10-K 1 r0010k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-K (Mark One) (x) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 3,2001 OR ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (NO FEE REQUIRED) For the transition period from to ------ ------ Commission file number 1-3381 ------ The Pep Boys - Manny, Moe & Jack ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-0962915 ------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 3111 West Allegheny Avenue, Philadelphia, PA 19132 --------------------------------------------- --------- (Address of principal executive office) (Zip code) 215-430-9000 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ----------------------- Common Stock, $1.00 par value New York Stock Exchange Liquid Yield Option Notes due September 20, 2011 New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 X No ----- ----- 1 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 registrant's 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. ( ) Yes No X ----- ----- As of the close of business on April 6, 2001, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $238,789,201. As of April 6, 2001, there were 53,455,933 shares of the registrant's common stock outstanding. 2 This Annual Report on Form 10-K contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward looking statements involve risks and uncertainties which could cause actual results to materially differ from those expressed in any such forward looking statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Forward Looking Statements." 3 DOCUMENTS INCORPORATED BY REFERENCE PART III Portions of the registrant's definitive proxy statement, which will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year, for the Company's Annual Meeting of Shareholders presently scheduled to be held on May 30, 2001. 4 This Annual Report on Form 10-K for the year ended February 3,2001 at the time of filing with the Securities and Exchange Commission, modifies and supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities on or after the date of such filing, pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference this Annual Report. 5 PART I ITEM 1 BUSINESS GENERAL The Pep Boys - Manny, Moe & Jack and Subsidiaries (the "Company") is a leading automotive retail and service chain. The Company operates in one industry, the automotive aftermarket. The Company is engaged principally in the retail sale of automotive parts, tires and accessories, automotive maintenance and service and the installation of parts. The Company's primary operating unit is its SUPERCENTER format. As of February 3, 2001, the Company operated 628 stores consisting of 615 SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of 6,498 service bays, as well as 12 non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates approximately 12,836,000 gross square feet of retail space, including service bays. The SUPERCENTERS average approximately 20,700 square feet and the 12 PEP BOYS EXPRESS stores average approximately 9,600 square feet. The Company believes that its unique SUPERCENTER format offers the broadest capabilities in the industry and positions the Company to gain market share and increase its profitability by serving the "do-it-yourself," automotive service, tire and "buy-for-resale" customer sectors with the highest quality merchandise and service. 6 As of February 3,2001 the Company operated its stores in 36 states and Puerto Rico. The following table indicates by state the number of stores of the Company in operation at the end of fiscal 1997, 1998, 1999 and 2000 and the number of stores opened and closed by the Company during each of the last three fiscal years:
NUMBER OF STORES AT END OF FISCAL YEARS 1997 THROUGH 2000 1997 1998 1999 2000 Year Year Year Year State End Opened Closed End Opened Closed End Opened Closed End ------ --- ------ ------ --- ------ ------ --- ------ ------ --- Alabama 1 - - 1 - - 1 - - 1 Arizona 24 - 1 23 - - 23 - - 23 Arkansas 1 - - 1 - - 1 - - 1 California 156 6 30 132 4 - 136 - 1 135 Colorado 8 - - 8 - - 8 - - 8 Connecticut 9 1 1 9 - - 9 - 1 8 Delaware 6 - - 6 - - 6 - - 6 District of Columbia 5 - 5 - - - - - - - Florida 51 2 5 48 - - 48 - 1 47 Georgia 26 - - 26 - - 26 - - 26 Illinois 32 1 8 25 - - 25 - 1 24 Indiana 12 4 4 12 1 - 13 - 4 9 Kansas 2 - - 2 - - 2 - - 2 Kentucky 4 - - 4 - - 4 - - 4 Louisiana 12 - - 12 - - 12 - 2 10 Maine - 1 - 1 - - 1 - - 1 Maryland 23 - 4 19 - - 19 - - 19 Massachusetts 11 3 6 8 2 - 10 - 2 8 Michigan 17 4 6 15 2 - 17 - 10 7 Minnesota - 2 - 2 1 - 3 - - 3 Missouri 1 - - 1 - - 1 - - 1 Nevada 10 2 - 12 - - 12 - - 12 New Hampshire 4 - - 4 - - 4 - - 4 New Jersey 34 - 9 25 3 - 28 - - 28 New Mexico 8 - - 8 - - 8 1 1 8 New York 46 2 18 30 3 - 33 1 5 29 North Carolina 11 - - 11 - - 11 - - 11 Ohio 14 1 - 15 - - 15 - 2 13 Oklahoma 6 - - 6 - - 6 - - 6 Oregon - 1 - 1 2 - 3 - 3 - Pennsylvania 50 4 8 46 - - 46 - - 46 Puerto Rico 21 2 - 23 2 - 25 2 - 27 Rhode Island 4 - 1 3 - - 3 - - 3 South Carolina 6 - - 6 - - 6 - - 6 Tennessee 7 - - 7 - - 7 - - 7 Texas 65 - 4 61 - - 61 - 1 60 Utah 6 - - 6 - - 6 - - 6 Virginia 18 - 2 16 1 - 17 - - 17 Washington - 3 - 3 3 - 6 1 5 2 ---- --- -- --- ---- -- ---- ---- -- ---- Total 711 39 112 638 24 - 662 5 39 628 - 628 === == == === == == === == === ===
7 STORE DEVELOPMENT AND EXPANSION The Company's primary focus in fiscal 2000 was the development of its existing stores. During fiscal 2000, the Company opened 5 SUPERCENTERS, all of which include service bays and closed 39 SUPERCENTERS of which 38 were associated with the Profit Enhancement Plan and one was relocated. The Company's typical SUPERCENTER is a free standing, "one-stop" shopping automotive warehouse that features state-of-the-art service bays. Each SUPERCENTER carries an average of approximately 26,000 stock-keeping units and serves the automotive aftermarket needs of the "do-it-yourself," the "do-it-for-me" (automotive service), tire and "buy-for-resale" customer sectors. The Company's primary SUPERCENTER prototype is approximately 18,200 square feet and generally features 12 service bays. The Company currently intends to continue to utilize this prototype in fiscal 2001. The Company completed the rollout of its commercial automotive parts delivery program during fiscal 1998. This program was established to increase the Company's market share with the professional installer. The program has strengthened the Company's position with the "buy-for-resale" customer by taking greater advantage of the breadth and quality of its parts inventory as well as its experience supplying its own service bays and mechanics. As of February 3, 2001, 490 of the Company's stores provide commercial parts delivery, which represents approximately 78% of its stores. 8 In fiscal 2001, the Company plans to continue to focus much of its energy on improving the performance of its existing stores. As a result, the Company plans to open only two new stores, both of which will be SUPERCENTERS. If the two stores are opened, the Company anticipates spending approximately $2,496,025 in addition to the $5,681,397 it has already spent as of February 3, 2001 in connection with certain of these locations. The Company expects to fund the new stores from net cash generated by operating activities. The most important factors considered by the Company when deciding to open new stores are vehicle and population demographics, market penetration, competitive positioning and site development costs. The most important factors considered by the Company when deciding whether to close a store are profitability and whether the store is outmoded by virtue of store size or number of service bays, number of other stores within the same market area and the cost/benefit of establishing a replacement store rather than expanding or otherwise upgrading an older store. The Company's ability to meet its limited expansion goals will depend, in large measure, upon the availability of suitable sites, prevailing economic conditions, its success in completing negotiations to purchase or lease properties, and its ability to obtain governmental approvals and meet construction deadlines. MERCHANDISING Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries the same basic product line, with variations based on the number and type of cars registered in the different markets. A full complement of inventory at a typical SUPERCENTER includes an average of approximately 26,000 items (approximately 25,000 items are in a PEP BOYS EXPRESS store). The Company's automotive product line