximately
$0.1 million, both of which were also recognized as a loss
of debt retirement during the second quarter of fiscal 2006.
In fiscal 2005, the Company completed the following
transactions: (1) the issuance of $125.0 million of
3
3
/
8
% Notes
and the purchase of a call option and issuance of a warrant for
shares of the Companys common stock in connection with the
issuance of the
3
3
/
8
% Notes,
(2) the establishment of the $325.0 million Senior
Credit Facility, and (3) the issuance of
$100.0 million of
4
5
/
8
% Notes.
The Company used the proceeds from the issuance of the
3
3
/
8
% Notes,
borrowings under the Senior Credit Facility and cash on-hand to
repay in full $251.2 million of indebtedness outstanding
under its previously existing senior credit facility (including
accrued and unpaid interest), repurchase approximately
$25.0 million of its common stock and pay fees and expenses
directly related to the transactions. In connection with the
early termination of its prior senior credit facility, the
Company recorded a $1.6 million loss on debt retirement
resulting from the write-off of certain deferred financing fees.
The Company
96
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
used the proceeds from the issuance of the
4
5
/
8
% Notes,
borrowings under the Senior Credit Facility and cash
on-hand
to
acquire Murrays in December 2005 for approximately
$180.9 million.
In connection with the issuance of the
3
3
/
8
% Notes,
the Company paid $27.0 million to a counterparty to
purchase a call option designed to mitigate the potential
dilution from the exchange of the
3
3
/
8
% Notes.
Under the call option, as amended, the Company had an option to
purchase from the counterparty 5,414,063 shares, subject to
adjustment, of its common stock at a price of $23.09 per share,
which was equal to the initial exchange price of the
3
3
/
8
% Notes.
The Company received an aggregate of $17.8 million of
proceeds from the same counterparty relating to the sale of
warrants to acquire, subject to adjustment, up to
5,414,063 shares of its common stock. The warrants were
exercisable at a price of $26.29 per share. Both the call option
and warrant transactions had five-year terms. The call option
and warrant transactions were each to be settled through a net
share settlement to the extent that the price of the
Companys common stock exceeds the exercise price set forth
in the agreements. The Companys objective with these
transactions was to reduce the potential dilution of its common
stock upon an exchange of the
3
3
/
8
% Notes.
The Company accounted for the call option and the warrant as
equity under EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock.
The embedded exchange feature in the
3
3
/
8
% Notes
providing for the issuance of common shares to the extent the
Companys exchange obligation exceeded the debt principal,
the embedded put options and the call options in the debt as
well as the separate freestanding call options and the warrants
associated with the
3
3
/
8
% Notes
each met the requirements of EITF
No. 00-19
to be accounted for as equity instruments. As such, the share
exchange feature, the put options and call options embedded in
the debt and the separate freestanding call options and the
warrants have not been accounted for as derivatives (which would
be marked to market each reporting period). In the event the
3
3
/
8
% Notes
were exchanged, the exchange was to be accounted for in a
similar manner to a conversion with no gain or loss (as the cash
payment of principal reduces the recorded liability issued at
par) and the issuance of common shares would have been recorded
in stockholders equity. Any accrued interest on the debt
would not be paid separately upon an exchange and would be
reclassified to equity. In addition, the premium paid for the
call option and the premium received for the warrant were
recorded as additional paid-in capital in the accompanying
consolidated balance sheet and were not accounted for as
derivatives (which would be marked to market each reporting
period). Incremental net shares for the
3
3
/
8
% Notes
exchange features and the warrant agreements were to be included
in the Companys future diluted earnings per share
calculations for those periods in which its average common stock
price exceeded $23.09 in the case of the
3
3
/
8
% Notes,
and $26.29 in the case of the warrants. The purchased call
option was anti-dilutive and was excluded from the diluted
earnings per share calculation.
As discussed above, in July 2006, the Company repaid all the
3
3
/
8
% Notes
upon the acceleration of their maturity. As a result, in
September 2006, the equity call option and warrant contracts
were terminated and settled with the counterparty. The Company
elected a cash settlement and received approximately
$3.0 million for the call option and paid $1.4 million
for the warrant contract. These amounts represented the fair
value of the contracts at the termination date and were recorded
as additional paid-in capital in fiscal 2006.
Seller
Financing Arrangements
Seller financing arrangements relate to debt established for
stores in which the Company was the seller-lessee and did not
recover substantially all construction costs from the lessor. In
those situations, the Company recorded its total cost in
property and equipment and amounts funded by the lessor as a
debt obligation in the accompanying balance sheet in accordance
with EITF
No. 97-10,
The Effect of Lessee Involvement in Asset Construction
. A
portion of the rental payments made to the lessor is charged to
interest expense and reduces the corresponding debt based on
amortization schedules.
97
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt
Covenants
Certain of the Companys debt agreements at
February 3, 2008 contained negative covenants and
restrictions on actions by the Company and its subsidiaries
including, without limitation, restrictions and limitations on
indebtedness, liens, guarantees, mergers, asset dispositions,
investments, loans, advances and acquisitions, payment of
dividends, transactions with affiliates, change in business
conducted, and certain prepayments and amendments of
indebtedness.
Auto is, under certain circumstances not applicable during the
year ended February 3, 2008, subject to a minimum Fixed
Charge Coverage Ratio under a Senior Credit Facility financial
maintenance covenant. However, under the second waiver the
Company entered into during the second quarter of fiscal 2006
and under all subsequent waivers, a minimum 1:1 Fixed Charge
Coverage Ratio was required until the termination of such
waivers. The filing of the Quarterly Report for the second
quarter of fiscal 2007 resulted in the termination of the
requirement to maintain the minimum 1:1 Fixed Charge Coverage
Ratio imposed by these waivers. For the twelve months ended
February 3, 2008, the Company would have been in compliance
with this ratio had it been applicable. See Senior Credit
Facility Revolving Line of Credit above.
The Term Loan Facility contains certain financial covenants, one
of which is the requirement of a minimum fixed charge coverage
ratio (as defined in the Term Loan Facility). At
February 3, 2008, the minimum fixed charge coverage ratio
was 1.25:1 for the fourth quarter of fiscal 2007, 1.20:1 for the
first quarter of fiscal 2008, 1.15:1 for the second quarter of
fiscal 2008, 1.20:1 for the third and fourth quarters of fiscal
2008, and 1.45:1 thereafter. For the twelve months ended
February 3, 2008, the Companys actual ratio was
1.37:1. The ratios for fiscal 2007 and 2008 reflect the
December 18, 2007 fourth amendment to the Term Loan
Facility.
The Term Loan Facility also requires that a leverage ratio test
be met. The December 18, 2007 fourth amendment to the Term
Loan Facility increased the maximum leverage ratios permitted
under the Term Loan Facility for the fourth quarter of fiscal
2007 and for each of the quarters of the fiscal year ending
February 1, 2009 (fiscal 2008). The amendment
increased the maximum leverage ratios as of February 3,
2008 to 5.30:1 for the fourth quarter of fiscal 2007, 5.80:1 for
the first quarter of fiscal 2008, 6.00:1 for the second quarter
of fiscal 2008, 5.75:1 for the third quarter of fiscal 2008, and
4.50:1 for the fourth quarter of fiscal 2008, while leaving all
other ratios unchanged. The leverage ratios decline to 3.25:1
after the end of fiscal 2008 and further decline to 3.00:1 at
the end of fiscal 2009. As of February 3, 2008, the
Companys actual leverage ratio was 4.37:1.
Based on the Companys current financial forecast for
fiscal 2008, the Company believes it will remain in compliance
with the financial covenants of the Senior Credit Facility and
Term Loan Facility during fiscal 2008. A significant decline in
its net sales or gross margin from what is currently forecasted
or anticipated could limit the effectiveness of discretionary
actions management could take to maintain compliance with the
financial covenants in fiscal 2008. Although the Company does
not expect such significant declines to occur, if they did
occur, it may seek to obtain a covenant waiver or amendment from
its lenders or seek a refinancing, all of which the Company
believes are viable options for the Company should the
Acquisition not occur. However, there can be no assurances a
waiver or amendment could be obtained or a refinancing could be
achieved.
The maximum leverage ratio permitted in the first quarter of
fiscal 2009 decreases significantly to 3.25:1 from 5.75:1 in the
third quarter of fiscal 2008 and 4.50:1 in the fourth quarter of
fiscal 2007. Based on the Companys current financial
forecast, it does not expect to be able to satisfy this covenant
for the first quarter of fiscal 2009. See
Note 1 Merger Agreement and Matters Related to
the Companys Indebtedness.
A breach of the covenants or restrictions contained in the
Companys debt agreements could result in an event of
default thereunder. Upon the occurrence and during the
continuance of an event of default under the Companys
Senior Credit Facility or the Term Loan Facility, the lenders
could elect to terminate the commitments thereunder (in the case
of the Senior Credit Facility only), declare all amounts
outstanding thereunder, together with accrued interest, to be
immediately due and payable and exercise the remedies of a
secured party against the collateral
98
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
granted to them to secure such indebtedness. If the Company were
unable to repay those amounts, the lenders could proceed against
the collateral granted to them to secure the indebtedness. If
the lenders under either the Senior Credit Facility or the Term
Loan Facility accelerate the payment of the indebtedness due
thereunder, the Company cannot be assured that its assets would
be sufficient to repay in full that indebtedness, which is
collateralized by substantially all of its assets. At
February 3, 2008, the Company was in compliance with the
covenants under all its debt agreements.
Restrictions
on Paying Dividends and Movement of Funds
Under the Senior Credit Facility and the Term Loan Facility,
Auto is prohibited from declaring dividends or making other
distributions with respect to its stock, subject to certain
exceptions, including an exception permitting stock dividends.
However, Auto may make distributions to the Company so that the
Company may take certain actions, including, without limitation,
payments of franchise taxes, other fees required to maintain its
corporate existence, operating costs and income taxes,
repurchases of the Companys stock from former employees
(subject to a dollar limitation), certain loans to employees and
up to $25.0 million of other stock repurchases or
redemptions, subject to certain conditions.
Long-Term
Debt Maturities
As of February 3, 2008, the maturities of long-term debt,
excluding capital leases, were as follows
($ in thousands):
|
|
|
|
|
|
|
|
|
Fiscal
2008
(1)
|
|
$
|
50,551
|
|
|
|
|
|
Fiscal 2009
|
|
|
4,111
|
|
|
|
|
|
Fiscal 2010
|
|
|
98,932
|
|
|
|
|
|
Fiscal 2011
|
|
|
4,528
|
|
|
|
|
|
Fiscal 2012
|
|
|
333,476
|
|
|
|
|
|
Thereafter
|
|
|
11,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
502,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes the $46.5 million currently borrowed under the
Senior Credit Facility.
|
|
|
Note 11
|
Derivative
Financial Instruments
|
During April 2004, the Company entered into an interest rate
swap agreement to effectively convert $100.0 million of its
then held 7% senior subordinated notes
(7% Notes) to a floating rate, set
semi-annually in arrears, equal to the six month LIBOR +
283 basis points. The agreement was for the term of the
7% Notes. The hedge was accounted for as a fair
value hedge; accordingly, the fair value of the derivative
and changes in the fair value of the underlying debt were
reported on the Companys consolidated balance sheet and
recognized in the results of operations. Based upon the
Companys assessment of effectiveness of the hedge, changes
in the fair value of this derivative and the underlying debt did
not have a significant effect on the Companys consolidated
results of operations. The differential to be paid under the
agreement was accrued consistent with the terms of the swap
agreement and was recognized in interest expense over the term
of the related debt.
In July 2006, after the Company had repurchased substantially
all of the 7% Notes, the Company paid $11.1 million to
terminate the swap agreement, representing $10.4 million of
a fair value liability and $0.7 million of accrued
interest. The $10.4 million was recognized as a loss on
debt retirement during the second quarter of fiscal 2006.
99
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of February 3, 2008, the Company has not entered into
any derivative financial agreements.
|
|
Note 12
|
Leases
and Other Commitments
|
The Company leases its office and warehouse facilities, all but
one of its retail stores, and most of its vehicles and
equipment. Generally, store leases provide for minimum rentals
and the payment of utilities, maintenance, insurance and taxes.
Certain store leases also provide for contingent rentals based
upon a percentage of sales in excess of a stipulated minimum.
The majority of lease agreements are for base lease periods
ranging from 10 to 20 years, with three to five renewal
options of five years each.
Operating lease rental expense is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Minimum rentals
|
|
$
|
147,911
|
|
|
$
|
140,484
|
|
|
$
|
122,378
|
|
Contingent rentals
|
|
|
744
|
|
|
|
802
|
|
|
|
1,068
|
|
Sublease rentals
|
|
|
(7,503
|
)
|
|
|
(7,955
|
)
|
|
|
(8,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
141,152
|
|
|
$
|
133,331
|
|
|
$
|
115,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum lease obligations (income) under non-cancelable
leases at February 3, 2008 are as follows ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
Sublease
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Rentals
|
|
|
Fiscal 2008
|
|
$
|
7,423
|
|
|
$
|
152,431
|
|
|
$
|
(5,249
|
)
|
Fiscal 2009
|
|
|
5,723
|
|
|
|
136,347
|
|
|
|
(3,285
|
)
|
Fiscal 2010
|
|
|
3,301
|
|
|
|
120,401
|
|
|
|
(2,253
|
)
|
Fiscal 2011
|
|
|
1,340
|
|
|
|
106,493
|
|
|
|
(1,655
|
)
|
Fiscal 2012
|
|
|
324
|
|
|
|
89,999
|
|
|
|
(807
|
)
|
Thereafter
|
|
|
238
|
|
|
|
291,026
|
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,349
|
|
|
$
|
896,697
|
|
|
$
|
(14,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
(2,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of obligations
|
|
|
16,216
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(6,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligation
|
|
$
|
9,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 7, 2005, the Company entered into a five-year
logistics services agreement with Penske Logistics
(Penske) whereby Penske provides substantially all
of transportation services needs for inventory movement between
each of the Companys distribution centers, warehouses and
stores. Billings from Penske contain bundled fixed and variable
components covering the costs of dispatching, drivers, fuel,
maintenance, equipment and other costs of providing the
services. Although the agreement has a five-year term, it is
cancellable by either party at each anniversary date of the
agreement. Should the Company cancel the agreement early without
cause, it would be subject to certain costs of early
termination. Amounts expensed to Penske for logistics services
were approximately $22.3 million for fiscal 2007,
$22.2 million for fiscal 2006, and $15.6 million for
the period of March 7, 2005 through January 29, 2006.
100
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2006, the FASB issued FIN 48 which was effective
for the Company at the beginning of fiscal 2007. FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109,
Accounting for Income
Taxes
. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
The Company adopted the provisions of FIN 48 on
February 5, 2007. The adoption of FIN 48 resulted in
no cumulative effect adjustment to retained earnings. As of
February 3, 2008 and February 5, 2007 (the date of
adoption), the Company had unrecognized tax benefits of
approximately $9.8 million and $5.4 million,
respectively. A reconciliation of the beginning and ending
amount of unrecognized tax benefits is as follows ($ in
thousands):
|
|
|
|
|
Balance at February 5, 2007
|
|
$
|
5,428
|
|
Additions for tax positions in prior periods
|
|
|
4,052
|
|
Additions for tax positions in current period
|
|
|
315
|
|
|
|
|
|
|
Balance at February 3, 2008
|
|
$
|
9,795
|
|
|
|
|
|
|
The Companys policy is to classify interest and penalties
relating to unrecognized tax benefits as a component of income
tax expense. As of February 3, 2008, the Company had not
accrued any interest and penalties since sufficient net
operating losses exist to offset any potential liability.
The total amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective income tax rate
in future periods was approximately $3.2 million and
$3.1 million as of February 3, 2008 and
February 5, 2007, respectively. The Company does not
anticipate a significant change in the total amount of
unrecognized tax benefits during the next twelve months. The
Companys liability for unrecognized tax benefits is
included in other non-current liabilities in the consolidated
balance sheet.
Prior to the adoption of FIN 48, the Company recognized
liabilities for anticipated income tax uncertainties based on
its estimate of whether, and the extent to which, additional
taxes will be due. If the Company ultimately determined that
payment of these amounts would not be required, the Company
reversed the liability and recognized a tax benefit during the
period in which it was determined that the liability was no
longer necessary. The Company recorded an additional charge in
its provision for taxes in the period in which it was determined
that the recorded tax liability was less than the Company
expected the ultimate assessment to be.