includes: tires (not stocked at PEP BOYS EXPRESS locations); batteries; new and remanufactured parts for domestic and imported cars, including suspension parts, ignition parts, exhaust systems, engines and engine parts, oil and air filters, belts, hoses, air conditioning parts, lighting, wiper blades and brake parts; chemicals, including oil, antifreeze, polishes, additives, cleansers and paints; mobile electronics, including sound systems, alarms, and remote vehicle starters; car accessories, including seat covers, floor mats, and exterior accessories; hand tools, including sockets, wrenches, ratchets, paint and body tools, jacks and lift equipment, automotive specialty tools and test gauges; as well as a selection of truck, van and sport utility vehicle accessories. In addition to offering a wide variety of high quality, branded products, the Company sells an array of high quality products under the Pep Boys and various other private label names. The Company sells chemicals, oil, oil treatments, air filters, oil filters, transmission fluids, anti-freeze, wiper blades, wheels and lubricants under the name PROLINE (R). The Company also sells paints under the name VARSITY (R), starters, batteries, battery booster packs and alternators under the name PROSTART (R), water pumps and cooling system parts under the name PROCOOL (R), wheel covers under the name FUTURA (R) and temperature gauges under the name PROTEMP (R). Brakes are sold under the names SHUR GRIP (R), PROSTOP (R) and ELITE (tm) and tires under the names CORNELL (R) and FUTURA (R). The Company also sells shock absorbers under 9 the name PRO RYDER (R), and trunk and hatchback lift supports under the name PROLIFT (R). All products sold by the Company under the Pep Boys and the various other private label names accounted for approximately 36% of the Company's merchandise sales in fiscal 2000. The remaining merchandise is sold under the brand names of others. Revenues from maintaining or repairing automobiles and installing products, accounted for approximately 19.1%, 18.4% and 17.0% of the Company's total revenues in fiscal years 2000, 1999 and 1998, respectively. Revenues from the sale of tires accounted for approximately 17.0%, 16.0% and 14.2% of the Company's total revenues in fiscal years 2000, 1999 and 1998, respectively. No other class of products or services accounted for as much as 10% of the Company's total revenues. The Company has a point-of-sale system in all of its stores which gathers sales and gross profit data by stock-keeping unit from each store on a daily basis. This information is then used by the Company to help formulate its pricing, marketing and merchandising strategies. The Company has an electronic parts catalog in all of its stores and an electronic commercial invoicing system in all of its stores that offer commercial parts delivery. The Company has an electronic work order system in all of its service centers. This system creates a service history for each vehicle, provides customers with a comprehensive sales document and enables the Company to maintain a service customer database. The Company uses an "Everyday Low Price" (EDLP) strategy in establishing its selling prices. Management believes that EDLP provides better value to its customers on a day-to-day basis, helps level customer demand and allows more efficient management of inventories. The Company uses various forms of advertising to promote its category- dominant product offering, its state-of-the-art automotive service and repair capabilities and its commitment to customer service and satisfaction. The Company's advertising vehicles include, but are not limited to, multi-page catalogs, television and radio commercials, newspaper advertisements and various in-store promotions. All or most of the gross cost of the advertising directed by the Company is customarily borne by the suppliers of the products advertised. In fiscal 2000, approximately 56% of the Company's total revenues were cash transactions (including personal checks), and the remainder were credit and debit card transactions and commercial credit accounts. The Company does not experience significant seasonal fluctuation in the generation of its revenues. STORE OPERATIONS AND MANAGEMENT All Pep Boys stores are open seven days a week. Each SUPERCENTER has a manager, a service manager and one or more assistant managers. Each PEP BOYS EXPRESS store has a manager and one or more assistant managers. Stores with the auto parts delivery program have a commercial sales manager in addition to the management previously mentioned. A store manager's average length of service with the Company is approximately seven years. The Company has service bays in 616 of its 628 locations. Each service department can perform a variety of services which generally include: engine diagnosis and tune-ups, wheel and front end alignments, state inspection and emission services, air conditioning service, heating and cooling system service, fuel injection and throttle body service, and battery and electrical 10 service; the repair and installation of parts and accessories including brake parts, suspension parts, exhaust systems, front end parts, ignition parts, belts, hoses, clutches, filters, stereos and speakers, alarms, remote starters and various other merchandise sold in the Company's stores; installation and balancing of tires; and oil and lubrication services. The Company coordinates the operation and merchandising of each store through a network of district and regional managers. The regional managers report to the Divisional Vice Presidents of Operations, who report to the Company's Vice President of Customer Satisfaction, who reports to the Company's Senior Vice President - Store Operations, who reports to the Company's Chairman of the Board, President & Chief Executive Officer. Supervision and control over the individual stores are facilitated by means of the Company's computer system, operational handbooks and regular visits to the individual stores by the district operations managers and loss prevention personnel. All of the Company's advertising, accounting, purchasing and most of its management information systems and administrative functions are conducted at its corporate headquarters in Philadelphia, Pennsylvania. Certain administrative functions for the Company's western, southwestern, southeastern, midwestern and Puerto Rico operations are performed at various regional offices of the Company. See "Properties." INVENTORY CONTROL AND DISTRIBUTION Most of the Company's merchandise is distributed to its stores from its warehouses primarily by dedicated and contract carriers and also by Company-owned or leased trucks. Target levels of inventory for each product have been established for each of the Company's warehouses and stores and are based upon prior shipment history, sales trends and seasonal demand. Inventory on hand is compared to the target levels on a weekly basis at each warehouse. If the inventory on hand at a warehouse is below the target levels, the Company's buyers order merchandise from its suppliers. Each Pep Boys store has an automatic inventory replenishment system that automatically orders additional inventory when a store's inventory on hand falls below the target level. In addition, the Company's centralized buying system, coupled with continued advancement in its warehouse and distribution systems, has enhanced the Company's ability to control its inventory. SUPPLIERS During fiscal 2000, the Company's ten largest suppliers accounted for approximately 47% of the merchandise purchased by the Company. No single supplier accounted for more than 15% of the Company's purchases. The Company has no long-term contracts under which the Company is required to purchase merchandise. Management believes that the relationships the Company has established with its suppliers are generally good. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist, at substantially similar cost, for virtually all types of merchandise sold in its stores. 11 COMPETITION The business of the Company is generally highly competitive. The Company encounters competition from nationwide and regional chains and from local independent merchants. Some of the Company's competitors are general, full range, discount or traditional department stores which carry automotive parts and accessories and/or have automotive service centers, and others, similar to the Company, are specialized automotive service retailers. Certain of its competitors are larger in terms of sales volume, store size, and/or number of stores, have access to greater capital and management resources and have been operating longer in particular geographic areas than the Company. Although the Company's competition varies by geographic area, the Company believes that it generally has a favorable competitive position in terms of depth and breadth of product line, price, quality of personnel and customer service. In addition, the Company believes that its operation of service bays in its SUPERCENTERS positively differentiates it from most of its competitors by providing its customers with the ability to purchase parts and have them installed at the same location. The Company believes that the warranty policies in connection with the higher priced items it sells, such as tires, batteries, brake linings and other major automotive parts and accessories, are comparable or superior to those of its competitors. EMPLOYEES At February 3, 2001, the Company employed 23,136 persons as follows:
Full-time Part-time Total Description Numbers % Numbers % Numbers % ------- ---- ------- ---- ------- ---- Store Sales 7,952 46.6 4,384 72.4 12,336 53.3 Store Service 6,980 40.9 1,515 25.0 8,495 36.7 ------- ----- ----- ----- ------- ----- STORE TOTAL 14,932 87.5 5,899 97.4 20,831 90.0 Warehouses 999 5.8 134 2.2 1,133 4.9 Offices 1,151 6.7 21 .4 1,172 5.1 ------- ------ ------- ------- ------- ------ TOTAL EMPLOYEES 17,082 100.0 6,054 100.0 23,136 100.0 ====== ===== ===== ===== ====== =====
The Company had no union employees as of February 3, 2001. At the end of fiscal 1999, the Company employed approximately 20,544 full-time and 7,443 part-time employees and at the end of fiscal 1998, the Company employed approximately 19,754 full-time and 7,706 part-time employees. 12 EXECUTIVE OFFICERS OF THE COMPANY The following table indicates the names, ages, years with the Company and positions (together with the year of election to such positions) of the executive officers of the Company:
----------------------------------------------------------------------------------------------------------------------------------- Years with Position with the Company and Name Age Company Date of Election to Position ----- --- ------- ---------------------------- Mitchell G. Leibovitz 55 22 Chairman of the Board since 1994; Chief Executive Officer since 1990; President since 1986 George Babich Jr. 49 5 Executive Vice President since 2001; Senior Vice President since 2000; Chief Financial Officer since 2000; Vice President of Finance and Treasurer since 1996 Mark L. Page 44 25 Senior Vice President - Store Operations since 1993 Frederick A. Stampone 45 18 Senior Vice President since 1987; Chief Administrative Officer since 1993; Secretary since 1988 Don Casey 49 1 Senior Vice President - Merchandising since July 2000
Messrs. Leibovitz, Page and Stampone have been executive officers of the Company for more than the past five years. Mr. Babich was appointed Executive Vice President on March 27, 2001. Mr. Babich joined the Company as Vice President-Finance & Treasurer in September 1996 and was elected to Senior Vice President & Chief Financial Officer of the Company on March 28, 2000 prior to being promoted to his current position. Prior to joining Pep Boys, Mr. Babich was the Senior Financial Executive of Morgan, Lewis & Bockius from 1991 to 1996; Vice President & CFO - North America and then Vice President Corporate Business & Strategic Planning of The Franklin Mint from 1989 to 1991; and held numerous management positions of increasing responsibility at PepsiCo Inc., from 1982 to 1989 and also at Ford Motor Company, from 1978 to 1982. Mr. Casey rejoined the Company as Senior Vice President-Merchandising in July 2000. From June 1999 through June 2000, Mr. Casey was Vice President of Purchasing and Supply Chain for Discount Auto Parts, Inc. From February 1987 through May 1999, Mr. Casey served in various merchandising positions of increasing seniority with the Company. Each of the officers serves at the pleasure of the Board of Directors of the Company. 13 ITEM 2 PROPERTIES The Company owns its five-story, approximately 300,000 square foot corporate headquarters in Philadelphia, Pennsylvania. The Company also owns the following administrative regional offices -- approximately 4,000 square feet of space in each of Melrose Park, Illinois and Bayamon, Puerto Rico. In addition, the Company leases approximately 4,000 square feet of space for administrative regional offices in each of Decatur, Georgia and Richardson, Texas. The Company owns a three-story, approximately 60,000 square foot structure in Los Angeles, California, which it anticipates to sell by fiscal 2002. Of the 628 store locations operated by the Company at February 3, 2001, 343 are owned and 285 are leased. Of the 285 leased store locations, 185 are ground leases. The following table sets forth certain information regarding the owned and leased warehouse space utilized by the Company for its 628 store locations at February 3, 2001.
Warehouse Products Square Owned or Stores States Location Warehoused Footage Leased Serviced Serviced --------- ---------- ------- ------ -------- ------- Los Angeles, CA All except 216,000 Owned 165 AZ, CA, NV, tires NM, UT, WA Los Angeles, CA Tires 73,000 Leased 165 AZ, CA, NV, NM, UT, WA Los Angeles, CA All except 137,000 Leased 165 AZ, CA, NV, tires NM, UT, WA Atlanta, GA All 392,000 Owned 134 AL, FL, GA, LA, NC, PR, SC, TN, VA Mesquite, TX All 244,000 Owned 96 AR, CO, LA, NM, OK, TX Plainfield, IN All 403,000 Leased 95 IL, IN, KY, KS, MI, MN, MO, NY, OH, OK, PA, TN VA Chester, NY All 400,400 Leased 138 CT, DE, MA, ---------- MD, ME, NH, NJ, NY, PA, RI, VA Total 1,865,400 ==========
As part of its Profit Enhancement Plan, the Company closed the Tracey California distribution center and completed the transition of its New Jersey distribution centers to the state of the art New York distribution center. In early 2001, the Company completed the sale of its New Jersey distribution center. The Company plans to allow the lease term in the other New Jersey distribution center to expire in May 2001. In addition, the Company is in the process of seeking a tenant to sublease the Tracey California facility. 14 The Company anticipates that its existing warehouse space will accommodate inventory necessary to support store expansion and any increase in stock-keeping units through the end of fiscal 2001. The Company is subject to federal, state and local provisions relating to the protection of the environment, including provisions with respect to the disposal of oil at its store locations. Estimated capital expenditures relating to compliance with such environmental provisions are not deemed material. ITEM 3 LEGAL PROCEEDINGS The Company is a defendant in an action entitled "Coalition for a Level Playing Field, L.L.C., et al. v. AutoZone, Inc., et al.," in the United States District Court for the Eastern District of New York. There are over 100 plaintiffs, consisting of automotive jobbers, warehouse distributors and a coalition of several trade associations; the defendants are AutoZone, Inc., Wal-Mart Stores, Inc., Advance Stores Company, Inc., CSK Auto, Inc., the Company, Discount Auto Parts, Inc., O'Reilly Automotive, Inc. and Keystone Automotive Operations, Inc. The plaintiffs allege that the defendants violated various provisions of the Robinson-Patman Act by, among other things, knowingly inducing and receiving various forms of discriminatory prices from automotive parts manufacturers. The plaintiffs are seeking compensatory damages, which would be trebled under applicable law, as well as injunctive and other equitable relief. The Company believes the claims are without merit and intends to vigorously defend this action. The Company is also party to various other lawsuits and claims, including purported class actions, arising in the normal course of business. In the opinion of management, these lawsuits and claims, including the cases above, are not, singularly or in the aggregate, material to the Company's financial position or results of operations. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended February 3, 2001. 15 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of The Pep Boys - Manny, Moe & Jack is listed on the New York Stock Exchange under the symbol "PBY". There were 3,453 registered shareholders as of February 3, 2001. The following table sets forth for the periods listed, the high and low sale prices and the cash dividends paid on the Company's common stock.