The Company is subject to the following significant taxing
jurisdictions: U.S. federal, Arizona, California, Colorado,
Illinois, Michigan, and Minnesota. The Company has had net
operating losses in various years dating back to the tax year
1993. The statute of limitation for a particular tax year for
examination by the Internal Revenue Service is three years
subsequent to the last year in which the loss carryover is
finally used, and three to four years for the states of Arizona,
California, Colorado, Illinois, Michigan and Minnesota.
Accordingly, there are multiple years open to examination. The
Internal Revenue Service has notified the Company they will be
auditing the fiscal years ending January 30, 2005 and
January 29, 2006.
101
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision (benefit) for income taxes (excluding the
$0.6 million deferred income tax benefit allocated to the
cumulative effect of a change in accounting principle in fiscal
2006) is comprised of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
44
|
|
|
$
|
596
|
|
|
$
|
1,156
|
|
State
|
|
|
240
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284
|
|
|
|
596
|
|
|
|
1,240
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(7,024
|
)
|
|
|
3,533
|
|
|
|
29,626
|
|
State
|
|
|
431
|
|
|
|
862
|
|
|
|
6,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,593
|
)
|
|
|
4,395
|
|
|
|
36,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(6,309
|
)
|
|
$
|
4,991
|
|
|
$
|
37,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the differences between the
Companys expected and actual provision (benefit) for
income taxes ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income (loss) before income taxes
|
|
$
|
(17,461
|
)
|
|
$
|
12,221
|
|
|
$
|
95,038
|
|
Federal income tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected provision (benefit) for income taxes
|
|
|
(6,111
|
)
|
|
|
4,277
|
|
|
|
33,263
|
|
Permanent wage add-back for federal tax credits
|
|
|
304
|
|
|
|
127
|
|
|
|
151
|
|
Permanent effect of stock based compensation
|
|
|
95
|
|
|
|
42
|
|
|
|
|
|
Other permanent differences including change in valuation
allowance
|
|
|
675
|
|
|
|
359
|
|
|
|
(944
|
)
|
State taxes, net of federal benefit
|
|
|
(590
|
)
|
|
|
550
|
|
|
|
4,114
|
|
Changes to tax reserves
|
|
|
77
|
|
|
|
|
|
|
|
1,096
|
|
Tax credits
|
|
|
(759
|
)
|
|
|
(364
|
)
|
|
|
(433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual provision (benefit) for income taxes
|
|
$
|
(6,309
|
)
|
|
$
|
4,991
|
|
|
$
|
37,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The current and non-current deferred tax assets and liabilities
reflected in the balance sheet consist of the following ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
Current deferred income taxes:
|
|
|
|
|
|
|
|
|
Store closing costs
|
|
$
|
714
|
|
|
$
|
999
|
|
Self-insurance reserves
|
|
|
9,648
|
|
|
|
8,489
|
|
Accrued employee benefits
|
|
|
6,842
|
|
|
|
7,320
|
|
Property taxes
|
|
|
|
|
|
|
(2,146
|
)
|
Provision for bad debts
|
|
|
148
|
|
|
|
155
|
|
Tax loss carryforwards
|
|
|
1,400
|
|
|
|
7,861
|
|
Inventory valuation differences
|
|
|
15,619
|
|
|
|
21,456
|
|
Securities class action settlement
|
|
|
4,579
|
|
|
|
|
|
Other accrued expenses
|
|
|
11,685
|
|
|
|
3,402
|
|
Other
|
|
|
60
|
|
|
|
(246
|
)
|
Valuation allowance
|
|
|
(46
|
)
|
|
|
(790
|
)
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax asset
|
|
|
50,649
|
|
|
|
46,500
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income taxes:
|
|
|
|
|
|
|
|
|
Store closing costs
|
|
|
471
|
|
|
|
951
|
|
Accrued employee benefits
|
|
|
3,467
|
|
|
|
2,490
|
|
Capital lease expenditures
|
|
|
(1,674
|
)
|
|
|
(1,712
|
)
|
Deferred rent and incentives
|
|
|
15,093
|
|
|
|
10,939
|
|
Credits and other benefits
|
|
|
10,415
|
|
|
|
11,697
|
|
Depreciation and amortization
|
|
|
(49,403
|
)
|
|
|
(48,004
|
)
|
Tax loss carryforwards
|
|
|
36,061
|
|
|
|
32,216
|
|
Discount on exchangeable notes
|
|
|
(2,100
|
)
|
|
|
(2,727
|
)
|
Other
|
|
|
3,111
|
|
|
|
(688
|
)
|
Valuation allowance
|
|
|
(61
|
)
|
|
|
(962
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current deferred income tax asset
|
|
|
15,380
|
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
66,029
|
|
|
$
|
50,700
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded deferred tax assets of approximately
$37.5 million as of February 3, 2008, reflecting the
benefit of federal and state tax net operating loss
(NOL) carryforwards of approximately
$103.4 million and $27.2 million, respectively. The
federal carryforwards will expire beginning in 2021 and the
state carryforwards will expire beginning in 2008. Realization
is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards.
Due to ownership changes from market trading in the
Companys common stock, the Company believes it had a
statutory ownership change in January 2008, as
defined under Section 382 of the Internal Revenue Code
(Section 382). When a company undergoes such an
ownership change, Section 382 limits the companys
future ability to utilize any NOL generated before the ownership
change and, in certain circumstances, subsequently recognized
built-in losses and deduction, if any, existing as
of the date of the ownership change. Accordingly, the
Companys annual use of its federal and state NOLs that
existed as of the date of the ownership change is limited to
approximately $11.3 million. The Company had a prior
Section 382 ownership change; however the Section 382
annual limitation arising from such ownership change was less
restrictive than the one created by the January 2008 ownership
change. The Company believes that it will be able to fully
utilize its pre-January 2008 NOLs and other tax attributes in
the future other than as noted below. The Companys ability
to utilize any new NOL arising after January 2008 is not
affected by this 382 limitation.
103
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Although realization is not assured, management believes it is
more likely than not that all the deferred tax assets will be
realized with the exception of a portion of the state net
operating losses, for which management has determined that a
valuation allowance in the amount of $0.1 million is
necessary at February 3, 2008.
|
|
Note 14
|
Stock-Based
Compensation and Other Employee Benefit Plans
|
Effective January 30, 2006, the Company adopted
SFAS No. 123R,
Share-Based Payment
, using the
modified-prospective method and began recognizing compensation
expense for its share-based compensation plans based on the fair
value of the awards. Share-based payments include stock option
grants, restricted stock and a share-based compensation plan
under the Companys long-term incentive plan (the
LTIP). Prior to January 30, 2006, the Company
accounted for its stock-based compensation plans as prescribed
by Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to Employees
. In
accordance with the modified-prospective transition method of
SFAS No. 123R, the Company has not restated prior
periods.
The Company also provides various health, welfare and disability
benefits to its full-time employees that are funded primarily by
Company contributions. Other than for certain of its senior
executives, the Company does not provide post-employment or
post-retirement health care or life insurance benefits to its
employees.
Long-Term
Incentive Plan
In fiscal 2005, the Compensation Committee of the Companys
Board of Directors adopted the CSK Auto Corporation Long-Term
Incentive Plan. The LTIP was established within the framework of
the CSK Auto Corporation 2004 Stock and Incentive Plan, pursuant
to which cash-based incentive bonus awards may be granted based
upon the satisfaction of specified performance criteria. The
Board also approved and adopted forms of Incentive Bonus Unit
Award Agreements used to evidence the awards under the LTIP.
Under the terms of the LTIP, participants (senior executive
officers only) were awarded a certain number of incentive units
that are subject to a four-year vesting period (25% per year,
with the first vesting period ending in fiscal 2007) as
well as stock performance criteria. Subject to specific terms
and conditions governing a change in control of the Company,
each incentive bonus unit, when vested, represents the
participants right to receive cash payments from the
Company on specified payment dates equal to the amounts, if any,
by which the average of the per share closing prices of the
Companys common stock on the New York Stock Exchange over
a specified period of time (after release by the Company of its
fiscal year earnings) (the measuring period) exceeds
$20 per share (which figure is subject to certain adjustments in
the event of a change in the Companys capitalization). The
Company recorded $1.0 million, net of $0.6 million
income tax benefit, as a cumulative effect of a change in
accounting principle for the LTIP fair value liability upon the
adoption of SFAS No. 123R on January 30, 2006.
For the year ended February 3, 2008, the Company reduced
the liability for the LTIP units by $1.2 million, as a
result of the decrease in market price based on the decline in
the Companys stock price when compared to the previous
fiscal year end. For the year ended February 4, 2007, the
Company recognized $0.3 million of expense related to the
LTIP units. The balance payable at February 3, 2008 is
$0.8 million.
2004
Stock and Incentive Plan
In June 2004, the Companys shareholders approved the CSK
Auto Corporation 2004 Stock and Incentive Plan (the
Plan), which replaces all of the following
previously existing plans: (1) the 1996 Associate Stock
Option Plan; (2) the 1996 Executive Stock Option Plan;
(3) the 1999 Executive Stock Option Plan; and (4) the
CSK Auto Corporation Directors Stock Plan. Approximately
1.9 million options to purchase shares of the
Companys common stock granted under these prior plans were
still outstanding at the inception of the new Plan. These
options can still be exercised by the grantees according to the
provisions of the prior plans. Pursuant to the provisions of the
Plan, any of these options which are cancelled under the prior
plans will be added to shares available for issuance under the
Plan.
104
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Plan is administered by the Compensation Committee of the
Companys Board of Directors, which has broad authority in
administering and interpreting the Plan. The Company believes
the Plan promotes and closely aligns the interests of its
employees and directors with its stockholders by permitting the
award of stock-based compensation and other performance-based
compensation. The Company believes the Plan will strengthen its
ability to reward performance that enhances long-term
stockholder value and to attract and retain outstanding
employees and executives. Plan participation is limited to
employees of the Company, any subsidiary or parent of the
Company and directors of the Company.
The Plan provides for the grant of incentive stock options,
non-qualified stock options, stock appreciation rights,
restricted stock, stock units, incentive bonuses and other stock
unit awards. Under the Plan, the number and kind of shares as to
which options, stock appreciation rights, restricted stock,
stock units, incentive bonuses or other stock unit awards may be
granted was 4.0 million shares of the Companys common
stock plus any shares subject to awards made under the prior
plans that were outstanding on the effective date of the Plan.
On November 8, 2007, the Companys stockholders
approved an amendment to the Plan that increased the number of
shares of the Companys common stock available for grant
under the Plan by 1.5 million to a total of
5.5 million shares (plus any shares subject to awards made
under the prior plans that were outstanding on the effective
date of the Plan). The number of shares that can be granted for
certain of the items listed above may be restricted per the Plan
document. In no event will any option be exercisable more than
10 years after the date the option is granted. In general,
the stock incentives vest in three years. As of February 3,
2008, there were approximately 2.1 million shares available
for grant.
Options
Activity
Activity in all of the Companys stock option plans is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Grant
|
|
|
Contractual
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Date Fair
|
|
|
Term
|
|
|
Options
|
|
|
Exercisable
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
(Years)
|
|
|
Exercisable
|
|
|
Price
|
|
|
Value
(1)
|
|
|
Balance at January 30, 2005
|
|
|
2,646,832
|
|
|
$
|
13.92
|
|
|
|
|
|
|
|
|
|
|
|
964,898
|
|
|
$
|
13.87
|
|
|
$
|
7,269,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted at market price
|
|
|
918,527
|
|
|
$
|
15.92
|
|
|
$
|
5.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(105,590
|
)
|
|
$
|
10.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(252,360
|
)
|
|
$
|
17.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2006
|
|
|
3,207,409
|
|
|
$
|
14.31
|
|
|
|
|
|
|
|
|
|
|
|
2,368,144
|
|
|
$
|
14.56
|
|
|
$
|
7,681,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted at market price
|
|
|
626,236
|
|
|
$
|
16.62
|
|
|
$
|
6.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(91,963
|
)
|
|
$
|
13.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(461,161
|
)
|
|
$
|
19.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 4, 2007
|
|
|
3,280,521
|
|
|
$
|
14.12
|
|
|
|
|
|
|
|
|
|
|
|
2,353,327
|
|
|
$
|
13.54
|
|
|
$
|
7,938,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted at market price
|
|
|
1,677,604
|
|
|
$
|
12.13
|
|
|
$
|
3.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(46,213
|
)
|
|
$
|
9.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,076,120
|
)
|
|
$
|
12.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2008
|
|
|
3,835,792
|
|
|
$
|
13.70
|
|
|
|
|
|
|
|
4.58
|
|
|
|
2,010,169
|
|
|
$
|
14.35
|
|
|
$
|
70,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Vested and Expected to Vest
|
|
|
3,329,097
|
|
|
$
|
13.79
|
|
|
|
|
|
|
|
4.29
|
|
|
|
|
|
|
|
|
|
|
$
|
70,500
|
|
Ending Exercisable
|
|
|
2,010,169
|
|
|
$
|
14.35
|
|
|
|
|
|
|
|
2.82
|
|
|
|
|
|
|
|
|
|
|
$
|
70,500
|
|
|
|
|
(1)
|
|
Based on the Companys closing stock price of $8.98 on
February 1, 2008.
|
105
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about the
Companys stock options at February 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercisable
|
|
|
Intrinsic
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
Value
|
|
|
$ 5.73 - $10.15
|
|
|
304,343
|
|
|
|
4.05
|
|
|
$
|
9.56
|
|
|
|
144,343
|
|
|
$
|
9.04
|
|
|
|
|
|
$10.53 - $10.80
|
|
|
1,063,249
|
|
|
|
6.70
|
|
|
$
|
10.79
|
|
|
|
4,950
|
|
|
$
|
10.69
|
|
|
|
|
|
$10.93 - $13.32
|
|
|
868,201
|
|
|
|
2.26
|
|
|
$
|
12.96
|
|
|
|
868,201
|
|
|
$
|
12.96
|
|
|
|
|
|
$13.46 - $16.62
|
|
|
1,215,480
|
|
|
|
4.20
|
|
|
$
|
16.26
|
|
|
|
908,156
|
|
|
$
|
16.16
|
|
|
|
|
|
$16.62 - $19.83
|
|
|
384,519
|
|
|
|
5.57
|
|
|
$
|
18.62
|
|
|
|
84,519
|
|
|
$
|
18.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 5.73 - $19.83
|
|
|
3,835,792
|
|
|
|
4.58
|
|
|
$
|
13.70
|
|
|
|
2,010,169
|
|
|
$
|
14.35
|
|
|
$
|
70,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2007, there was minimal intrinsic value for stock
options exercised. For fiscal 2006 and 2005, the intrinsic value
of stock options exercised was $0.3 million and
$0.6 million, respectively. The weighted average grant date
fair value for options granted for fiscal 2007, 2006, and 2005
was $6.6 million, $4.0 million, and $5.3 million,
respectively.
In the fourth quarter of fiscal 2005, the Board of Directors
approved the acceleration of the vesting of all
underwater stock options (those stock options
previously granted with exercise prices above $15.90, the market
price of the Companys stock on January 27,
2006) previously awarded to employees and executive
officers. Option awards not underwater at
January 27, 2006 and granted subsequent to the Boards
action are not included in the acceleration and will vest
equally over the service period established in the award,
typically three years. The primary purpose of the accelerated
vesting was to enable the Company to avoid recognizing future
compensation expense associated with these options upon the
adoption of SFAS No. 123R in the first quarter of
fiscal 2006. The Companys Board of Directors took this
action with the belief that it was in the best interest of
shareholders as it would reduce the Companys reported
non-cash compensation expense in future periods.
As a result of the vesting acceleration, options to purchase
approximately 770,775 shares became exercisable
immediately; however, restrictions on the sale of any such
shares obtained by way of the exercise of accelerated options
were imposed to minimize unintended personal benefits to the
option holders. Sales of such shares may not occur until the
original vesting dates, and sales of any such shares by officers
and employees who terminate their employment with the Company
(subject to certain exceptions in the case of retirement, death,
disability and change of control) are disallowed for three years
following the later of the date of their termination of
employment or their exercise of the options.
The following table summarizes values for stock options
exercised (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash received
|
|
$
|
443
|
|
|
$
|
1,196
|
|
|
$
|
1,130
|
|
Tax benefits
|
|
$
|
|
|
|
$
|
|
|
|
$
|
231
|
|
Restricted
Stock Activity
During fiscal 2007 and 2006, the Company issued
262,686 shares and 71,147 shares of restricted stock,
respectively, at an average market price of $12.27 and $16.62,
respectively, to its executive officers and other associates
pursuant to the Plan, which vest equally over a three year
period.