--------------------------------------------------------------------------------------------------------------- MARKET PRICE PER SHARE Market Price Per Share Cash Dividends Fiscal year ended February 3,2001 High Low Per Share ----------------------------------- ---- --- --------- First Quarter 7 11/16 5 1/2 $.0675 Second Quarter 7 5/8 5 5/8 .0675 Third Quarter 6 7/16 4 3/16 .0675 Fourth Quarter 5 3/8 3 5/16 .0675 Fiscal year ended January 29, 2000 ---------------------------------- First Quarter 20 3/16 14 1/4 .0675 Second Quarter 21 5/8 14 3/16 .0675 Third Quarter 17 7/16 11 5/16 .0675 Fourth Quarter 13 7 1/8 .0675
It is the present intention of the Company's Board of Directors to continue to pay regular quarterly cash dividends; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company and other factors which the Board of Directors deems relevant. 16 ITEM 6 SELECTED FINANCIAL DATA The following tables sets forth the selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein. SELECTED FINANCIAL DATA (UNAUDITED) (dollar amounts in thousands, except per share amounts)
Year ended Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 Jan.31, 1998 Feb. 1, 1997 ----------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Merchandise sales $ 1,957,480 $ 1,954,010 $ 1,991,340 $ 1,720,670 $ 1,554,757 Service revenue 460,988 440,523 407,368 335,850 273,782 Total revenues 2,418,468 2,394,533 2,398,708 2,056,520 1,828,539 Gross profit from merchandise sales 452,038(2) 538,957 492,443(3) 474,239(4) 484,494 Gross profit from service revenue 79,813(2) 84,078 79,453 66,081 53,025 Total gross profit 531,851(2) 623,035 571,896(3) 540,320(4) 537,519 Selling, general and administrative expenses 559,883(2) 528,838 517,827(3) 429,523(4) 349,353 Operating (loss) profit (28,032)(2) 94,197 54,069(3) 110,797(4) 188,166 Nonoperating income 2,245 2,327 2,145 4,315 1,369 Interest expense 57,882 51,557 48,930 39,656 30,306 (Loss) earnings before income taxes and extraordinary items (83,669)(2) 44,967 7,284(3) 75,456(4) 159,229 (Loss) earnings before extraordinary items (53,148) 29,303 4,974(3) 49,611(4) 100,824 Extraordinary items 2,054 - - - - Net (loss) earnings (51,094)(2) 29,303 4,974(3) 49,611(4) 100,824 BALANCE SHEET DATA Working capital $ 109,207 $ 172,332 $ 241,738 $ 151,340 $ 70,691 Current ratio 1.18 to 1 1.31 to 1 1.47 to 1 1.24 to 1 1.13 to 1 Merchandise inventories $ 547,735 $ 582,898 $ 527,397 $ 655,363 $ 520,082 Property and equipment-net 1,194,235 1,335,749 1,330,256 1,377,749 1,189,734 Total assets 1,906,204 2,072,672 2,096,112 2,161,360 1,818,365 Long-term debt (includes all convertible debt) 654,194 784,024 691,714 646,641 455,665 Stockholders' equity 594,766 658,284 811,784 822,635 778,091 DATA PER COMMON SHARE Basic (loss) earnings before extraordinary items (1) $ (1.04)(2) $ .58 $ .08(3) $ .81(4) $ 1.67 Basic (loss) earnings (1) (1.00)(2) .58 .08(3) .81(4) 1.67 Diluted (loss) earnings before extraordinary items (1) (1.04)(2) .58 .08(3) .80(4) 1.62 Diluted (loss) earnings(1) (1.00)(2) .58 .08(3) .80(4) 1.62 Cash dividends .27 .27 .26 .24 .21 Stockholders' equity 11.60 12.91 13.18 13.39 12.78 Common share price range: high 7 11/16 21 5/8 26 11/16 35 5/8 38 1/4 low 3 5/16 7 1/8 12 3/8 21 9/16 27 7/8 OTHER STATISTICS Return on average stockholders' equity (8.2)% 4.0% 0.6% 6.2% 14.0% Common shares issued and outstanding 51,260,663 50,994,099 61,615,140 61,425,228 60,886,991 Capital expenditures $ 57,336 $ 104,446 $ 167,876 $ 284,084 $ 245,246 Number of retail outlets 628 662 638 711 604 Number of service bays 6,498 6,895 6,608 6,208 5,398 ----------------------------------------------------------------------------------------------------------------------------------
(1) All data per common share for the year ended February 1, 1997 has been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128 "Earnings per Share." (2) Includes pretax charges of $76,945 related to the Profit Enhancement Plan of which $67,085 reduced the gross profit from merchandise sales, $5,232 reduced gross profit from service revenue and $2,628 was included in selling, general and administrative expenses. (3) Includes pretax charges of $29,451 ($20,109 net of tax or $.33 per share-basic and diluted), $27,733 of which reduced gross profit from merchandise sales with the remaining $1,718 included in selling, general and administrative expenses. These charges were associated with the closure and sale of 109 Express stores. (4) Includes pretax charges of $28,012 ($18,418 net of tax or $.30 per share-basic and diluted), $16,330 of which reduced gross profit from merchandise sales with the remaining $11,682 included in selling, general and administrative expenses. These charges were associated with closing nine stores, reducing the store expansion program, converting all Parts USA stores to the Pep Boys Express format, certain equipment write-offs, and severance and other non-recurring expenses. 17 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements arise principally from the need to finance the renovation of its existing stores, the acquisition, construction and equipping of new stores and to purchase inventory. The Company decreased the amount of store openings to 5 new stores in fiscal 2000 compared to 24 stores in fiscal 1999 and 39 stores in fiscal 1998. In fiscal 2000, the Company decreased its level of capital expenditures by 45.1% as compared to fiscal 1999. In fiscal 2000, with an increase in net inventory levels offset, in part, by decreased levels of capital expenditures, the Company increased its debt by $28,739,000 and decreased its cash and cash equivalents by $10,490,000. In fiscal 1999, the Company decreased its level of capital expenditures by 37.8% as compared to fiscal 1998. In fiscal 1999, with decreased levels of capital expenditures, the use of cash to repurchase 11,276,698 common shares of stock (partially offset by a decrease in net inventory levels), the Company increased its debt by $20,029,000 and decreased its cash and cash equivalents by $96,063,000. In fiscal 1998, with decreased levels of capital expenditures and the cash generated from its sale of real estate assets (partially offset by an increase in net inventory levels), the Company increased its debt by $70,380,000 and increased its cash and cash equivalents by $103,737,000.
The following table indicates the Company's principal cash requirements for the past three years. (dollar amounts Fiscal Fiscal Fiscal in thousands) 2000 1999 1998 Total --------------------------------------------------------------------------------------------------------------- Cash Requirements: Capital expenditures $ 57,336 $104,446 $167,876 $329,658 Net inventory increase (decrease)(1) 80,148 (24,174) 40,696 96,670 --------------------------------------------------------------------------------------------------------------- Total $137,484 $ 80,272 $208,572 $426,328 --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities (excluding the change in net inventory) $ 99,739 $155,207 $160,713 $415,659 ---------------------------------------------------------------------------------------------------------------
(1) Net inventory increase (decrease) is the change in inventory less the change in accounts payable. In fiscal 2000, merchandise inventories decreased as the Company decreased its net store count by 34 and closed two distribution centers. The average number of stockkeeping units per store was approximately 26,000 in fiscal year 2000 and 25,000 in fiscal years 1999, and 1998.In fiscal 1999, merchandise inventories increased as the Company added an additional 24 stores and a new distribution center in Chester, New York. In fiscal 1998, merchandise inventories decreased as the Company reduced its warehouse inventories, closed one distribution center, better tailored its store inventories and decreased its net store count by 73 stores. 18 The Company's working capital was $109,207,000 at February 3, 2001, $172,332,000 at January 29, 2000 and $241,738,000 at January 30, 1999. The Company's long-term debt, as a percentage of its total capitalization, was 52% at February 3, 2001, 54% at January 29, 2000 and 46% at January 30, 1999. As of February 3, 2001, the Company had available lines of credit totaling $67,915,000. The Company currently plans to open two new Supercenters in fiscal 2001. Management estimates the costs of opening the two Supercenters, coupled with capital expenditures relating to existing stores, warehouses and offices during fiscal 2001, will be approximately $35,000,000. The Company anticipates that its net cash provided by operating activities and its existing lines of credit will exceed its principal cash requirements for capital expenditures and net inventory in fiscal 2001. In September 2000, the Company reclassed the zero coupon convertible Liquid Yield Option Notes (LYONs), which have a put option, at the option of the holder, in September 2001, to current liabilities on the Consolidated Balance Sheet. The Company expects to repurchase these notes, which will have a value of $162,525,000, with cash from operating activities coupled with the proceeds from the sale of assets held for disposal, its existing lines of credit, and additional financing the Company anticipates obtaining in early 2001. In the event that the Company does not secure the financing, the Company has the option to redeem the LYONs with issuance of common stock. The final number of shares issued would be determined at the time of issuance based upon any cash shortfall and the then current stock price. In September 2000, the Company entered into a new revolving credit agreement and a new operating lease facility. The new revolving credit agreement provides up to $225,000,000 of borrowing availability, which is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days prior to each anniversary date, the Company may request and, upon agreement with the bank, extend the maturity of this facility an additional year. The interest rate on any loan is equal to the London Interbank Offered Rate ("LIBOR") plus 1.75%, and increases in 0.25% increments as the excess availability falls below $50,000,000. The revolver is subject to a financial covenant for minimum adjusted tangible net worth. This revolver replaces the revolver the Company had with nine major banks, which provided up to $200 million in borrowings. The Company recorded an after-tax extraordinary charge related to the extinguishment of its previous revolving credit agreement of $931,000. The new $143,000,000 of operating leases, which have an interest rate of LIBOR plus 1.85% replaces $143,000,000 of operating leases, which had an interest rate of LIBOR plus 2.27%. The Company, as a result of replacing the existing operating leases, recorded a pretax charge to earnings of $1,630,000 of unamortized lease costs, which was recorded in the costs of merchandise sold section of the Consolidated Statement of Operations. In September 2000, the Company retired $70,000,000 of Senior Notes, at par, using the proceeds from its new $225,000,000 revolving line of credit. The retired notes were issued in a private placement in February 1999 in two tranches. The first tranche was for $45,000,000 and had a coupon of 8.45% with a maturity of 2011. The second tranche was for $25,000,000 and had a coupon of 8.30% with a maturity of 2009. In June 2000, the Company repurchased $5,995,000 face value of the $49,000,000 medium-term note which was redeemable at the option of the holder on September 19, 2002. The after-tax extraordinary gain was $960,000. In April 2000, the Company repurchased $30,200,000 face value of its LYONs at a price of $520 per LYON. The book value of the repurchased LYONs were $19,226,000 and the after-tax extraordinary gain was $2,025,000. On February 1, 1999, the Company repurchased 11,276,698 of its common shares outstanding. The Company financed the share repurchase with $110,427,000 in cash and with the $70,000,000 proceeds received in connection with the private placement of Senior Notes issued on February 1, 1999. The Senior Notes were issued in two series at par and paid interest semiannually on January 31 and July 31, commencing July 31, 1999. Series A Senior Notes, with an aggregate principal balance of $25,000,000, were scheduled to mature in 2009 and bore interest at 7.80% per annum. Series B Senior Notes, with an aggregate principal balance of $45,000,000, were scheduled to mature in 2011 and bore interest at 7.95% per annum. In addition, the interest rates on the Senior Notes are subject to a .50% increase for such time as the credit rating of the Company's long-term unsecured debt securities decreases below investment grade as rated by both Moody's and Standard & Poor's. These notes were retired in September 2000 as previously stated. In February 1998, the Company established a Medium-Term Note program which permitted the Company to issue up to $200,000,000 of Medium-Term Notes. Under this program the Company sold $100,000,000 principal amount of senior notes, ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006. The net proceeds of $99,429,000 were used for working capital, the repayment of debt and for general corporate purposes. Additionally, in July 1998, under this note program, the Company sold $100,000,000 of Term Enhanced ReMarketable Securities with a stated maturity date of July 2017. The Company also sold a call option with the securities, which allows the securities to be remarketed to the public in July 2006 under certain circumstances. If the securities are not remarketed, the Company will be obligated to repay the principal amount in full in July 2017. The level yield to maturity on the securities is approximately 6.85% and the coupon rate is 6.92%. The net proceeds of $101,923,500 from the sale of the securities and the call option were used for working capital, the repayment of debt and for general corporate purposes. 19 EFFECTS OF INFLATION The Company uses the LIFO method of inventory valuation. Thus, the cost of merchandise sold approximates current cost. Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on revenues or results of operations during fiscal 2000, fiscal 1999 or fiscal 1998. IMPAIRMENT CHARGES During fiscal year 2000, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that the carrying value may not be fully recoverable. An impairment charge of $5,735,000 was recorded for these stores in costs of merchandise sold on the Consolidated Statement of Operations. The charge reflects the difference between carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. Management judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates. PROFIT ENHANCEMENT PLAN In the third quarter 2000, the Company performed a comprehensive review of its field, distribution, and store support center infrastructure as well as the performance of each store. As a result of this review, the Company implemented a number of changes that it believes will improve its performance. These changes included the closure of 38 underperforming stores and two distribution centers, a decrease of store operating hours and a reduction in the store support center infrastructure. The Company recorded a pretax charge to earnings for fiscal year 2000 as follows:
(dollar amounts Non-Reservable Total in thousands) Expense Expense Income Statement Original Reserve Incurred in Year Ended Classification Charge Adjustments 4th Quarter Feb. 3, 2001 ----------------------------------------------------------------------------- Costs of Merchandise Sold $62,665 $ 939 $3,481 $67,085 Costs of Service Revenue 5,661 (177) (252) 5,232 Selling, General and Administrative 2,908 (661) 381 2,628 ----------------------------------------------------------------------------- Total Expenses $71,234 $ 101 $3,610 $74,945 -----------------------------------------------------------------------------
The original third quarter charge totaled $71,234,000 of which $62,665,000 was recorded in costs of merchandise sold on the Company's Consolidated Statement of Operations and includes expenses associated with the closure of 38 stores and two distribution centers, certain equipment write-offs and severance costs associated with the contraction of the special order department. The remaining $8,569,000 was divided with $5,661,000 recorded as costs of service revenue, which includes service department expenses associated with the store closures, and $2,908,000 recorded as selling, general and administrative which includes expenses associated with the closure of the two regional offices, the abandonment of future development projects and severance for the reduction of the store support center infrastructure. The fourth quarter reserve adjustments increased by $101,000 due to additional expenses which were recorded in costs of merchandise sold on the Company's Consolidated Statement of Operations. These additional expenses included write-downs of certain equipment, the on-going expenses associated with the change in estimated time to sublease the properties offset, in part, by decreases in rent expense related to the change in Company's estimated time to sublease the properties, the change in estimated sublease value and a present value interest adjustment, coupled with a reduction in estimated warehouse severance. The increase in reserve adjustment was offset, in part, by a decrease in cost of service revenue related to the reduction of the estimated employee severance and the decrease in rent expense related to the change in the Company's estimated time to sublease the properties, the change in the estimated sublease value, and a present value interest adjustment offset, in part, by an increase in on-going expenses associated with the changes in estimated time to sublease the properties. In addition, selling, general and administrative expense was reduced due to a change in estimated cost to exit leases for abandoned projects coupled with a reduction of employee severance. 20 In the fourth quarter of 2000, the Company incurred expenses related to the closure of the 38 stores and two distribution centers, for inventory and equipment handling which was offset, in part, by a recovery of certain benefits expenses related to the reduction of workforce. These expenses which totaled $3,610,000 were not reserved and were recorded as incurred. The Company estimates additional expenses of approximately $1,200,000 to be incurred during first quarter of 2001. The Company, as a result of the Profit Enhancement Plan, anticipates annualized savings of approximately $70,000,000. These anticipated savings are expected to result from a reduction in the store and field infrastructure, store operating hours and positions within the store support center, as well as the closure of the 38 stores and two distribution centers. Approximately 1,300 of the Company's employees were notified of their separation from the Company prior to the end of the third quarter. As of February 3, 2001, the number of employees to be separated was reduced to approximately 1,000 of which 97% have left their positions and the remaining 3% are anticipated to leave the Company during the first quarter of 2001. The 1,000 employees were composed of 76% store employees,13% distribution employees, and 11% store support center and field administrative employees. The reduction in employees to be separated was primarily a result of some of the notified store employees being transferred to other stores within the Company. The total severance paid during fiscal 2000 in connection with the Profit Enhancement Plan was $1,213,000. At the end of the third quarter 2000, the Company set up a reserve liability account which is included in accrued liabilities on the Consolidated Balance Sheet. This liability account will track all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed facilities. The following chart reconciles the charge since its initial recording to the reserve balance at February 3,2001. (dollar amounts Lease Fixed On-Going in thousands) Expenses Assets(3) Severance Expenses Total ------------------------------------------------------------------------------------------------------------- Original Charges $ 7,916 $ 57,680 $ 1,694 $ 3,944 $ 71,234 ------------------------------------------------------------------------------------------------------------- Addition(1) - 1,074 - 361 1,435 ------------------------------------------------------------------------------------------------------------- Utilization (975) (58,754) (1,213) (1,345) (62,287) ------------------------------------------------------------------------------------------------------------- Adjustments(2) 113 - (272) - (159) ------------------------------------------------------------------------------------------------------------- Reserve Balance at February 3, 2001 $ 7,054 $ - $ 209 $ 2,960 $ 10,223 -------------------------------------------------------------------------------------------------------------
(1) Additions are composed of additional equipment write-offs and an increase in on-going expenses related to the change in estimated time required to sublet or sell the properties held for disposal. (2) Adjustments are composed of a decrease in employee severance offset, in part, by an increase in lease expenses due to a reclass of a portion of the reserve to offset a lease liability previously accrued of $1,176 offset, in part, by a decrease in estimated lease expenses of $1,063 due to a change in fair value of the sublease payments offset, in part, by a change in estimated time required to sublet properties and a change in present value interest on the lease expenses. (3) The total carrying costs related to assets held for disposal or written-off were $81,384 of which the Company recorded a loss of $58,754. 21 RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change ----------------------------------------------------------------------------------------------------------------------------------- Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 Fiscal 2000 vs. Fiscal 1999 vs. Year ended (Fiscal 2000) (Fiscal 1999) (Fiscal 1998) Fiscal 1999 Fiscal 1998 ----------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales 80.9% 81.6% 83.0% 0.2 % (1.9)% Service Revenue(1) 19.1 18.4 17.0 4.6 8.1 ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 100.0 1.0 (0.2) ----------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales(2) 76.9(3) 72.4(3) 75.3(3) 6.4 (5.6) Costs of Service Revenue(2) 82.7(3) 80.9(3) 80.5(3) 6.9 8.7 ----------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 78.0 74.0 76.2 6.5 (3.0) ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 23.1(3) 27.6(3) 24.7(3) (16.1) 9.4 Gross Profit from Service Revenue 17.3(3) 19.1(3) 19.5(3) (5.1) 5.8 ----------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 22.0 26.0 23.8 (14.6) 8.9 ----------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 23.2 22.1 21.6 5.9 2.1 ----------------------------------------------------------------------------------------------------------------------------------- Operating (Loss) Profit (1.2) 3.9 2.2 (129.8) 74.2 Nonoperating Income 0.1 0.1 0.1 (3.5) 8.5 Interest Expense 2.4 2.1 2.0 12.3 5.4 ----------------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings Before Income Taxes (3.5) 1.9 0.3 (286.1) 517.3 ----------------------------------------------------------------------------------------------------------------------------------- Income Taxes 36.5(4) 34.8(4) 31.7(4) (294.8) 578.1 ----------------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings Before Extraordinary Items (2.2) 1.2 0.2 (281.4) 489.1 ----------------------------------------------------------------------------------------------------------------------------------- Extraordinary Items 0.1 - - N/A - ----------------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings (2.1) 1.2 0.2 (274.4) 489.1 -----------------------------------------------------------------------------------------------------------------------------------