106
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity for the Companys restricted stock is summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
Term (Years)
|
|
|
Value
(1)
|
|
|
Non-vested at February 4, 2007
|
|
|
128,309
|
|
|
$
|
15.86
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
262,686
|
|
|
$
|
12.27
|
|
|
|
|
|
|
|
|
|
Released
|
|
|
(34,002
|
)
|
|
$
|
15.34
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(75,372
|
)
|
|
$
|
12.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at February 3, 2008
|
|
|
281,621
|
|
|
$
|
13.23
|
|
|
|
2.40
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on the Companys closing stock price of $8.98 on
February 1, 2008.
|
Retirement
Program
The Company sponsors a 401(k) plan that is available to all
employees who, up until December 31, 2006, had to have
completed one year of continuous service to be eligible.
Effective October 1, 1997, the Company matches from 40% to
60% of employee contributions in 10% increments, based on years
of service, up to 4% of the participants base salary.
Participant contributions are subject to certain restrictions as
set forth in the Internal Revenue Code (IRC) of
1986, as amended. The Companys matching contributions
totaled $2.0 million, $1.9 million and
$1.5 million for fiscal 2007, 2006 and 2005 respectively.
Effective January 1, 2007, the Company amended the 401(k)
plan to provide immediate eligibility for participation at the
date of hire if the employee is at least 21 years of age;
however, no Company matching contributions vest until one year
of plan participation (or three years of Company service).
The Company also sponsors the CSK Auto, Inc. Deferred
Compensation Plan. This plan is maintained primarily to provide
deferred compensation benefits for a select group of
management or highly compensated employees
as
defined by the Employee Retirement Income Security Act of 1974,
as amended (ERISA). For IRC and ERISA purposes, this
plan is deemed to be unfunded. The Deferred
Compensation Plan permits participants voluntarily to defer up
to 50% of their salary and 100% of their annual bonus without
regard to the limitations under the IRC applicable to the
Companys tax-qualified plans. In addition, any refunds
resulting from non-discrimination testing of the Companys
401(k) Plan will be automatically transferred from the
participants 401(k) account to the Deferred Compensation
Plan. Although the Company may also make matching contributions
to a participants account under this plan (except for
automatic transfers of excess Company matching contributions
from a participants 401(k) plan account), the Company has
not elected to do so. Deferred amounts and any matching
contributions under the Deferred Compensation Plan are 100%
vested at all times, and are invested on behalf of the
participant in investment vehicles selected from time to time by
the administrators of the plan. Benefits are payable at
retirement in either a lump sum or installments for up to
12 years. Benefits upon a termination of employment prior
to retirement are payable only in a lump sum.
Supplemental
Retirement Plan Agreement
The Company has a supplemental executive retirement plan
agreement with its former Chairman and Chief Executive Officer,
Maynard Jenkins, which provides supplemental retirement benefits
for a period of 10 years beginning on the first anniversary
of the effective date of termination of his employment for any
reason other than for Cause (as defined in such retirement plan
agreement). Mr. Jenkins retired on August 15, 2007.
The benefit amount in this agreement is fully vested and payable
to Mr. Jenkins at a rate of $600,000 per annum. In January
2006, this agreement was amended to make such changes as were
necessary to bring the agreement into compliance
107
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with the American Jobs Creation Act of 2004. The Company has
accrued the entire present value of this obligation of
approximately $4.0 million as of February 3, 2008 and
February 4, 2007. Payments of $0.4 million were made
to Mr. Jenkins during fiscal 2007.
|
|
Note 15
|
Earnings
per Share
|
SFAS No. 128,
Earnings Per Share
(EPS) requires earnings per share to be computed
and reported as both basic EPS and diluted EPS. Basic EPS is
computed by dividing net income by the weighted average number
of common shares outstanding for the period. Diluted EPS is
computed by dividing net income by the weighted average number
of common shares and dilutive common stock equivalents
(convertible notes and interest on the notes, stock awards and
stock options) outstanding during the period. Dilutive EPS
reflects the potential dilution that could occur if options to
purchase common stock were exercised for shares of common stock.
The following is a reconciliation of the number of shares
(denominator) used in the basic and diluted EPS computations ($
and share data in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,152
|
)
|
|
$
|
6,264
|
|
|
$
|
57,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (basic)
|
|
|
43,971
|
|
|
|
43,877
|
|
|
|
44,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (basic)
|
|
|
43,971
|
|
|
|
43,877
|
|
|
|
44,465
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
252
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (diluted)
|
|
|
43,971
|
|
|
|
44,129
|
|
|
|
44,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded as a result of anti-dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,519
|
|
|
|
2,029
|
|
|
|
790
|
|
Incremental net shares for the exchange feature of the
$100.0 million
6
3
/
4
% senior
exchangeable notes due in 2025 will be included in the
Companys future diluted earnings per share calculations
for those periods in which the Companys average common
stock price exceeds $16.50 per share.
|
|
Note 16
|
Stock
Repurchase Program
|
On July 25, 2005, the Company announced a share repurchase
program for the purchase of up to $25.0 million (aggregate
purchase price) of its common stock in connection with the
refinancing transactions completed in 2005 (discussed in
Note 10 Long Term Debt, above). In the second
quarter of 2005, the Company repurchased 1,409,300 shares
of common stock for an aggregate purchase price of
$25.0 million.
108
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 17
|
Fair
Value of Financial Instruments
|
The estimated fair values of the Companys financial
instruments, which are determined by reference to quoted market
prices, where available, or are based upon comparisons to
similar instruments of comparable maturities, are as follows ($
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2008
|
|
February 4, 2007
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Receivables
|
|
$
|
37,322
|
|
|
$
|
37,322
|
|
|
$
|
43,898
|
|
|
$
|
43,898
|
|
Amounts due under term loan facility
|
|
$
|
345,647
|
|
|
$
|
345,647
|
|
|
$
|
349,125
|
|
|
$
|
349,125
|
|
Amounts due under senior credit facility
|
|
$
|
46,500
|
|
|
$
|
46,500
|
|
|
$
|
52,000
|
|
|
$
|
52,000
|
|
Obligations under
6
3
/
4
% senior
exchangeable notes
|
|
$
|
94,635
|
|
|
$
|
92,065
|
|
|
$
|
93,061
|
|
|
$
|
124,211
|
|
|
|
Note 18
|
Employee
Severance and Store Asset Impairment Charges
|
During the third quarter of fiscal 2007, the Company commenced a
comprehensive strategic review of the Company aimed at improving
its profitability and restoring top line growth. As part of the
initial strategic planning process, the Company made the
decision to close approximately 40 stores during fiscal 2008.
For the identified store closures the Company performed an asset
impairment review in accordance with SFAS No. 144,
Accounting for the Impairment of Disposal of Long-Lived
Assets
, and recorded a non-cash impairment charge of
$1.2 million for leasehold assets and store fixtures that
will be sold or otherwise disposed of significantly before the
end of their originally estimated useful lives. The impairment
charge is included in operating and administrative expenses in
the accompanying consolidated statement of operations.
The strategic review of the Company continued into the fourth
quarter of 2007. As part of this review, the Companys
executive management team also evaluated the current management
structure and eliminated approximately 160 non-sales positions,
primarily in the corporate and field administration areas,
reorganized the staffing in the Companys corporate
offices, consolidated certain corporate functions and eliminated
several vice president and other management positions during the
third and fourth quarters of fiscal 2007. A number of executives
were reassigned in order to leverage existing skills and
experience across the team in an effort to continue reducing
operating costs. During the third and fourth quarters of fiscal
2007, the Company incurred $2.0 million in severance costs
related to these strategic personnel reductions, and as of
February 3, 2008, the remaining liability for employee
severance costs was approximately $0.9 million.
All store locations currently planned for closure in fiscal 2008
are leased, and substantially all of these closures are expected
to occur near the end of a noncancellable lease term, resulting
in minimal closed store costs. The costs of any remaining
operating lease commitments will be recognized in accordance
with SFAS No. 146,
Accounting for Costs Associated
with Exit or Disposal Activities
, and as such will be
expensed at the fair value at the date the Company ceases
operating the store.
In connection with the disposition
and/or
sublease of certain store locations and service centers, the
Company has indemnified the purchasers/subtenants against claims
arising from environmental contamination, if any, existing on
the date of disposition. In some of these cases, the Company is
indemnified by or have recourse to an unrelated third party for
claims arising from any such contamination, and also, or in the
alternative, have insurance coverage that may be available to
offset the potential cost of the indemnity obligation. The
Company also indemnifies third party landlords under most of its
store leases against claims resulting from the occurrence of
certain triggering events or conditions arising out of the
Companys operations from the leased premises. The
109
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company enters into various other agreements with unrelated
parties in the ordinary course of its business, which may
include indemnity obligations relating to a triggering event, or
condition, which is, in most cases, based on the Companys
future performance. In some cases, the indemnity obligations are
triggered by the Companys prior acts or third
parties future performance, but are otherwise not limited
in duration or monetary exposure. However, in such instances,
the Company has determined that the likelihood of occurrence of
the triggering event is remote
and/or
that
the potential cost to the Company of performance of the
indemnity would not be material.
The Companys risk management philosophy is to limit risk
in any transaction or relationship to the maximum extent
reasonable in relation to commercial and other considerations.
Before accepting any indemnity obligation, the Company makes an
informed risk management decision considering, among other
things, the remoteness of the possibility that the triggering
event will occur, the potential costs to perform any resulting
indemnity obligation, possible actions to reduce the likelihood
of a triggering event or to reduce the costs of performing an
indemnity obligation, whether the Company is in fact indemnified
by an unrelated third party, insurance coverage that may be
available to offset the cost of the indemnity obligation, and
the benefits to the Company from the transaction or relationship.
Because most of the Companys indemnity obligations are not
limited in duration or potential monetary exposure, the Company
cannot calculate the maximum potential amount of future payments
that could be paid under its indemnity obligations stemming from
all its existing agreements. The Company also accrues for
contingent liabilities, including those arising out of indemnity
obligations, when a loss is probable and the amounts can be
reasonably estimated. The Company is not aware of the occurrence
of any triggering event or condition that would have a material
adverse impact on its financial statements as a result of an
indemnity obligation relating to such triggering event or
condition.
The Company has issued standby letters of credit related to
insurance coverage, lease obligations and other matters that
expire during fiscal 2008. As of February 3, 2008, total
amounts committed under these letters of credit were
$31.5 million, which consists of $29.4 million of
stand-by letters of credit and $2.1 million of commercial
letters of credit.
|
|
Note 20
|
Transactions
and Relationships with Related Parties
|
Upon his retirement as President and Chief Operating Officer of
the Company in April 2000, the Company entered into an
employment agreement with Mr. James Bazlen, a member of its
Board of Directors, for the performance of specific projects for
the Company, as designated by the Chief Executive Officer or
President, for an annual base salary of $50,000 and continued
payment of certain medical, dental, insurance, 401(k) and other
benefits. This agreement is terminable by either party upon
written notice. In connection with his membership on the
Companys Board of Directors, Mr. Bazlen receives all
compensation (including annual grants of stock options), except
for the Annual Stipend, that is provided to the Companys
outside directors under the Outside Director Compensation Policy.
The Company entered into an agreement on November 18, 2005
with Evercore Financial Advisors L.L.C. (Evercore)
for certain financial advisory services in connection with the
Companys acquisition of Murrays. William A. Shutzer,
one of the Companys directors, is a Senior Managing
Director of Evercore. Under the agreement, the Company agreed to
pay, and the Board of Directors approved the payment of,
approximately $1.4 million to Evercore upon the successful
closing of the transaction. The agreement also contained
standard terms and conditions. The Company closed the
Murrays transaction on December 19, 2005. In May
2006, the Board of Directors approved the Companys entry
into a separate agreement with Evercore for financial advisory
services in connection with the Companys refinancing in
fiscal 2006, resulting in payments in fiscal 2006 to Evercore of
approximately $610,000.
110
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2005, Maynard Jenkins, Chairman of the Board of Directors
and Chief Executive Officer of the Company, performed consulting
services for an unaffiliated entity relating to a proposed
acquisition for which he was paid a fee of $250,000. When he
accepted the consulting engagement, Mr. Jenkins did not
recall that his employment agreement with the Company (which
initially was executed in 1998) requires prior approval by
the Board of any outside work for compensation. In early 2006,
this matter was raised by Mr. Jenkins with the Board and
the Board requested, and Mr. Jenkins agreed, that he remit
the after-tax proceeds of the consulting fee to the Company. As
a result, in March, 2006, Mr. Jenkins paid to the Company
the amount of $147,060.
Fiscal
2006 Audit Committee Investigation and Restatement of the
Consolidated Financial Statements
Overview
In its 2005
10-K,
the
Companys consolidated financial statements for fiscal 2004
and 2003 and quarterly information for the first three quarterly
periods in fiscal 2005 and all of fiscal 2004 were restated to
correct errors and irregularities of the type identified in its
Audit Committee-led independent accounting investigation
(referred to herein as the Audit Committee-led
investigation) and other accounting errors and
irregularities identified by the Company in the course of the
restatement process, all as more fully described in the
Background section below.
The Audit Committee concluded that the errors and irregularities
were primarily the result of actions directed by certain
personnel and an ineffective control environment that, among
other things, permitted the following to occur:
|
|
|
|
|
recording of improper accounting entries as directed by certain
personnel;
|
|
|
|
inappropriate override of, or interference with, existing
policies, procedures and internal controls;
|
|
|
|
withholding of information from, and providing of improper
explanations and supporting documentation to, the Companys
Audit Committee and Board of Directors, as well as its internal
auditors and independent registered public accountants; and
|
|
|
|
discouraging employees from raising accounting related concerns
and suppressing accounting related inquiries that were made.
|
In September 2006, upon the substantial conclusion of the Audit
Committee-led investigation, the Company announced the
departures of the Companys President and Chief Operating
Officer, Chief Administrative Officer (who, until October 2005,
served as the Companys Senior Vice President and Chief
Financial Officer) and several other individuals (including its
Controller) within the Companys Finance organization.
Management, with the assistance of numerous experienced
accounting consultants (other than its firm of independent
registered public accountants) that the Company had retained
near the onset of the investigation to assist the then new Chief
Financial Officer with the restatement efforts, continued to
review the Companys accounting practices and identified
additional errors and irregularities that were corrected in the
restatements.
Background
In the Companys 2004 Annual Report on
Form 10-K
for fiscal 2004, filed May 2, 2005 (the 2004
10-K),
management concluded that the Company did not maintain effective
internal control over financial reporting as of January 30,
2005 due to the existence of material weaknesses as described in
the 2004
10-K.
The
plan for remediation at that time called for, among other
things, the Company to enhance staffing and capabilities in its
Finance organization. During fiscal 2005, the Company made
several enhancements to its Finance organization
111
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including the October 2005 hiring of a new Senior Vice President
and Chief Financial Officer. In the fourth quarter of fiscal
2005, new personnel in the Companys Finance organization
raised questions regarding the existence of inventory underlying
certain general ledger account balances, and an internal audit
of vendor allowances raised additional concerns about the
processing and collections of vendor allowances.
Managements review of these matters continued into the
Companys fiscal 2005 year-end financial closing. In
early March 2006, it became apparent that inventories and vendor
allowances were potentially misstated and that the effect was
potentially material to the Companys previously issued
consolidated financial statements. The Audit Committee, acting
through a Special Investigation Committee appointed by the Audit
Committee consisting of the Audit Committee Chairman and the
Companys designated Presiding Director, retained
independent legal counsel who, in turn, retained a nationally
recognized accounting firm, other than the Companys
independent registered public accountants, to assist it in
conducting an independent investigation relative to accounting
errors and irregularities, relating primarily to the
Companys historical accounting for its inventories and
vendor allowances.
On March 23, 2006, the Audit Committee concluded that, due
to accounting errors and irregularities then noted, the
Companys (i) fiscal 2004 consolidated financial
statements, as well as its consolidated financial statements for
fiscal years 2003, 2002 and 2001, (ii) selected
consolidated financial data for each of the five years in the
period ended January 30, 2005, (iii) interim financial
information for each of its quarters in fiscal 2003 and fiscal
2004 included in its 2004 Annual Report, and (iv) interim
financial statements included in its
Form 10-Qs
for the first three quarterly periods of fiscal 2005, should no
longer be relied upon. On March 27, 2006, the Company
announced that it would be postponing the release of its fourth
quarter and fiscal 2005 financial results pending the outcome of
the Audit Committee-led investigation; that it would be
restating historical financial statements; and that the
Companys consolidated financial statements for the prior
interim periods and fiscal years indicated above should no
longer be relied upon.