(1) Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. (2) Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. (3) As a percentage of related sales or revenue, as applicable. (4) As a percentage of earnings before income taxes. 22 FISCAL 2000 VS. FISCAL 1999 Total revenues for fiscal 2000, which included 53 weeks, increased 1% over fiscal 1999, due primarily to the extra week of operation during fiscal 2000 vs. 1999. Comparable store revenues (revenues generated by stores in operation during the same months of each period) decreased by 1%. Total revenues for fiscal 2000, excluding the extra week, decreased by 1% on an overall basis and were unchanged on a comparable store basis. Comparable store merchandise sales decreased 2% while comparable store service revenue increased 2% over fiscal 1999 on a 52 week basis. The decrease in gross profit from merchandise sales, as a percentage of merchandise sales, was due primarily to the pretax charge from the Profit Enhancement Plan of $67,085,000 coupled with the impairment charge, increases in warehousing and store occupancy costs offset, in part, by higher merchandise margins, as a percentage of merchandise sales. The decrease in gross profit from service revenue, as a percentage of service revenue, was due to a $5,232,000 pretax charge from the Profit Enhancement Plan and an increase in service center personnel costs, as a percentage of service revenue. The increase in selling, general and administrative expenses, as a percentage of total revenues, was due primarily to increases in store and general office expenses coupled with a pretax charge from the Profit Enhancement Plan of $2,628,000, as a percentage of total revenues. The increase in interest expense, as a percentage of total revenues, was due primarily to higher interest rates coupled with slightly higher average debt levels incurred during the year to fund the Company's capital expenditures. The Company's net loss in fiscal 2000, as compared with net earnings in fiscal 1999, was due primarily to decreases in gross profit from merchandise sales, as a percentage of merchandise sales, and gross profit from service revenue, as a percentage of service revenue, and an increase in selling, general and administrative expenses, as a percentage of total revenues, all of which included the effects of the Profit Enhancement Plan, coupled with an increase in interest expense, as a percentage of total revenues. FISCAL 1999 VS. FISCAL 1998 Total revenues for fiscal 1999 decreased 0.2% from fiscal 1998 due primarily to the sale and closure of 115 stores in fiscal 1998. This decrease was offset, in part, by an increase in comparable store revenues (revenues generated by stores in operation during the same months of each period) of 1.5% in fiscal 1999. Comparable store merchandise sales increased 0.9% while comparable service revenue increased 4.4%. During fiscal 1998, the Company recorded pretax charges to earnings of $29,451,000 ($20,109,000 net of tax) related to the sale and closure of 115 stores. The total pretax charges were comprised of $27,733,000 recorded as costs of merchandise sales and $1,718,000 of selling, general and administrative expenses. There were no such charges in fiscal 1999. Gross profit from merchandise sales increased, as a percentage of merchandise sales, due primarily to higher merchandise margins coupled with the absence of $27,733,000 in pretax charges recorded in fiscal 1998 offset, in part, by an increase in store occupancy costs. Selling, general and administrative expenses increased, as a percentage of total revenues, due primarily to increases in general office costs and store expenses offset, in part, by a decrease in media costs and the absence of $1,718,000 in pretax charges recorded in fiscal 1998. The increase in net earnings, as a percentage of total revenues, was due primarily to an increase in gross profit from merchandise sales, as a percentage of merchandise sales, and the absence of after tax charges of $20,109,000 recorded in fiscal 1998 offset, in part, by an increase in selling, general and administrative expenses, as a percentage of total revenues. 23 NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. As amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of FASB statement No. 133)" this statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has analyzed the impact of the adoption of this statement and it will not have a material effect on the Company upon its adoption on February 4, 2001. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement, changes in the lenders' prime rate or LIBOR could affect the rates at which the Company could borrow funds thereunder. At February 3, 2001, the Company had outstanding borrowings of $127,718,000 against these credit facilities. The table below summarizes the fair value and contract terms of fixed rate debt instruments held by the Company at February 3, 2001:
(dollar amounts Average in thousands) Amount Interest Rate ---------------------------------------------------------------- Fair value at February 3, 2001 $472,770 Expected maturities: 2001 162,710 4.0% 2002 93,103 6.5 2003 81,000 6.6 2004 108,000 6.7 2005 100,000 7.0 -----------------------------------------------------------------
At January 29, 2000, the Company held fixed rate debt instruments with an aggregate fair value of $489,824. FORWARD-LOOKING STATEMENTS Certain statements made herein, including those discussing management's expectations for future periods, are forward-looking and involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond the control of the Company, including the strength of the national and regional economies and retail and commercial consumers' ability to spend, the health of the various sectors of the market that the Company serves, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, location and number of competitors' stores and product and labor costs. Further factors that might cause such a difference include, but are not limited to, the factors described in the Company's filings with the Securities and Exchange Commission. ITEM 7A QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The material in Item 7 of this filing titled "Quantitive and Qualitative Disclosures about Market Risk" are hereby incorporated herein by reference. 24 ITEM 8 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Pep Boys - Manny, Moe & Jack We have audited the accompanying consolidated balance sheets of The Pep Boys - Manny, Moe & Jack and subsidiaries as of February 3, 2001 and January 29, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 3, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Pep Boys - Manny, Moe & Jack and subsidiaries at February 3, 2001 and January 29, 2000, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 22, 2001 25