The initial and primary focus of the Audit Committee-led
investigation was the Companys accounting for inventory
and for vendor allowances associated with its merchandising
programs. However, the Audit Committee did not limit the scope
of the investigation in any respect, which was subsequently
broadened to encompass other potential concerns raised during
the course of the investigation. Throughout and upon completion
of the investigation, representatives of the Audit Committee and
its legal and accounting advisors shared the results of the
investigation with the Companys independent registered
public accounting firm and the SEC, which is conducting a formal
investigation of these matters. The Company continues to share
information and believes it is cooperating fully with the SEC in
its formal investigation.
During and following the Audit Committee-led investigation, the
Companys Finance personnel (consisting primarily of the
Companys then new Chief Financial Officer and numerous
experienced finance/accounting consultants the Company had
retained near the onset of the investigation to assist with the
restatement efforts), assisted by the Companys Internal
Audit staff, conducted
follow-up
procedures to ensure that the information uncovered during the
investigation was complete, evaluated the initial accounting for
numerous transactions and reviewed the activity in accounts in
light of the newly available information to determine the
propriety of the initial record-keeping and accounting. In the
course of these
follow-up
procedures, the Company also identified a number of other
accounting errors and irregularities that were corrected in its
restated consolidated financial statements in its 2005
10-K.
The legal and accounting advisors to the Audit Committee, from
March through the end of September 2006, reviewed relevant
documentation and interviewed current and former officers and
employees of the Company. The investigation and restatement
process identified numerous instances of improperly supported
journal entries recorded to general ledger accounts, override of
Company policies and procedures, absence of appropriately
designed policies and procedures, misapplication of GAAP and
other ineffective controls. In addition, the investigation
identified evidence of both a tone among certain
senior executives of the Company that discouraged the raising of
accounting concerns and other behavior that was deemed to not be
acceptable by the Companys disinterested directors (i.e.,
the five of the Companys directors, including the members
of the Special Investigation
112
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Committee, who are not present or former members of Company
management) (hereinafter, the Disinterested
Directors).
On September 28, 2006, the Company announced the
substantial completion of the Audit Committee-led investigation,
and that the investigation had identified accounting errors and
irregularities that materially and improperly impacted various
inventory accounts, vendor allowance receivables, other accrual
accounts and related expense accounts. In addition, the Company
announced personnel changes and also announced its intent to
implement remedial measures in the areas of enhanced accounting
policies, internal controls and employee training.
Following the completion of the Audit Committee-led
investigation, the Board of Directors created a Remediation
Committee comprised of certain positions within key functional
areas of the Company and co-chaired by the General Counsel and
the Chief Financial Officer to develop a remediation plan to
address the types of matters identified during the
investigation. The remediation plan the Remediation Committee
has been working with reflects the input of the Disinterested
Directors. While many aspects of the remediation plan have been
implemented, other aspects of the plan are presently in the
development phase or scheduled for later implementation. This
remediation plan includes a comprehensive review, and
development or modification as appropriate, of various
components of the Companys compliance program, including
ethics and compliance training, hotline awareness and education,
corporate governance training, awareness of and education
relative to key codes and policies, as well as departmental
specific measures. See discussion under Managements
Report on Internal Control Over Financial Reporting
Plan for Remediation of Material Weaknesses in
Item 9A, Controls and Procedures.
The Audit Committee-led investigation and restatement process
resulted in legal, accounting consultant and audit expenses of
approximately $25.7 million in fiscal 2006. Legal,
accounting consultant and audit expenses relative to the
securities class action and shareholder derivative litigation,
regulatory investigations, completion of the restatement process
(relative to the 2005
10-K
filed
May 1, 2007) and completion of the Companys
fiscal 2006 delinquent filings continued into fiscal 2007 and
totaled approximately $12.3 million. The Company expects to
continue to incur legal expenses in fiscal 2008 related to the
regulatory investigations and securities class action litigation.
Securities
Class Action Litigation
On June 9 and 20, 2006, two shareholder class actions alleging
violations of the federal securities laws were filed in the
United States District Court for the District of Arizona against
the Company and four of its former officers: Maynard Jenkins
(who also was a director), James Riley, Martin Fraser and Don
Watson. The cases are entitled Communication Workers of America
Plan for Employees Pensions and Death Benefits v. CSK Auto
Corporation, et al.,
No. CV-06-1503
PHX DGC (Communication Workers) and Wilfred
Fortier v. CSK Auto Corporation, et al.,
No. CV-06-1580
PHX DGC. The cases were consolidated on September 18, 2006
with Communication Workers as the lead case. The consolidated
actions have been brought by lead plaintiff Communication
Workers of America Plan for Employee Pensions and Death Benefits
(the Lead Plaintiff) on behalf of a putative class
of purchasers of CSK Auto Corporation stock between
March 20, 2003 and April 13, 2006, inclusive. Lead
Plaintiff filed an Amended Consolidated Complaint on
November 30, 2006. Lead Plaintiff voluntarily dismissed
James Riley by not naming him as a defendant in the Amended
Consolidated Complaint. The Company and Messrs. Jenkins,
Fraser and Watson (collectively referred to as the
Defendants) filed motions to dismiss the Amended
Consolidated Complaint, which the court granted on
March 28, 2007. The court allowed Lead Plaintiff leave to
amend its complaint, and it filed their Second Amended
Consolidated Complaint on May 25, 2007.
The Second Amended Consolidated Complaint alleges violations of
Section 10(b) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and
Rule 10b-5
promulgated thereunder, as well as Section 20(a) of the
Exchange Act. The Second Amended Consolidated Complaint alleges
that Defendants issued false statements before and during the
putative class period about the Companys income, earnings
and internal controls, allegedly
113
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
causing the Companys stock to trade at artificially
inflated prices during the putative class period. It seeks an
unspecified amount of damages. Defendants filed motions to
dismiss the Second Amended Consolidated Complaint on
July 13, 2007. On September 27, 2007, the court issued
an order granting the motion to dismiss Mr. Fraser with
prejudice and denying the motions to dismiss the Company and
Messrs. Jenkins and Watson. On October 24, 2007, the
court issued a scheduling order setting forth a pretrial
schedule that contemplates a trial if necessary, in March 2009,
Lead Plaintiff filed its motion to certify the class on
January 18, 2008 and the Company filed its response on
February 15, 2008. Lead Plaintiff filed its reply in
support of its motion for class certification on March 14,
2008. A hearing on the motion was scheduled to take place on
March 21, 2008. See Note 22 Subsequent Events
for details of an agreement in principle to settle this
litigation.
Shareholder
Derivative Litigation
On July 31, 2006, a shareholder derivative suit was filed
in the United States District Court for the District of Arizona
against certain of CSKs former officers and certain
current and former directors. The Company was a nominal
defendant. On June 11, 2007, plaintiff filed a Second
Amended Complaint alleging claims under Section 304 of the
Sarbanes-Oxley Act of 2002 and for alleged breaches of fiduciary
duties, abuse of control, gross mismanagement, waste of
corporate assets, and unjust enrichment. The Second Amended
Complaint sought, purportedly on behalf of the Company, damages,
restitution, and equitable and injunctive relief. On
June 22, 2007, the Company filed a motion to dismiss the
Second Amended Complaint for failure to plead demand futility
adequately or, in the alternative, to stay the case until the
shareholder class action litigation is resolved. The individual
defendants joined in the Companys motion. On
August 24, 2007, the court granted the Companys
motion to dismiss the suit based on plaintiffs failure to
adequately plead demand futility. The court entered a judgment
in defendants favor on October 22, 2007. Plaintiff
did not file a notice of appeal in the 30 days allowed for
doing so, and the judgment in defendants favor is now
final.
Governmental
Investigations
The SEC is conducting an investigation related to certain
historical accounting practices of the Company. On
November 27, 2006, the SEC served a subpoena on the Company
seeking the production of documents from the period
January 1, 1997 to the date of the subpoena related
primarily to the types of matters identified in the Audit
Committee-led investigation, including internal controls and
accounting for inventories and vendor allowances. On
December 5, 2006, the SEC also served document subpoenas on
Messrs. Jenkins, Fraser and Watson. Since that time, the
SEC has served subpoenas for documents and testimony on, and
requested testimony from, current and former employees,
officers, directors and other parties it believes may have
information relevant to the investigation. The Companys
Audit Committee has shared with the SEC the conclusions of the
Audit Committee-led investigation. In addition, the
U.S. Attorneys office in Phoenix (the
USAO) and the Department of Justice in
Washington, D.C. (the DOJ) have opened an
investigation related to these historical accounting practices.
Counsel for the Companys Audit Committee-led investigation
has met with the USAO and DOJ and has shared with them requested
information from the Audit Committee-led investigation. At this
time, the Company cannot predict when these investigations will
be completed or what their outcomes will be.
Other
Litigation
During fiscal 2007, the Company accrued approximately
$1.5 million for the estimated costs of settling various
regulatory compliance matters relating to operating practices.
The Company does not believe these matters will have a material
adverse effect on its consolidated financial position, results
of operations or cash flows.
The Company currently and from time to time is involved in other
litigation incidental to the conduct of its business, including
but not limited to asbestos and similar product liability
claims, slip and fall and other general liability claims,
discrimination and employment claims, vendor disputes, and
miscellaneous environmental and real
114
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estate claims. The damages claimed in some of this litigation
are substantial. Based on internal review, the Company accrues
reserves using its best estimate of the probable and reasonably
estimable contingent liabilities. The Company does not currently
believe that any of these other legal claims incidental to the
conduct of its business, individually or in the aggregate, will
result in liabilities material to its consolidated financial
position, results of operations or cash flows.
|
|
Note 22
|
Subsequent
Events
|
Merger Agreement
As described above in
Note 1 Merger Agreement and Matters Related to
the Companys Indebtedness, on April 1, 2008 the
Company entered into an Agreement and Plan of Merger with
OReilly Automotive, Inc. and an indirect wholly-owned
subsidiary of OReilly pursuant to which the Company is
expected to become a wholly-owned subsidiary of OReilly.
Stockholder Rights Plan
On February 4,
2008, the Company issued a press release announcing it had
adopted a stockholder rights plan (the Rights Plan)
and entered into a Rights Agreement on the same date with Mellon
Investor Services LLC, as Rights Agent. The Rights Plan was
adopted in order to maintain the integrity of the strategic
review process that the Companys Board of Directors is
conducting.
Under the Rights Plan, one Right has been issued for
each share of the Company common stock outstanding as of
February 14, 2008. The Rights will not become exercisable,
and separate certificates evidencing the Rights will not be
issued, unless the Rights are triggered. The Rights would be
triggered by, among other things, a person or group acquiring or
announcing an intention to acquire 10% or more of the
Companys common stock, or upon the consummation of a
transaction in which the Company is not the surviving entity,
the outstanding shares of the Companys common stock are
exchanged for stock or assets of another person, or 50% or more
of the Companys consolidated assets or earning power are
sold. If a party exceeds the ownership thresholds and the Rights
are not redeemed, each Right will entitle the holder, other than
the triggering party, to purchase a number of shares of the
Companys common stock having a value of twice the $45
exercise price. Such an exercise would dilute the triggering
partys holdings in the Company.
The Rights will expire on February 3, 2009, unless the
Rights Plan is extended by the Companys stockholders, in
which case, the Rights will expire on February 4, 2011
(unless earlier redeemed or exchanged). Subject to certain
exceptions, the Rights are redeemable by action of the
Companys Board of Directors at a nominal price per Right.
Securities Class Action Litigation
Settlement
On March 21, 2008, as a result
of ongoing settlement discussions regarding the securities class
action litigation, Lead Plaintiff and the defendants (including
the Company) reached an agreement in principle to settle the
case. Pursuant to the agreement in principle, the settlement
amount will be $10.0 million in cash (which the Company
expects will be paid by its directors and officers liability
insurance) and $1.7 million in Company stock (to be
contributed by the Company and valued at the closing price of
the Companys stock on March 20, 2008). The Company
would also pay interest on the cash portion of the settlement at
the rate of 5% per annum to the extent that it is not deposited
into the settlement escrow account within 30 days of
March 21, 2008. The agreement in principle also includes
certain corporate governance and contracting policy terms that
would apply so long as the Company remains an independent
company. The court has scheduled a hearing to preliminarily
approve the settlement on April 22, 2008.
In fiscal 2007, the Company recorded a charge for the
$11.7 million settlement, which is included in accrued
expenses and other current liabilities. The Company had tendered
a claim with its primary insurer, under its Directors and
Officers liability insurance policy, which participated in the
settlement negotiations and has agreed to fund within its policy
limits the $10.0 million cash portion of the settlement
agreement. Such insurer has also agreed, pursuant to the policy,
to reimburse the Company $5.0 million for certain legal
defense costs the Company has incurred related to the securities
class action litigation described above and the shareholder
derivative litigation and SEC investigation described in
Note 21-Legal
Matters, the majority of which was reimbursed in fiscal 2007.
115
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Such legal costs were expensed as incurred by the Company and
reported as a component of investigation and restatement costs
in the accompanying Consolidated Statement of Operations. The
Company expects to recognize the insurance defense cost
reimbursements and settlement payments of $15.0 million (in
the aggregate) in results of operations in fiscal 2008 upon
preliminary approval by the court of the settlement, expected in
the first quarter of fiscal 2008.
|
|
Note 23
|
Quarterly
Results (unaudited)
|
The Companys business is somewhat seasonal in nature, with
the highest sales occurring in the months of June through
October (overlapping the Companys second and third fiscal
quarters). In addition, the Companys business is affected
by weather conditions. While unusually severe or inclement
weather tends to reduce sales as customers are more likely to
defer elective maintenance during such periods, extremely hot
and cold temperatures tend to enhance sales by causing auto
parts to fail and sales of seasonal products to increase.
The following table sets forth certain quarterly unaudited
operating data for fiscal 2007 and 2006. The unaudited quarterly
information includes all adjustments which management considers
necessary for a fair presentation of the information shown.
Please note the sum of the quarterly earnings (loss) per share
amounts within a fiscal year may differ from the total earnings
(loss) per share for the fiscal year due to the impact of
differing weighted average share outstanding calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2007
(1)
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(In thousands, except share and per share data)
|
|
Results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
473,035
|
|
|
$
|
480,227
|
|
|
$
|
471,386
|
|
|
$
|
426,999
|
|
Gross profit
|
|
$
|
220,598
|
|
|
$
|
230,380
|
|
|
$
|
214,563
|
|
|
$
|
201,457
|
|
Investigation and restatement costs
|
|
$
|
4,564
|
|
|
$
|
3,771
|
|
|
$
|
2,288
|
|
|
$
|
1,725
|
|
Securities class action settlement
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,700
|
|
Operating profit (loss)
|
|
$
|
16,094
|
|
|
$
|
21,899
|
|
|
$
|
4,267
|
|
|
$
|
(5,558
|
)
|
Interest expense
|
|
$
|
13,322
|
|
|
$
|
13,164
|
|
|
$
|
13,186
|
|
|
$
|
14,491
|
|
Income (loss) before income taxes
|
|
$
|
2,772
|
|
|
$
|
8,735
|
|
|
$
|
(8,919
|
)
|
|
$
|
(20,049
|
)
|
Income tax expense (benefit)
|
|
$
|
1,102
|
|
|
$
|
3,436
|
|
|
$
|
(3,096
|
)
|
|
$
|
(7,751
|
)
|
Net income (loss)
|
|
$
|
1,670
|
|
|
$
|
5,299
|
|
|
$
|
(5,823
|
)
|
|
$
|
(12,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.28
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.04
|
|
|
$
|
0.12
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,951
|
|
|
|
43,955
|
|
|
|
43,962
|
|
|
|
44,019
|
|
Diluted
|
|
|
44,697
|
|
|
|
44,844
|
|
|
|
43,962
|
|
|
|
44,019
|
|
116
CSK AUTO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
2006
(1)
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
463,768
|
|
|
$
|
488,742
|
|
|
$
|
483,075
|
|
|
$
|
472,191
|
|
Gross profit
|
|
$
|
215,195
|
|
|
$
|
232,553
|
|
|
$
|
226,887
|
|
|
$
|
221,429
|
|
Investigation and restatement costs
|
|
$
|
3,670
|
|
|
$
|
11,962
|
|
|
$
|
6,736
|
|
|
$
|
3,371
|
|
Operating profit
|
|
$
|
29,213
|
|
|
$
|
20,463
|
|
|
$
|
18,731
|
|
|
$
|
12,031
|
|
Interest expense
|
|
$
|
10,321
|
|
|
$
|
10,999
|
|
|
$
|
13,308
|
|
|
$
|
14,139
|
|
Loss on debt retirement
|
|
$
|
|
|
|
$
|
19,336
|
|
|
$
|
90
|
|
|
$
|
24
|
|
Income (loss) before income taxes and cumulative effect of
change in accounting principle
|
|
$
|
18,892
|
|
|
$
|
(9,872
|
)
|
|
$
|
5,333
|
|
|
$
|
(2,132
|
)
|
Income tax expense (benefit)
|
|
$
|
7,735
|
|
|
$
|
(4,055
|
)
|
|
$
|
2,175
|
|
|
$
|
(864
|
)
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
11,157
|
|
|
$
|
(5,817
|
)
|
|
$
|
3,158
|
|
|
$
|
(1,268
|
)
|
Cumulative effect of change in accounting principle, net of tax
|
|
$
|
(966
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income (loss)
|
|
$
|
10,191
|
|
|
$
|
(5,817
|
)
|
|
$
|
3,158
|
|
|
$
|
(1,268
|
)
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
0.25
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.03
|
)
|
Cumulative effect of change in accounting principle
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.23
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
0.25
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.03
|
)
|
Cumulative effect of change in accounting principle
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.23
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,844
|
|
|
|
43,855
|
|
|
|
43,867
|
|
|
|
43,937
|
|
Diluted
|
|
|
44,218
|
|
|
|
43,855
|
|
|
|
44,050
|
|
|
|
43,937
|
|
|
|
|
(1)
|
|
The Companys fiscal year consists of 52 or 53 weeks,
ends on the Sunday nearest to January 31, and is named for
the calendar year just ended. Fiscal 2007 and fiscal 2006 had
52 and 53 weeks, respectively. The additional week in fiscal
2006 is included in the fourth quarter.
|
117
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
DISCLOSURE
CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures (as such
term is defined in
Rule 13a-15(e)
under the Exchange Act of 1934, as amended (the Exchange
Act)) was performed as of February 3, 2008, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer. Our disclosure controls and procedures have been
designed to ensure that information we are required to disclose
in our reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified by the SECs rules and forms and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosures.
Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer, concluded that our disclosure controls
and procedures were not effective as of February 3, 2008
because of the material weaknesses described below. The Company
performed additional analyses and other post-closing procedures
to ensure that our consolidated financial statements contained
within this Annual Report were prepared in accordance with
Generally Accepted Accounting Principles (GAAP).
Accordingly, management believes that the consolidated financial
statements included in this Annual Report fairly present in all
material respects our financial position, results of operations
and cash flows for the periods presented.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act and for the assessment of the
effectiveness of internal control over financial reporting. The
Companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
GAAP. The Companys internal control over financial
reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the
Company; and
(iii) provide reasonable assurance regarding prevention, or
timely detection, of unauthorized acquisition, use or
disposition of the Companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision of our Chief Executive Officer and Chief
Financial Officer, management conducted an assessment of the
effectiveness of the Companys internal control over
financial reporting as of February 3, 2008. In making this
assessment, management used the criteria set forth in the
framework established by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)
entitled
Internal Control-Integrated Framework
.
118
A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a
material misstatement of the Companys annual or interim
financial statements will not be prevented or detected on a
timely basis. A deficiency in internal control over
financial reporting exists when the design or operation of a
control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or
detect misstatements on a timely basis.
In connection with managements assessment, as of
February 3, 2008, the following material weaknesses in the
Companys internal control over financial reporting were
identified:
1) Resources, and Policies and Procedures to Ensure
Proper and Consistent Application
of GAAP
The Company failed to have a
sufficient complement of personnel with a level of accounting
knowledge, experience and training in the application of GAAP
commensurate with the Companys financial reporting
requirements. This material weakness in the Companys
resources, and policies and procedures contributed to the
following additional material weakness:
a) Financial Reporting
The Company
did not maintain effective controls over the completeness and
accuracy of its period end financial reporting process.
Specifically, effective controls, including monitoring, were not
maintained to ensure (i) timely resolution of reconciling
items and review of account reconciliations over certain balance
sheet accounts, (ii) timely recording of required
period-end adjustments, and (iii) accumulation and review
of all required supporting information to ensure the
completeness and accuracy of the consolidated financial
statements and disclosures.
These material weaknesses contributed to the following
additional material weaknesses and resulted in adjustments to
the Companys fiscal 2007, fiscal 2006 and fiscal 2005
annual interim consolidated financial statements prior to the
inclusion in the Companys periodic filings with the SEC
and to the restatement of the Companys fiscal 2004 and
2003 annual consolidated financial statements and consolidated
financial statements for each of the first three quarters of
fiscal 2005 and for each of the quarters of fiscal 2004 as
described in the Companys Form 10 -K for its
fiscal year ended January 29, 2006 filed on May 1,
2007. Additionally, these material weaknesses could result in
misstatements of any of the Companys consolidated
financial statement accounts and disclosures that would result
in a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected.
2) Accounting for Inventory
The Company
did not maintain effective controls over the completeness,
accuracy, existence and valuation of its inventory.
Specifically, effective controls, including monitoring, were not
maintained to ensure that the Companys inventory systems
completely and accurately processed and accounted for inventory
movements within the Companys distribution network,
particularly the disposition of inventory returns from
customers. Additionally, the Company did not maintain effective
monitoring and review over in-transit inventory, defective
product warranty costs, core inventory and related core return
liability accounts and shrink expense and shrink accruals.
Furthermore, reconciliations of distribution center and
warehouse physical inventory counts to the general ledger
balances were not performed accurately, resulting in adjustments
to year-end inventory balances.
3) Accounting for Vendor Allowances
The
Company did not maintain effective controls over the
completeness, accuracy and valuation of its vendor allowances.
Specifically, effective controls, including monitoring, were not
maintained to ensure (i) errors were prevented or detected
in interim and annual estimates of vendor allowances under
certain contracts and that vendor allowances were recorded in
the appropriate general ledger accounts to allow for appropriate
inventory cost capitalization calculations, (ii) all final
contracts were reviewed by accounting personnel on a timely
basis, and (iii) accounting of vendor allowances were
recorded in the proper periods.
4) Accounting for Certain Accrued
Expenses
The Company did not maintain effective
controls over the completeness, accuracy and valuation of
certain of its accrued expense accounts and related cost of
sales, operating and administrative expenses, and store closing
costs. Specifically, effective controls including
119
monitoring, and review and analysis were not maintained to
ensure certain accrued expense accounts were complete and
accurate.
These material weaknesses described in 2 4 above
resulted in adjustments to the aforementioned accounts within
the Companys fiscal 2007, fiscal 2006 and fiscal 2005
annual and interim consolidated financial statements prior to
the inclusion in the Companys periodic filings with the
SEC and to the restatement of the Companys fiscal 2004 and
2003 annual consolidated financial statements and consolidated
financial statements for each of the first three quarters of
fiscal 2005 and for each of the quarters of fiscal 2004 as
described in the Companys
Form 10-K
for its fiscal year ended January 29, 2006 filed on
May 1, 2007. In addition, each of the material weaknesses
described in 2 4 above could result in a
misstatement of the aforementioned accounts that would result in
a material misstatement to the Companys annual or interim
consolidated financial statements and disclosures that would not
be prevented or detected on a timely basis.
Management has concluded that due to the aforementioned material
weaknesses, the Company did not maintain effective internal
control over financial reporting as of February 3, 2008
based on criteria established in
Internal Control
Integrated Framework
issued by COSO.
The effectiveness of the Companys internal control over
financial reporting as of February 3, 2008 has been audited
by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears under
Item 8 of this Annual Report.
PLAN FOR
REMEDIATION OF MATERIAL WEAKNESSES
Remediation
Initiatives
The Board of Directors created a Remediation Committee comprised
of certain positions within key functional areas of the Company
and co-chaired by the General Counsel and the Chief Financial
Officer to develop and implement a remediation plan to address
the material weaknesses and other deficiencies noted from the
completion of the Companys evaluation of internal controls
over financial reporting. The remediation plan that the
Remediation Committee has been working with reflects the input
of the Disinterested Directors.
To remediate the material weaknesses described above, the
Company has implemented or plans to implement the remedial
measures described below. In addition, the Company plans to
continue its evaluation of its controls and procedures and may,
in the future, implement additional enhancements:
Resources, and Policies and Procedures to Ensure Proper and
Consistent Application of GAAP
The Company plans
to prepare or enhance formal written accounting policies and
procedures and establish procedures and processes for their
periodic update. In addition, procedures are being written that
should provide for the ability to effectively audit compliance.
The Company has hired, and plans to hire additional Finance
organization employees who have knowledge, experience and
training in the application of GAAP to handle the Companys
operations and related financial reporting requirements. These
employees, along with a rigorous monthly financial statement
review and comparison of actual results to budget, are intended
to assist in substantiating that our financial reporting is in
compliance with GAAP and SEC rules and regulations. The Company
plans to increase the accounting, internal control, and SEC
reporting acumen and accountability of its Finance organization
employees through a regular training program, which is planned
to include, among other things, in-house training and
development programs to enhance their competency with respect to
GAAP and financial reporting.
Financial Reporting
Formalized
procedures are being enhanced to provide for the proper
preparation of account reconciliations and their independent
review and approval. The Company also is automating certain
procedures so that it will be more effective and efficient to
complete and review account reconciliations and prepare
complete, accurate and timely supporting documentation for the
account reconciliations. The inclusion of this supporting
documentation is intended to allow the approver to more
effectively and efficiently
120
ascertain whether the account reconciliations are correct and in
accordance with the Companys policies and procedures.
Accounting for Inventory
The Company has
instituted monitoring processes to ensure compliance with its
established policies to assure timely reconciliations of all
physical inventories and reflection of the results of the
reconciliations in the general ledger, as well as independent
supervisory review of the reconciliations. Review and approval
processes are in place for distribution centers, warehouses and
stores to ensure inventory shrink estimates are calculated in
accordance with established procedures. Additional staff
increases in the inventory area are planned due to turnover. We
plan to enhance our reconciliation process of the book and
perpetual inventory for each reporting period to mitigate the
risk of material unsubstantiated balances accumulating in
general ledger accounts. Longer term, we plan to make system
enhancements so that our book and perpetual systems function as
one system that is used to replenish the operations and utilize
the same information to account for
on-hand
merchandise inventory and cost of sales. Currently, the Company
uses an estimation technique for determining its in-transit
inventory rather than halting operations to enable a physical
inventory of in-transit merchandise to be conducted. This
estimate is reviewed and approved on a quarterly basis. In the
future, the Company expects to make modifications to its systems
that will allow for a systematic method of determining the
in-transit inventory balances. In connection with the
adjustments of inventory and cost of sales for warranty, cores
and allowance for sales returns, the Company has developed more
rigorous processes for the independent review of the methodology
and underlying judgments used in developing the estimates that
underlie the related accounts.
Accounting for Vendor Allowances
Our
remediation activities have improved our contract review and
approval process and our accounting for vendor allowances.
However, during fiscal 2007, we continued to experience
difficulties with clerical accuracy of estimates and timely
communication and documentation of contracts. We also continued
to identify instances where certain transactions within
contracts should be accounted for differently. These errors are
inherent in our vendor allowance process and we rely on
management monitoring to detect and correct errors that could be
material. That monitoring has reduced the frequency of errors,
but not enough to conclude we have fully remediated this
material weakness. The policies and procedures pertaining to
vendor contracts and the earning and recognition of vendor
allowances have been formalized and now require extensive
management review prior to entering into a new contract or a
contract modification. These policies were supported by training
of merchandising, legal, and finance staff members in fiscal
2007 relative to vendor arrangements. In addition, we have
assigned one manager in the Companys accounting department
the responsibility for monitoring compliance with the policies
to increase accountability over the completeness and accuracy of
the Companys accounting for vendor allowances.
Accounting for Certain Accrued Expenses
The
Companys remediation measures planned to address the
material weakness related to the Companys recording of
accrued expenses include the development of a standardized
checklist of expected accrual items and the implementation of a
process of enhanced review of invoices, disbursements and other
supporting documentation at the end of each quarter to provide
for proper recording of accrued expenses and liabilities. In
addition, we believe that the formal review procedures for
period-end
closings and account reconciliations and the hiring of new
Finance organization management, along with written policies and
procedures, should remediate this material weakness.
Interim
Measures Pending Completion of Remediation
Initiatives
Management has not yet implemented all of the measures described
above or adequately tested those controls already implemented.
Nevertheless, management believes those remediation measures
already implemented, together with the additional measures
undertaken by the Company described below, satisfactorily
address the material weaknesses described above as they might
affect the consolidated financial statements and information
included in this Annual Report. These additional measures
included the following:
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Additional planning, analysis and procedures, and management
reviews have been performed to ensure the accuracy of financial
reporting contained in this Annual Report.
|
121
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Where the Company identified the existence of a material
weakness, the Company has performed extensive substantive
procedures to ensure that affected amounts are fairly stated for
all periods presented in this Annual Report.
|
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|
The Company retained experienced accounting consultants, other
than the Companys independent registered public accounting
firm, with relevant accounting experience, skills and knowledge,
working under the supervision and direction of the
Companys management, to assist with the fiscal
2007 year-end reporting process.
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|
The Company conducted a detailed and extensive review of account
reconciliations, non-routine transactions and agreements,
financial statement classifications, spreadsheets, and journal
entries and related substantiation for accuracy and conformance
with GAAP.
|
Control
deficiencies not constituting material weaknesses
In addition to the material weaknesses described above,
management has identified other deficiencies in internal control
over financial reporting that did not constitute material
weaknesses as of February 3, 2008. The Company implemented
during fiscal 2007, and plans to implement during fiscal 2008,
various measures to remediate these control deficiencies and has
undertaken other interim measures to address these control
deficiencies.
Managements
conclusions
Management believes the remediation measures described above
will strengthen the Companys internal control over
financial reporting and remediate the material weaknesses
identified above. Although management has not yet implemented
all of these measures or tested all those that have been
implemented, management has concluded that the interim measures
described above provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the
Companys financial statements included in this Annual
Report and has discussed its conclusions with the Companys
Audit Committee.
The Company is committed to continuing to improve its internal
control processes and will continue to diligently and vigorously
review its disclosure controls and procedures and its internal
control over financial reporting in order to ensure compliance
with the requirements of SOX 404. However, any control system,
regardless of how well designed, operated and evaluated, can
provide only reasonable, not absolute, assurance that its
objectives will be met. As management continues to evaluate and
work to improve the Companys internal control over
financial reporting, it may determine to take additional
measures to address control deficiencies, and it may determine
not to complete certain of the measures described above.
Remediation
of fiscal 2006 Material Weaknesses
As disclosed in our 2006
10-K
and in
our Quarterly Reports on
Form 10-Q
for each of the first three quarters of fiscal 2007, the Company
reported material weaknesses in internal control over financial
reporting. As of February 3, 2008, the following summarizes
the material weaknesses reported and the remedial actions taken:
(i)
Control Environment
The Company
failed to design controls to prevent or detect instances of
inappropriate override of, or interference with, existing
policies, procedures and internal controls. The Company did not
establish and maintain a proper tone as to internal control over
financial reporting. More specifically, senior management failed
to emphasize, through consistent communication and behavior, the
importance of internal control over financial reporting and
adherence to the Companys code of business conduct and
ethics, which, among other things, resulted in information being
withheld from, and improper explanations and inadequate
supporting documentation being provided to the Companys
Audit Committee, its Board of Directors, its internal auditors
and independent registered public accountants. In addition,
certain members of senior management created an environment that
discouraged employees from raising accounting related concerns
and suppressed accounting related inquiries that were made.
122
A number of actions were taken by the Company to prevent the
potential for management override and to strengthen the tone
regarding internal control over financial reporting. These
actions include:
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Since the third quarter of 2006, personnel changes have been
made, which have improved the overall tone within the
organization and represented the first and most critical step in
establishing an environment conducive to maintaining an adequate
control environment.
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|
The hiring of key management positions such as a new Chief
Executive Officer in the Companys second fiscal quarter of
fiscal 2007, a Senior Vice President and Controller in the third
quarter of fiscal 2007, and an Executive Vice President of
Finance and Chief Financial Officer in the fourth quarter of
fiscal 2007, as well as other finance personnel throughout
fiscal 2007.
|
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Development of a customized hotline and awareness training that
reinforced the Companys code of business conduct and
ethics, new procedures and controls that limit the ability of
employees or managers to override accounting events and that
establish an environment of personal accountability in the
fourth quarter of fiscal 2007.
|
As of February 3, 2008, we have concluded that this
material weakness has been remediated.
(ii)
Accounting for Inventory
The
Companys lack of effective controls did not prevent or
detect the inappropriate override of established procedures
regarding the adjustment of inventories for the results of
annual physical inventory counts at each of the Companys
distribution centers, warehouses and stores. In addition, the
Companys lack of effective controls did not prevent or
detect inappropriate and inaccurate accumulations of inventory
balances in in-transit accounts (i.e., store returns to
warehouses, distribution centers and return centers; and to
vendors), which was known or should have been known to several
members of the Finance organization. The lack of effective
controls permitted (i) errors in inventory balances to be
inappropriately systematically amortized to cost of sales in
improper periods; (ii) instances where improper adjustments
were made to certain product costs within the perpetual
inventory system that, together with improper journal entries to
the general ledger, resulted in the overstatement of inventory
and cost of sales being recognized in incorrect periods; and
(iii) the inappropriate capitalization of inventory
overheads (purchasing, warehousing and distribution costs) and
vendor allowance receivables. Additionally, Company personnel
did not properly oversee the processes for accounting for
inventory warranties and did not establish adequate accrued
liabilities for warranty returns from customers.
A number of actions were taken by the Company to eliminate the
potential of management override of inventory costs and physical
inventory adjustments. Additionally, the Company has implemented
manual procedures to accurately calculate inventory balances
related to in-transit inventory, warranty and overhead
capitalization balances:
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|
|
Company personnel were required to adhere to policies that
physical inventory adjustments be determined and recorded on a
timely basis and shrink accrual rates be adjusted to actual
experience by location on a timely basis.
|
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|
We enhanced business system security to restrict the authority
to record adjustments to product costs to a limited number of
individuals.
|
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The process of adjusting inventory costs based on vendor
invoices was enhanced to require a more rigorous management
review and approval.
|
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|
We adjusted system produced balances of in-transit inventory to
our estimates each quarter in fiscal 2007 to prevent
inappropriate and inaccurate accumulations of inventory balances
in in-transit accounts.
|
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|
|
We established policies and procedures for capitalizing
overheads into inventory and developed and implemented a process
to estimate liabilities for warranty returns from customers.
|
123
As of February 3, 2008, we do not consider this material
weakness remediated. Refer to Managements Report on
Internal Control Over Financial Reporting.
(iii)
Accounting for Vendor Allowances
The Companys lack of effective controls did not detect or
prevent the inappropriate override of established procedures
related to: (i) the review and approval process for initial
vendor allowance agreements; (ii) the monitoring of
modifications to existing vendor allowance agreements; and
(iii) the accuracy of recording of various vendor allowance
transactions, including applicable cash collections and
estimates. Furthermore, as a result of the lack of a sufficient
complement of personnel with the requisite level of accounting
knowledge, experience and training in GAAP, the Company did not
identify that provisions in certain agreements were required to
be accounted for differently. The 2006 Audit Committee-led
investigation revealed that improper debits were issued and
applied to accounts payable for amounts the Company was not
entitled to receive. These amounts were subsequently repaid to
those vendors through direct cash payments, the foregoing of
future cash discounts, the acceptance of increased prices on
future purchases and paybacks through the warranty account. This
material weakness resulted in errors in vendor allowance
receivables, inventory, accounts payable and costs of sales
accounts.
A number of actions were taken to eliminate the potential of
management override related to vendor allowances:
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|
|
|
|
The policies and procedures pertaining to vendor contract
development and the earning and recognition of vendor allowances
have been formalized. Vendor contracts require extensive
management review prior to entering into a new contract or a
contract modification.
|
|
|
|
These policies were supported by training of merchandising,
legal, and finance staff members in fiscal 2007 relative to
vendor arrangements.
|
|
|
|
We have assigned one manager in the Companys accounting
department the responsibility for monitoring compliance with the
policies to increase accountability over the completeness and
accuracy of the Companys accounting for vendor allowances.
|
As of February 3, 2008, we do not consider this material
weakness remediated. Refer to Managements Report on
Internal Control Over Financial Reporting.
(iv)
Accounting for Certain Accrued
Expenses
The Companys lack of effective
controls did not prevent or detect the inappropriate override of
established procedures to adjust workers compensation
liabilities to amounts determined by independent actuaries.
Errors in timing of incentive compensation accruals resulted
from inadvertent misapplication of GAAP as well as the lack of
effective controls which permitted override of established
procedures. In addition, the Company identified improper and
unsupported journal entries to the general ledger that resulted
in the misstatement of certain accrued expense accounts and
related operating and administrative expenses. This material
weakness resulted in errors in certain accrued expenses and
related operating and administrative expenses, including
workers compensation liabilities and incentive
compensation costs.
The following actions were implemented to eliminate the override
of established procedures contributing to the inaccurate
reporting of workers compensation and certain incentive
compensation accruals:
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|
|
Actuarial studies of workers compensation were performed
twice in fiscal 2007 and the Companys recorded liabilities
are adjusted to actuarys estimates.
|
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|
The appropriate GAAP pertaining to incentive compensation
expenses has been determined and applied appropriately in fiscal
2007.
|
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|
|
Controls over preparation, review and approval of journal
entries has been enhanced.
|
As of February 3, 2008, we do not consider this material
weakness remediated. Refer to Managements Report on
Internal Control Over Financial Reporting.
124
(v)
Accounting for Store Fixtures and
Supplies
The Companys lack of effective
controls did not prevent or detect the override of established
procedures for periodic physical inspections and usability
evaluations of store fixtures held for future use in a
warehouse. Specifically, the Company did not detect that certain
of these assets were impaired or did not exist and that, as a
result, their recorded cost was overstated. In addition, the
Companys controls failed to detect an inappropriate
accumulation of costs related to store fixtures and supplies in
general ledger accounts and the Companys overstatement of
supplies
on-hand
in
each store. This material weakness resulted in errors in its
store fixtures (fixed assets) and supplies accounts (other
current assets) and related operating and administrative
expenses.
The following actions were taken by management to correct the
reported store fixtures and supplies balances:
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Management has closed the fixture warehouse and moved all usable
fixtures and supplies to the distribution center where it is
under perpetual inventory controls and has scrapped unusable
items.
|
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|
The Company now performs an annual physical inventory and
usability review of these items in the distribution center. The
valuation of fixtures is monitored quarterly.
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|
Store supplies balances have been adjusted and adherence to the
Company policy of valuation is monitored quarterly.
|
As of February 3, 2008, we have concluded that this
material weakness has been remediated.
(vi)
Resources, and Policies and Procedures to Ensure
Proper and Consistent Application of GAAP
The
Company did not maintain effective controls over the application
of GAAP. Specifically, the Company failed to have a sufficient
complement of personnel with a level of accounting knowledge,
experience and training in the application of GAAP commensurate
with the Companys financial reporting requirements.
As discussed above, the hiring of key management positions such
as a new Chief Executive Officer in the Companys second
quarter of fiscal 2007, a Senior Vice President of Finance and
Controller in the third quarter of fiscal 2007, and an Executive
Vice President of Finance and Chief Financial Officer in the
fourth quarter of fiscal 2007, as well as other highly qualified
finance personnel throughout fiscal 2007 has improved the
competency level of the Finance organization; however there
continues to be a lack of capability, experience and training of
the Companys employees regarding the financial reporting
requirements to fully remediate the material weakness.
As of February 3, 2008, we do not consider this material
weakness remediated. Refer to Managements Report on
Internal Control Over Financial Reporting.
(vii)
Accounting for Leases
The Company
did not maintain effective controls over the completeness and
accuracy of its accounting for leased fixed assets and debt,
related operating and administrative expenses and interest
expense, and financial statement disclosures. Specifically, the
Company did not detect that a vehicle master leasing arrangement
was not properly evaluated under GAAP.
A process to require a management review of new and modified
vehicle leasing agreements in accordance with the various
aspects of lease accounting GAAP has been established to ensure
proper accounting and GAAP compliance.
As of February 3, 2008, we have concluded that this
material weakness has been remediated.
(viii)
Allowance for Sales Returns
The
Company did not maintain effective controls over the
completeness of its allowance for sales returns and related net
sales, cost of sales, accrued liabilities and other current
assets accounts. Specifically, the Company did not detect that
it had inappropriately excluded an estimate for certain returns
that were incorrectly classified as warranty and core returns in
the Companys methodology for determining an allowance for
sales returns.
125
A new, all inclusive process was developed to estimate sales
returns using historical sales return data to estimate future
return rates. The new process is formally reviewed by qualified
personnel on a quarterly basis to ensure the estimates are
reasonable and compliant with GAAP.
As of February 3, 2008, we have concluded that this
material weakness has been remediated.
(ix)
Accounting for Certain Accrued Expenses
The Company did not maintain effective controls
over the completeness, valuation and reporting in the proper
period of certain of its accrued expense accounts and related
operating and administrative expenses. The Company identified
numerous instances of errors in accrual accounts, including
transactions not accounted for in accordance with GAAP, that was
attributable to the Companys lack of a sufficient
complement of experienced personnel and written accounting
policies and procedures in certain areas.
Although the Company has assigned responsibility for the
reconciliation of all accounts to process owners and required a
management review of the reconciliations, we continue to
experience instances of reconciliations not done properly and
accounts containing errors not identified on a timely basis or
at all.
As of February 3, 2008, we do not consider this material
weakness remediated. Refer to Managements Report on
Internal Control Over Financial Reporting.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As indicated above, although the Company continues to progress
in its remediation efforts, we continue to implement new
controls and enhancements to previously existing controls to
remediate the remaining material weaknesses. There were changes
in our internal control over financial reporting that occurred
during the fourth quarter of fiscal 2007 that have materially
affected or are reasonably likely to materially affect our
internal control over financial reporting. These changes were:
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We hired an Executive Vice President of Finance and Chief
Financial Officer.
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We initiated an on-line ethics training pilot which
was required to be taken by a selection of 1,000 general and
administrative employees (i.e. employees at the corporate
office) to ensure their familiarity with the key policies
included in the code of business conduct and ethics.
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Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item is incorporated by
reference from the information under the captions
Proposal 1 Election of Directors,
Information about our Executive Officers,
Audit Committee, Section 16(a) Beneficial
Ownership Reporting Compliance, Codes of
Conduct and Board Committees contained in the
proxy statement.
|
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Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference from the information under the captions
Compensation of Directors and Executive Officers,
Compensation Committee Interlocks and Insider
Participation and Compensation Committee
Report contained in the proxy statement.
126
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated by
reference from the information under the captions
Securities Authorized for Issuance Under Equity
Compensation Plans and Security Ownership of Certain
Beneficial Owners and Management contained in the proxy
statement.
|
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Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this item is incorporated by
reference from the information under the captions Certain
Relationships and Related Transactions and Director
Independence contained in the proxy statement.
|
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Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference from the information under the caption Report of
the Audit Committee contained in the Proxy Statement.
127
PART IV
|
|
Item 15.
|
Exhibit
and Financial Statement Schedules
|
(a)(1) The following consolidated financial statements of CSK
Auto Corporation are included in Item 8, Financial
Statements and Supplementary Data of this Annual Report.
|
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|
Consolidated Statements of Operations Fiscal Years
Ended February 3, 2008, February 4, 2007 and
January 29, 2006
|
|
65
|
Consolidated Balance Sheets February 3, 2008
and February 4, 2007
|
|
66
|
Consolidated Statements of Cash Flows Fiscal Years
Ended February 3, 2008, February 4, 2007 and
January 29, 2006
|
|
67
|
Consolidated Statements of Stockholders Equity
Fiscal Years Ended February 3, 2008, February 4, 2007
and January 29, 2006
|
|
69
|
Notes to Consolidated Financial Statements
|
|
70
|
(a)(2) The following financial statement schedules of CSK Auto
Corporation for the three years ended February 3, 2008 are
included in this Report on
Form 10-K,
as required by Item 14(d): Schedule I Financial
Information of the Registrant and Schedule II Valuation and
Qualifying Accounts. Other schedules have been omitted because
information is not required or otherwise is included in the
Notes to Consolidated Financial Statements.
(a)(3) and (b) Exhibits:
The Exhibit Index included at the end of this Annual Report
is incorporated herein by reference.
128
Schedule I
CSK AUTO
CORPORATION
(Parent Company Only)
BALANCE SHEETS
|
|
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|
|
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|
|
|
February 3,
|
|
|
February 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
share data)
|
|
|
ASSETS
|
Investment in subsidiaries
|
|
$
|
164,538
|
|
|
$
|
171,510
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
164,538
|
|
|
$
|
171,510
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 90,000,000 shares
authorized, 44,030,644 and 43,950,751 shares issued and
outstanding at February 3, 2008 and February 4, 2007,
respectively
|
|
$
|
440
|
|
|
$
|
440
|
|
Additional paid-in capital
|
|
|
438,092
|
|
|
|
433,912
|
|
Accumulated deficit
|
|
|
(273,994
|
)
|
|
|
(262,842
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
164,538
|
|
|
|
171,510
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
164,538
|
|
|
$
|
171,510
|
|
|
|
|
|
|
|
|
|
|
The accompanying note is an integral part of these financial
statements.
129
Schedule I
CSK AUTO
CORPORATION
(Parent Company Only)
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except share and per share data)
|
|
|
Equity interest in net income (loss) from subsidiaries
|
|
$
|
(11,152
|
)
|
|
$
|
6,264
|
|
|
$
|
57,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of
change in accounting principle
|
|
|
(17,461
|
)
|
|
|
12,221
|
|
|
|
95,038
|
|
Income tax expense (benefit)
|
|
|
(6,309
|
)
|
|
|
4,991
|
|
|
|
37,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(11,152
|
)
|
|
|
7,230
|
|
|
|
57,790
|
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
|
|
|
|
(966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,152
|
)
|
|
$
|
6,264
|
|
|
$
|
57,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(0.25
|
)
|
|
$
|
0.16
|
|
|
$
|
1.30
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.14
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts
|
|
|
43,971,417
|
|
|
|
43,876,533
|
|
|
|
44,465,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
$
|
(0.25
|
)
|
|
$
|
0.16
|
|
|
$
|
1.29
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.25
|
)
|
|
$
|
0.14
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts
|
|
|
43,971,417
|
|
|
|
44,129,278
|
|
|
|
44,812,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying note is an integral part of these financial
statements.
130
Schedule I
CSK AUTO
CORPORATION
(Parent Company Only)
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stockholder
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
|
Balances at January 30, 2005
|
|
|
45,116,301
|
|
|
$
|
451
|
|
|
$
|
447,612
|
|
|
$
|
(10
|
)
|
|
$
|
(1,018
|
)
|
|
$
|
(326,896
|
)
|
|
$
|
120,139
|
|
Repurchase and retirement of common stock
|
|
|
(1,409,300
|
)
|
|
|
(14
|
)
|
|
|
(25,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,029
|
)
|
Restricted stock
|
|
|
17,731
|
|
|
|
|
|
|
|
1,159
|
|
|
|
|
|
|
|
(1,288
|
)
|
|
|
|
|
|
|
(129
|
)
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
|
|
|
|
|
|
571
|
|
Recovery of stockholder receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Exercise of options
|
|
|
105,590
|
|
|
|
1
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,130
|
|
Tax benefit relating to stock option exercises
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
Compensation expense, stock options
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Warrants and call options, net of tax
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,790
|
|
|
|
57,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 29, 2006
|
|
|
43,830,322
|
|
|
|
438
|
|
|
|
426,560
|
|
|
|
|
|
|
|
(1,735
|
)
|
|
|
(269,106
|
)
|
|
|
156,157
|
|
Restricted stock
|
|
|
28,466
|
|
|
|
1
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
Adoption of SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
(1,735
|
)
|
|
|
|
|
|
|
1,735
|
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
|
91,963
|
|
|
|
1
|
|
|
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,196
|
|
Compensation expense, stock-based awards
|
|
|
|
|
|
|
|
|
|
|
3,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,048
|
|
Warrants and call options, net of tax
|
|
|
|
|
|
|
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390
|
|
Discount on senior exchangeable notes, net of tax
|
|
|
|
|
|
|
|
|
|
|
4,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,675
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,264
|
|
|
|
6,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 4, 2007
|
|
|
43,950,751
|
|
|
|
440
|
|
|
|
433,912
|
|
|
|
|
|
|
|
|
|
|
|
(262,842
|
)
|
|
|
171,510
|
|
Restricted stock
|
|
|
34,010
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(221
|
)
|
Exercise of options
|
|
|
45,883
|
|
|
|
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443
|
|
Compensation expense, stock-based awards
|
|
|
|
|
|
|
|
|
|
|
3,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,958
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,152
|
)
|
|
|
(11,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 3, 2008
|
|
|
44,030,644
|
|
|
$
|
440
|
|
|
$
|
438,092
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(273,994
|
)
|
|
$
|
164,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying note is an integral part of these financial
statements.
131
Schedule I
CSK AUTO
CORPORATION
(Parent Company Only)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 4,
|
|
|
January 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,152
|
)
|
|
$
|
6,264
|
|
|
$
|
57,790
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity interest in net income (loss) from subsidiaries
|
|
|
11,152
|
|
|
|
(6,264
|
)
|
|
|
(57,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying note is an integral part of these financial
statements.
132
Schedule I
CSK AUTO
CORPORATION
(Parent Company Only)
NOTE TO FINANCIAL STATEMENT SCHEDULE
The accompanying financial statement schedule presents the
financial position, results of operations and cash flows of CSK
Auto Corporation (Corporate) as a parent company
only, and thus includes Corporates investment in CSK Auto,
Inc. (Auto) as well as Corporates interest in the results
of Autos operations, accounted for under the equity method
of accounting. Corporate has not received any dividends from
Auto during the periods presented.
This financial statement schedule should be read in conjunction
with the consolidated financial statements of CSK Auto
Corporation and Subsidiaries for descriptions of significant
accounting policies and other matters, including guarantees by
Corporate.
133
CSK AUTO
CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years 2007, 2006 and 2005
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Purchase
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Accounting
|
|
|
|
End of
|
|
|
Period
|
|
Expenses
|
|
Adjustments
|
|
Deductions
|
|
Period
|
|
Allowance for Bad Debts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 29, 2006
|
|
$
|
569
|
|
|
|
2,674
|
|
|
|
49
|
|
|
|
(2,856
|
)
|
|
$
|
436
|
|
Year Ended February 4, 2007
|
|
$
|
436
|
|
|
|
105
|
|
|
|
|
|
|
|
(148
|
)
|
|
$
|
393
|
|
Year Ended February 3, 2008
|
|
$
|
393
|
|
|
|
664
|
|
|
|
|
|
|
|
(679
|
)
|
|
$
|
378
|
|
Allowance for Closed Stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 29, 2006
|
|
$
|
7,774
|
|
|
|
2,903
|
|
|
|
324
|
|
|
|
(3,968
|
)
|
|
$
|
7,033
|
|
Year Ended February 4, 2007
|
|
$
|
7,033
|
|
|
|
1,487
|
|
|
|
|
|
|
|
(3,609
|
)
|
|
$
|
4,911
|
|
Year Ended February 3, 2008
|
|
$
|
4,911
|
|
|
|
1,983
|
|
|
|
|
|
|
|
(3,867
|
)
|
|
$
|
3,027
|
|
Allowance for Inventory Shrink:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 29, 2006
|
|
$
|
13,079
|
|
|
|
28,780
|
|
|
|
658
|
|
|
|
(30,029
|
)
|
|
$
|
12,488
|
|
Year Ended February 4, 2007
|
|
$
|
12,488
|
|
|
|
31,605
|
|
|
|
|
|
|
|
(25,977
|
)
|
|
$
|
18,116
|
|
Year Ended February 3, 2008
|
|
$
|
18,116
|
|
|
|
23,797
|
|
|
|
|
|
|
|
(28,883
|
)
|
|
$
|
13,030
|
|
Allowance for Inventory Obsolescence:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 29, 2006
|
|
$
|
1,469
|
|
|
|
(462
|
)
|
|
|
1,127
|
|
|
|
(50
|
)
|
|
$
|
2,084
|
|
Year Ended February 4, 2007
|
|
$
|
2,084
|
|
|
|
|
|
|
|
|
|
|
|
(1,326
|
)
|
|
$
|
758
|
|
Year Ended February 3, 2008
|
|
$
|
758
|
|
|
|
2,452
|
|
|
|
|
|
|
|
(1,016
|
)
|
|
$
|
2,194
|
|
Allowance for Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 29, 2006
|
|
$
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,752
|
|
Year Ended February 4, 2007
|
|
$
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,752
|
|
Year Ended February 3, 2008
|
|
$
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
(1,645
|
)
|
|
$
|
107
|
|
Allowance for Sales Returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 29, 2006
|
|
$
|
13,286
|
|
|
|
14,411
|
|
|
|
1,844
|
|
|
|
(13,286
|
)
|
|
$
|
16,255
|
|
Year Ended February 4, 2007
|
|
$
|
16,255
|
|
|
|
16,460
|
|
|
|
|
|
|
|
(15,085
|
)
|
|
$
|
17,630
|
|
Year Ended February 3, 2008
|
|
$
|
17,630
|
|
|
|
18,597
|
|
|
|
|
|
|
|
(18,329
|
)
|
|
$
|
17,898
|
|
134
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 18th day of
April, 2008.
CSK AUTO CORPORATION
|
|
|
|
By:
|
/s/ Lawrence
N. Mondry
|
Lawrence N. Mondry
President and Chief Executive Officer
|
|
|
|
By:
|
/s/ James
D. Constantine
|
James D. Constantine
Executive Vice President of Finance and Chief Financial
Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below does hereby constitute and appoint Randi
V. Morrison with full power of substitution and full power to
act as his or her true and lawful attorney-in-fact and agent
with full power and authority to do and perform all and every
act and thing whatsoever requisite and necessary to be done in
and about the premises as fully, to all intents and purposes, as
he or she might or could do if personally present at the doing
thereof, hereby ratifying and confirming all that said
attorney-in-fact and agent may or shall lawfully do, or cause to
be done, in connection with the proposed filing by CSK Auto
Corporation with the Securities and Exchange Commission, under
the provisions of the Securities Exchange Act of 1934, as
amended, of an Annual Report on
Form 10-K
for the fiscal year ended February 3, 2008 (the
Annual Report), including but not limited to, such
full power and authority to do the following: (i) execute
and file such Annual Report; (ii) execute and file any
amendment or amendments thereto; (iii) receive and respond
to comments from the Securities and Exchange Commission related
in any way to such Annual Report or any amendment or amendments
thereto; and (iv) execute and deliver any and all
certificates, instruments or other documents related to the
matters enumerated above, as the attorney-in-fact in her sole
discretion deems appropriate.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, this report has
been signed by the following persons on behalf of the
registrant, and in the capacities indicated, on this
18th day of April, 2008.
|
|
|
|
|
|
|
|
/s/
CHARLES
K. MARQUIS
Charles
K. Marquis
|
|
Chairman of the Board
|
|
|
|
/s/
JAMES
G. BAZLEN
James
G. Bazlen
|
|
Director
|
|
|
|
/s/
MORTON
GODLAS
Morton
Godlas
|
|
Director
|
135
|
|
|
|
|
|
|
|
/s/
TERILYN
A. HENDERSON
Terilyn
A. Henderson
|
|
Director
|
|
|
|
/s/
LAWRENCE
N. MONDRY
Lawrence
N. Mondry
|
|
Director,
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/
CHARLES
J. PHILIPPIN
Charles
J. Philippin
|
|
Director
|
|
|
|
/s/
WILLIAM
A. SHUTZER
William
A. Shutzer
|
|
Director
|
|
|
|
/s/
JAMES
D. CONSTANTINE
James
D. Constantine
|
|
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer )
|
|
|
|
/s/
MICHAEL
D. BRYK
Michael
D. Bryk
|
|
Senior Vice President and
Controller
(Principal Accounting Officer)
|
136
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
2
|
.01
|
|
Agreement and Plan of Merger, dated as of November 30,
2005, among CSK Auto Corporation, Fastlane Merger Corp.,
Murrays, Inc., the sellers named therein, and J.W. Childs
Associates, L.P., as seller representative, incorporated herein
by reference to Exhibit 2.1 of our Current Report on
Form 8-K,
filed on December 1, 2005. (File
No. 001-13927).
|
|
2
|
.02
|
|
Agreement and Plan of Merger among OReilly Automotive,
Inc., OC Acquisition Company, and CSK Auto Corporation, dated
April 1, 2008 incorporated herein by reference to
Exhibit 2.1 of our Current Report on Form 8-K, filed
on April 7, 2008 (File
No. 001-13927).
|
|
3
|
.01
|
|
Restated Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.01 of our
Annual Report on
Form 10-K,
filed on May 4, 1998 (File
No. 001-13927).
|
|
3
|
.02
|
|
Certificate of Correction to the Restated Certificate of
Incorporation of the Company, incorporated herein by reference
to Exhibit 3.02 of our Annual Report on
Form 10-K,
filed on May 4, 1998 (File
No. 001-13927).
|
|
3
|
.03
|
|
Certificate of Amendment to the Restated Certificate of
Incorporation of CSK Auto Corporation, incorporated herein by
reference to Exhibit 3.2.1 of our Quarterly Report on
Form 10-Q,
filed on September 18, 2002 (File
No. 001-13927).
|
|
3
|
.04
|
|
Second Certificate of Amendment of the Restated Certificate of
Incorporation of CSK Auto Corporation, incorporated herein by
reference to Exhibit 3.04 of our Quarterly Report on
Form 10-Q,
filed on December 9, 2005 (File
No. 001-13927).
|
|
3
|
.05
|
|
Amended and Restated By-laws of the Company, incorporated herein
by reference to Exhibit 3.03 of our Annual Report on
Form 10-K,
filed on April 28, 1999 (File
No. 001-13927).
|
|
3
|
.05.1
|
|
First Amendment to Amended and Restated By-laws of the Company,
incorporated herein by reference to Exhibit 3.03.1 of our
annual report on
Form 10-K,
filed on May 1, 2001. (File No
001-13927).
|
|
3
|
.05.2
|
|
Second Amendment to Amended and Restated By-laws of the Company,
incorporated herein by reference to Exhibit 3.03.2 of our
Quarterly Report on
Form 10-Q,
filed on June 14, 2004 (File
No. 001-13927).
|
|
3
|
.05.3
|
|
Third Amendment to Amended and Restated By-Laws of CSK Auto
Corporation, incorporated herein by reference to
Exhibit 3.1 to our Current Report on
Form 8-K,
filed on August 16, 2007 (File
No. 001-13927).
|
|
3
|
.06.4
|
|
Fourth Amendment to Amended and Restated By-Laws of CSK Auto
Corporation, incorporated herein by reference to
Exhibit 3.1 to our Current Report on
Form 8-K,
filed on September 5, 2007 (File
No. 001-13927).
|
|
4
|
.01
|
|
Form of Common Stock certificate, incorporated herein by
reference to Exhibit 4.05 of our Registration Statement on
Form S-1/A,
filed on March 3, 1998 (File
No. 333-43211).
|
|
4
|
.02
|
|
Indenture, dated as of December 19, 2005, among CSK Auto,
Inc., CSK Auto Corporation, CSKAUTO.COM, Inc. as guarantors, and
the Bank of New York Trust Company, N.A., as Trustee,
incorporated herein by reference to Exhibit 4.1 of our
Current Report on
Form 8-K,
filed on December 20, 2005 (File
No. 001-13927).
|
|
4
|
.03
|
|
Second Supplemental Indenture, dated as of July 27, 2006,
among CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc.,
and The Bank of New York Trust Company, N.A., as Trustee,
incorporated herein by reference to Exhibit 4.1 of our
Current Report on
Form 8-K,
filed on July 31, 2006 (File
No. 001-13927).
|
|
4
|
.04
|
|
Rights Agreement dated as of February 4, 2008 by and
between CSK Auto Corporation and Mellon Investor Services LLC,
as Rights Agent, filed as Exhibit 1 to the Registration
Statement on
Form 8-A
of CSK Auto Corporation and incorporated herein by reference
(File
No. 001-13927).
|
|
10
|
.01
|
|
Amended and Restated Employment Agreement, dated as of
June 12, 1998, between CSK Auto, Inc. and Maynard Jenkins,
incorporated herein by reference to Exhibit 10.02 of our
Quarterly Report on
Form 10-Q,
filed on September 11, 1998 (File
No. 001-13927).
|
|
10
|
.01.1
|
|
Form of Amendment to Employment Agreement, by and between CSK
Auto, Inc. and Maynard Jenkins, incorporated herein by reference
to Exhibit 10.2 of our Current Report on
Form 8-K,
filed on March 3, 2006 (File
No. 001-13927).
|
137
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.01.2
|
|
Form of Amendment to Employment Agreement, by and between CSK
Auto, Inc. and Maynard Jenkins, incorporated herein by reference
to Exhibit 10.1 of our Current Report on
Form 8-K,
filed on April 18, 2007 (File
No. 001-13927).
|
|
10
|
.02
|
|
Stock Option Agreement, dated March 9, 1998, between the
Company and Maynard Jenkins, incorporated herein by reference to
Exhibit 10.26 of our Registration Statement on
Form S-1/A,
filed on March 10, 1998 (File
No. 333-43211).
|
|
10
|
.03
|
|
Form of Letter Agreement between CSK Auto Corporation and
Maynard Jenkins amending March 17, 1998 Stock Option Grant,
incorporated herein by reference to Exhibit 10.2 of our
Current Report on
Form 8-K,
filed on April 18, 2007 (File
No. 001-13927).
|
|
10
|
.04
|
|
Restated 1996 Associate Stock Option Plan, dated as of
June 5, 1998, incorporated herein by reference to
Exhibit 10.11 of our Registration Statement on
Form S-1,
filed on November 13, 1998 (File
No. 333-67231).
|
|
10
|
.04.1*
|
|
First Amendment to the Restated 1996 Associate Stock Option
Plan.
|
|
10
|
.05*
|
|
Form of Non-Qualified Stock Option Contract previously used in
connection with the 1996 Associate Stock Option Plan.
|
|
10
|
.06
|
|
Amended and Restated Supplemental Executive Retirement Plan
Agreement, effective January 1, 2005, between CSK Auto,
Inc. and Maynard Jenkins, incorporated herein by reference to
Exhibit 10.1 of our Current Report on
Form 8-K,
filed on December 21, 2004 (File
No. 001-13927).
|
|
10
|
.06.1
|
|
Form of First Amendment to Amended and Restated Supplemental
Executive Retirement Plan Agreement, dated as of January 1,
2005, between CSK Auto, Inc. and Maynard Jenkins, incorporated
herein by reference to Exhibit 10.1 of our Current Report
on
Form 8-K,
filed on March 3, 2006 (File
No. 001-13927).
|
|
10
|
.07
|
|
Restated 1996 Executive Stock Option Plan (Amended and Restated
June 8, 1999), incorporated herein by reference to
Appendix B of our definitive Proxy Statement, filed on
May 11, 1999 (File
No. 001-13927).
|
|
10
|
.07.1*
|
|
First Amendment to the Restated 1996 Executive Stock Option
Plan.
|
|
10
|
.08*
|
|
Form of Non-Qualified Stock Option Contract previously used in
connection with the 1996 Executive Stock Option Plan.
|
|
10
|
.09
|
|
1999 Employee Stock Option Plan, incorporated by reference to
Appendix C of our definitive Proxy Statement, filed on
May 11, 1999 (File
No. 001-13927).
|
|
10
|
.09.1*
|
|
First Amendment to the 1999 Employee Stock Option
Plan.
|
|
10
|
.10*
|
|
Form of Non-Qualified Stock Option Contract previously used in
connection with the 1999 Employee Stock Option Plan.
|
|
10
|
.11
|
|
2004 Stock and Incentive Plan (as amended and restated effective
as of November 8, 2007), incorporated herein by reference
to Appendix A of our amended definitive Proxy Statement,
filed on November 1, 2007 (File
No. 001-13927).
|
|
10
|
.11.1*
|
|
First Amendment to the 2004 Stock and Incentive Plan (as amended
and restated effective as of November 8, 2007).
|
|
10
|
.12
|
|
Form of Non-Qualified Stock Option Contract (Employee Form) to
be used in connection with our 2004 Stock and Incentive Plan,
incorporated herein by reference to Exhibit 99.1 of our
Current Report on
Form 8-K,
filed on October 20, 2004 (File
No. 001-13927).
|
|
10
|
.13
|
|
Form of Non-Qualified Stock Option Contract (Director Form) to
be used in connection with our 2004 Stock and Incentive Plan,
incorporated herein by reference to Exhibit 99.2 of our
Current Report on
Form 8-K,
filed on October 20, 2004 (File
No. 001-13927).
|
|
10
|
.14
|
|
Form of Restricted Stock Agreement to be used in connection with
our 2004 Stock and Incentive Plan, incorporated herein by
reference to Exhibit 99.3 of our Current Report on
Form 8-K,
filed on October 20, 2004 (File
No. 001-13927).
|
138
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.15
|
|
Amended and Restated Lease, dated October 23, 1989 (the
Missouri Falls Lease), between CSK Auto, Inc. (formerly known as
Northern Automotive Corporation) and Missouri Falls Associates
Limited Partnership, incorporated herein by reference to
Exhibit 10.10 of CSK Auto, Incs Registration
Statement on
Form S-4,
filed on February 28, 1997 (File
No. 333-22511).
|
|
10
|
.16
|
|
First Amendment to the Missouri Falls Lease, dated
November 22, 1991, between CSK Auto, Inc. (formerly known
as Northern Automotive Corporation) and Missouri Falls
Associates Limited Partnership, incorporated herein by reference
to Exhibit 10.11 of CSK Auto, Incs Registration
Statement on
Form S-4,
filed on February 28, 1997 (File
No. 333-22511).
|
|
10
|
.17
|
|
Amendment to Leases, dated October 30, 1996, by and between
Missouri Falls Associates Limited Partnership and CSK Auto, Inc.
(formerly known as Northern Automotive Corporation),
incorporated herein by reference to Exhibit 10.12 of CSK
Auto, Incs Registration Statement on
Form S-4,
filed February on 28, 1997 (File
No. 333-22511).
|
|
10
|
.18
|
|
Lease, dated July 31, 1997, between Missouri Falls Partners
and CSK Auto, Inc.; First Amendment to Lease, dated
April 1, 2000, incorporated herein by reference to
Exhibit 10.15 of our Annual Report on
Form 10-K,
filed on May 1, 2001 (File
No. 001-13927).
|
|
10
|
.19
|
|
Lease, dated April 20, 2000, between Missouri Falls
Partners and CSK Auto, Inc.; First Amendment to Lease, dated
February 23, 2001, incorporated herein by reference to
Exhibit 10.16 of our Annual Report on
Form 10-K,
filed on May 1, 2001 (File
No. 001-13927).
|
|
10
|
.20
|
|
Lease, dated April 20, 2000, between Missouri Falls
Partners and CSK Auto, Inc.; First Amendment to Lease dated
August 20, 2000, incorporated herein by reference to
Exhibit 10.17 of our Annual Report on
Form 10-K,
filed on May 1, 2001 (File
No. 001-13927).
|
|
10
|
.21
|
|
Amendment to all CSK Auto, Inc. Leases at Missouri Falls, dated
December 6, 2001, between Missouri Falls Partners and MFP
Holdings, LLC and CSK Auto, Inc., incorporated herein by
reference to Exhibit 10.24 of our Registration Statement on
Form S-4,
filed on February 11, 2002 (File
No. 333-82492).
|
|
10
|
.22
|
|
Form of Indemnity Agreement, between CSK Auto Corporation and
each Director, incorporated herein by reference to
Exhibit 10.21 of our Annual Report on
Form 10-K,
filed on May 2, 2005 (File
No. 001-13927).
|
|
10
|
.23
|
|
Severance and Retention Agreement, between CSK Auto, Inc. and
James B. Riley, dated October 24, 2005, incorporated herein
by reference to Exhibit 10.05 to our Quarterly Report on
Form 10-Q,
filed on December 9, 2005 (File
No. 001-13927).
|
|
10
|
.24*
|
|
Form of Amended and Restated Severance and Retention Agreement
between CSK Auto, Inc. and each of its then senior executive
officers (other than Lawrence Mondry).
|
|
10
|
.25
|
|
Indicative Callable Swap Term Sheet, effective as of
April 5, 2004, between Lehman Brothers and CSK Auto, Inc.,
incorporated herein by reference to Exhibit 10.57 of our
Annual Report on
Form 10-K,
filed on April 15, 2004 (File
No. 001-13927).
|
|
10
|
.26
|
|
Amended and Restated Registration Rights Agreement, dated as of
May 16, 2002, by and among CSK Auto Corporation, LBI Group
Inc. and Investcorp CSK Holdings L.P., incorporated herein by
reference to Exhibit 4.05.01 to our Registration Statement
on
Form S-3/A,
filed on May 17, 2002 (File
No. 333-77008).
|
|
10
|
.27
|
|
Employment Agreement, dated March 30, 2000, between CSK
Auto, Inc. and James Bazlen, incorporated herein by reference to
Exhibit 10.47 of our Annual Report on
Form 10-K,
filed on May 5, 2003 (File
No. 001-13927).
|
|
10
|
.27.1
|
|
First Amendment to March 30, 2000 Employment Agreement,
between CSK Auto, Inc. and James Bazlen, effective as of
June 11, 2003, incorporated herein by reference to
Exhibit 10.01 of our Quarterly Report on
Form 10-Q,
filed on September 17, 2003 (File
No. 001-13927).
|
|
10
|
.27.2
|
|
Second Amendment to March 30, 2000 Employment Agreement,
between CSK Auto, Inc. and James Bazlen, effective as of
October 15, 2004, incorporated herein by reference to
Exhibit 99.4 of our Current Report on
Form 8-K,
filed on October 20, 2004 (File
No. 001-13927).
|
139
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.28
|
|
Stock Purchase Agreement relating to Automotive Information
Systems, Inc., dated January 21, 2005, by and between CSK
Auto, Inc. and Mobile Productivity, Inc., incorporated herein by
reference to Exhibit 10.1 of our Current Report on
Form 8-K,
filed on January 27, 2005 (File
No. 001-13927).
|
|
10
|
.29
|
|
Amended and Restated Outside Director Compensation Policy,
incorporated herein by reference to our Current Report on
Form 8-K,
filed on May 18, 2005 (File
No. 001-13927).
|
|
10
|
.29.1*
|
|
First Amendment to Amended and Restated Outside Director
Compensation Policy, effective as of August 15, 2007.
|
|
10
|
.29.2*
|
|
Second Amendment to Amended and Restated Outside Director
Compensation Policy, effective as of March 7, 2008.
|
|
10
|
.30
|
|
Long-Term Incentive Plan, incorporated herein by reference to
Exhibit 10.1 of our Current Report on
Form 8-K,
filed on July 1, 2005 (File
No. 001-13927).
|
|
10
|
.31
|
|
Form of Incentive Bonus Unit Award Agreement, incorporated
herein by reference to Exhibit 10.2 of our Current Report
on
Form 8-K,
filed on July 1, 2005 (File
No. 001-13927).
|
|
10
|
.32
|
|
Second Amended and Restated Credit Agreement, dated as of
July 25, 2005, among CSK Auto, Inc., the Lenders party
thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and
J.P. Morgan Securities, Inc., as Sole Bookrunner and Sole
Lead Arranger, incorporated herein by reference to
Exhibit 10.1 of our Current Report on
Form 8-K,
filed on July 29, 2005 (File
No. 001-13927).
|
|
10
|
.32.1
|
|
First Amendment to Second Amended and Restated Credit Agreement,
dated as of December 16, 2005, among CSK Auto, Inc., the
several lenders from time to time parties thereto, JPMorgan
Chase Bank N.A., as administrative agent, and the co-syndication
agents and co-documentation agents party thereto, incorporated
herein by reference to Exhibit 10.1 of our Current Report
on
Form 8-K,
filed on December 20, 2005 (File
No. 001-13927).
|
|
10
|
.33
|
|
Term Credit Agreement, dated as of June 30, 2006, among CSK
Auto, Inc., the Lenders party thereto, JPMorgan Chase Bank,
N.A., as Administrative Agent, and Lehman Commercial Paper Inc.
and Wachovia Bank, N.A., as Co-Syndication Agents, incorporated
herein by reference to Exhibit 10.1 of our Current Report
on
Form 8-K,
filed on July 7, 2006 (File
No. 001-13927).
|
|
10
|
.33.1
|
|
Amendment, dated as of August 3, 2006, to the Credit
Agreement dated as of June 30, 2006, among CSK Auto, Inc.,
the Lenders party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent, and Lehman Commercial Paper Inc. and
Wachovia Bank, National Association, as Co-Syndication Agents,
incorporated by reference to Exhibit 10.50.1 of our Annual
Report on
Form 10-K,
filed on May 1, 2007 (File
No. 001-13927).
|
|
10
|
.33.2
|
|
Second Amendment, dated as of April 27, 2007, to the Credit
Agreement dated as of June 30, 2006, among CSK Auto, Inc.,
the Lenders party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent, and Lehman Commercial Paper Inc. and
Wachovia Bank, National Association, as
Co-Syndication
Agents, incorporated by reference to Exhibit 10.50.2 of our
Annual Report on
Form 10-K,
filed on May 1, 2007 (File
No. 001-13927).
|
|
10
|
.33.3
|
|
Third Amendment, dated as of October 10, 2007, to the
Credit Agreement dated as of June 30, 2006 among CSK Auto,
Inc., the Lenders party thereto, and JPMorgan Chase Bank, N.A.,
as Administrative Agent, and Lehman Commercial Paper Inc. and
Wachovia Bank, National Association, as
Co-Syndication
Agents, incorporated herein by reference to Exhibit 10.1 to
our Current Report on
Form 8-K,
filed on October 15, 2007 (File
No. 001-13927).
|
|
10
|
.33.4
|
|
Fourth Amendment, dated as of December 18, 2007, to the
Credit Agreement dated as of June 30, 2006 among CSK Auto,
Inc., the Lenders party thereto, and JPMorgan Chase Bank, N.A.,
as Administrative Agent, and Lehman Commercial Paper Inc. and
Wachovia Bank, National Association, as
Co-Syndication
Agents, incorporated herein by reference to Exhibit 10.1 to
our Current Report on
Form 8-K,
filed on December 26, 2007 (File
No. 001-13927).
|
|
10
|
.34
|
|
Form of Letter Agreement between CSK Auto Corporation and
Maynard Jenkins amending March 18, 1999 Stock Option Grant,
incorporated herein by reference to Exhibit 10.3 of our
Current Report on
Form 8-K,
filed on April 18, 2007 (File
No. 001-13927).
|
140
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
10
|
.35
|
|
Form of Letter Agreement between CSK Auto Corporation and
Maynard Jenkins amending December 21, 1999 Stock Option
Grant, incorporated herein by reference to Exhibit 10.4 of
our Current Report on
Form 8-K,
filed on April 18, 2007 (File
No. 001-13927).
|
|
10
|
.36
|
|
Form of Letter Agreement between CSK Auto Corporation and
Maynard Jenkins amending April 5, 2002 Stock Option Grant,
incorporated herein by reference to Exhibit 10.5 of our
Current Report on
Form 8-K,
filed on April 18, 2007 (File
No. 001-13927).
|
|
10
|
.37
|
|
Form of Election Agreement between Optionee and CSK Auto
Corporation, incorporated by reference to Exhibit 10.1 of
our Current Report on
Form 8-K
filed on December 22, 2006 (File
No. 001-13927).
|
|
10
|
.38
|
|
Employment Agreement, dated as of June 8, 2007, by and
between CSK Auto, Inc., and Lawrence N. Mondry, which includes
the Form of Nonqualified Stock Option Contract between the
Company and Lawrence N. Mondry regarding the June 13, 2007
Inducement Award and the Form of Restricted Stock Unit Agreement
between the Company and Lawrence N. Mondry regarding the
June 13, 2007 Inducement Award, incorporated by reference
to Exhibit 10.1 of our Current Report on
Form 8-K,
filed on June 13, 2007 (File
No. 001-13927).
|
|
10
|
.38.1*
|
|
First Amendment to Employment Agreement, dated as of
June 8, 2007, by and between CSK Auto, Inc., and Lawrence
N. Mondry.
|
|
10
|
.39
|
|
Form of Contract for October 20, 2007 Stock Option Award to
Lawrence Mondry, incorporated herein by reference to
Exhibit 10.1 to our Current Report on
Form 8-K,
filed on October 24, 2007 (File
No. 001-13927).
|
|
10
|
.40
|
|
Form of Interim Executive Services Agreement between CSK Auto,
Inc. and Tatum, LLC, incorporated by reference to
Exhibit 10.1 of our Current Report on
Form 8-K,
filed on June 26, 2007 (File
No. 001-13927).
|
|
10
|
.41
|
|
Form of Indemnification Agreement for Interim Executive among
CSK Auto Corporation, CSK Auto, Inc., CSKAUTO.COM, Inc. and
Steven L. Korby, incorporated by reference to Exhibit 10.2
of our Current Report on
Form 8-K,
filed on June 26, 2007 (File
No. 001-13927).
|
|
10
|
.42*
|
|
2008
Cash-In-Lieu
Bonus Plan.
|
|
10
|
.42.1*
|
|
Form of Notice of Participation in 2008 Cash in Lieu Bonus
Plan.
|
|
10
|
.43*
|
|
Side Letter between CSK Auto, Inc., CSK Auto Corporation and
Michael Bryk, dated March 31, 2008, regarding reimbursement
for travel and temporary living expenses.
|
|
10
|
.44*
|
|
Side Letter between CSK Auto, Inc., CSK Auto Corporation and
James Constantine, dated March 31, 2008, regarding
reimbursement for travel and temporary living expenses.
|
|
10
|
.45*
|
|
Side Letter between CSK Auto, Inc., CSK Auto Corporation and
Randi Morrison, dated March 31, 2008, regarding
reimbursement for travel and temporary living expenses.
|
|
10
|
.46*
|
|
Side Letter between CSK Auto, Inc., CSK Auto Corporation and
Brian Woods, dated March 31, 2008, regarding reimbursement
for travel, temporary living expenses, and relocation
costs.
|
|
10
|
.47*
|
|
2008 General and Administrative Staff Incentive Plan.
|
|
10
|
.48*
|
|
2008 Executive Incentive Plan for Lawrence N. Mondry.
|
|
21
|
.01*
|
|
Subsidiaries of the Company.
|
|
23
|
.1*
|
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm.
|
|
24
|
.01*
|
|
Power of Attorney (included on signature page to this Annual
Report).
|
|
31
|
.01*
|
|
Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.02*
|
|
Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.01*
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
99
|
.01
|
|
Waiver, dated as of May 4, 2006, to Second Amended and
Restated Credit Agreement, dated as of July 25, 2005, among
CSK Auto, Inc., the lenders party thereto and JPMorgan Chase
Bank, N.A., as administrative agent, incorporated herein by
reference to Exhibit 99.2 of our Current Report on
Form 8-K,
filed on May 23, 2006 (File
No. 001-13927).
|
141
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
99
|
.01.1
|
|
Second Waiver, dated as of June 16, 2006, to the Second
Amended and Restated Credit Agreement, dated as of July 25,
2005, among CSK Auto, Inc., the Lenders party thereto, the
Co-Syndication Agents and the Co-Documentation Agents party
thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent,
incorporated herein by reference to Exhibit 99.3 of our
Current Report on
Form 8-K,
filed on June 19, 2006 (File
No. 001-13927).
|
|
99
|
.01.2
|
|
Third Waiver, dated as of June 11, 2007, to the Second
Amended and Restated Credit Agreement, dated as of July 25,
2005, among CSK Auto, Inc., the Lenders party thereto, the
Co-Syndication Agents and the Co-Documentation Agents party
thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent,
incorporated herein by reference to Exhibit 99.1 of our
Current Report on
Form 8-K,
filed on June 13, 2007 (File
No. 001-13927).
|
|
99
|
.01.3
|
|
Fourth Waiver, dated as of August 10, 2007, to the Second
Amended and Restated Credit Agreement, dated as of July 25,
2005, among CSK Auto, Inc., the Lenders party thereto, the
Co-Syndication Agents and the Co-Documentation Agents party
thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent,
incorporated herein by reference to Exhibit 99.1 to our
Current Report on
Form 8-K,
filed on August 13, 2007 (File
No. 001-13927).
|
|
|
|
*
|
|
Filed herewith.
|
|
|
|
Executive compensation plans or arrangements.
|
142
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