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 3, January 29, 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 7,995 $ 18,485 Accounts receivable, less allowance for uncollectible accounts of $639 and $826 16,792 17,281 Merchandise inventories 547,735 582,898 Prepaid expenses 28,705 39,184 Deferred income taxes 25,409 16,606 Other 50,401 46,278 Assets held for disposal 22,629 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 699,666 720,732 ---------------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 278,017 287,039 Building and improvements 918,031 954,638 Furniture, fixtures and equipment 618,959 647,557 Construction in progress 15,032 25,763 ---------------------------------------------------------------------------------------------------------------------------------- 1,830,039 1,914,997 Less accumulated depreciation and amortization 635,804 579,248 ---------------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment 1,194,235 1,335,749 ---------------------------------------------------------------------------------------------------------------------------------- Other 12,303 16,191 ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,906,204 $ 2,072,672 ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 204,755 $ 320,066 Accrued expenses 226,952 228,151 Current maturities of convertible debt 158,555 - Current maturities of long-term debt 197 183 ---------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 590,459 548,400 ---------------------------------------------------------------------------------------------------------------------------------- Long-Term Debt, less current maturities 654,194 612,668 Convertible Debt, less current maturities - 171,356 Deferred Income Taxes 66,192 81,964 Deferred Gain on Sale Leaseback 593 - Commitments and Contingencies Stockholders' Equity: Common stock, par value $1 per share: Authorized 500,000,000 shares; Issued 63,910,577 63,911 63,911 Additional paid-in capital 177,244 177,247 Retained earnings 581,668 649,487 ---------------------------------------------------------------------------------------------------------------------------------- 822,823 890,645 Less shares in treasury - 10,454,644 and 10,721,208 shares, at cost 168,793 173,097 Less cost of shares in benefits trust - 2,195,270 shares, at cost 59,264 59,264 ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 594,766 658,284 ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,906,204 $ 2,072,672 ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 26
CONSOLIDATED STATEMENTS OF OPERATIONS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 3, January 29, January 30, Year ended 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $1,957,480 $1,954,010 $ 1,991,340 Service Revenue 460,988 440,523 407,368 ---------------------------------------------------------------------------------------------------------------------------------- Total Revenues 2,418,468 2,394,533 2,398,708 ---------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 1,505,442 1,415,053 1,498,897 Costs of Service Revenue 381,175 356,445 327,915 ---------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 1,886,617 1,771,498 1,826,812 ---------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 452,038 538,957 492,443 Gross Profit from Service Revenue 79,813 84,078 79,453 ---------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 531,851 623,035 571,896 ---------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 559,883 528,838 517,827 ---------------------------------------------------------------------------------------------------------------------------------- Operating (Loss) Profit (28,032) 94,197 54,069 Nonoperating Income 2,245 2,327 2,145 Interest Expense 57,882 51,557 48,930 ---------------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings Before Income Taxes (83,669) 44,967 7,284 Income Tax (Benefit) Expense (30,521) 15,664 2,310 ---------------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings Before Extraordinary Items (53,148) 29,303 4,974 Extraordinary Items, Net of Tax of $1,180 2,054 - - Net (Loss) Earnings $ (51,094) $ 29,303 $ 4,974 ---------------------------------------------------------------------------------------------------------------------------------- Basic (Loss) Earnings per Share: Before Extraordinary Items $ (1.04) $ .58 $ .08 Extraordinary Items, Net of Tax .04 - - --------------------------------------------------------------------------------------------------------------------------------- Basic (Loss) Earnings per Share: $ (1.00) $ .58 $ .08 --------------------------------------------------------------------------------------------------------------------------------- Diluted (Loss) Earnings per Share: Before Extraordinary Items $ (1.04) $ .58 $ .08 Extraordinary Items, Net of Tax .04 - - --------------------------------------------------------------------------------------------------------------------------------- Diluted (Loss) Earnings per Share: $ (1.00) $ .58 $ .08 ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) Accumulated Additional Other Total Common Stock Paid-in Retained Treasury Stock Comprehensive Benefits Stockholders' Shares Amount Capital Earnings Shares Amount Income Trust Equity ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1998 63,657,728 $63,658 $173,107 $647,505 $(1,366) $(60,269) $822,635 Comprehensive Income Net earnings 4,974 Minimum pension liability adjustment, net of tax (2,844) Total Comprehensive Income 2,130 Cash dividends ($.26 per share) (16,004) (16,004) Exercise of stock options and related tax benefits 107,825 108 1,369 1,477 Dividend reinvestment plan 82,087 82 1,369 1,451 Acquisitions and transfers of 75,000 shares to employees' savings plan 95 95 ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 30, 1999 63,847,640 63,848 175,940 636,475 (4,210) (60,269) 811,784 Comprehensive Income Net earnings 29,303 Minimum pension liability adjustment, net of tax 4,210 Total Comprehensive Income 33,513 Cash dividends ($.27 per share) (13,693) (13,693) Repurchase of Treasury Stock (410) (11,276,698) $(182,065) 1,005 (181,470) Exercise of stock options and related tax benefits 27,630 28 774 (1,795) 495,000 7,991 6,998 Dividend reinvestment plan 35,307 35 533 (393) 60,490 977 1,152 ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 29, 2000 63,910,577 63,911 177,247 649,487 (10,721,208) (173,097) - (59,264) 658,284 Comprehensive Income-Net loss (51,094) (51,094) Cash dividends ($.27 per share) (13,793) (13,793) Dividend reinvestment plan (3) (2,932) 266,564 4,304 1,369 ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 3, 2001 63,910,577 $63,911 $177,244 $581,668 (10,454,644) $(168,793) $ - $(59,264) $594,766
See notes to consolidated financial statements. 28
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 3, January 29, January 30, Year ended 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net (Loss) Earnings $ (51,094) $ 29,303 $ 4,974 Adjustments to Reconcile Net (Loss) Earnings to Net Cash Provided by Operating Activities: Extraordinary items, net of tax (2,054) - - Depreciation and amortization 99,308 97,012 96,856 Accretion of bond discount 6,425 6,493 6,493 (Decrease) increase in deferred income taxes (24,575) 2,223 13,142 Loss on assets held for disposal 53,740 - - Loss on asset impairment 5,735 - - Loss (Gain) from sales of assets 3,651 (538) 19,968 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable, prepaid expenses and other 9,802 (12,096) (14,857) Decrease (increase) in merchandise inventories 35,163 (55,501) 127,966 (Decrease) increase in accounts payable (115,311) 79,675 (168,662) (Decrease) increase in accrued expenses (1,199) 32,810 34,137 ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 19,591 179,381 120,017 ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (57,336) (104,446) (167,876) Proceeds from sales of assets 14,380 2,479 98,545 ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (42,956) (101,967) (69,331) ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net borrowings (payments) under line of credit agreements 117,535 10,000 (122,000) Net proceeds from issuance of notes - 76,000 202,241 Reduction of long-term debt (70,000) (170) (158) Reduction of convertible debt - (72,294) (13,956) Early extinguishment of debt (22,236) - - Dividends paid (13,793) (13,693) (16,004) Purchase of Treasury Shares - (181,470) - Proceeds from exercise of stock options - 6,998 1,477 Proceeds from dividend reinvestment plan 1,369 1,152 1,451 ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 12,875 (173,477) 53,051 ----------------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash (10,490) (96,063) 103,737 Cash and Cash Equivalents at Beginning of Period 18,485 114,548 10,811 ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 7,995 $ 18,485 $ 114,548 ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Income taxes paid $ - $ - $ - Interest paid, net of amounts capitalized 53,415 43,449 39,966 -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 29 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 3, 2001, January 29, 2000 and January 30, 1999 (dollar amounts in thousands, except per share amounts) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS The Pep Boys - Manny, Moe & Jack and subsidiaries (the "Company") is engaged principally in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores at February 3, 2001. The Company currently operates stores in 36 states and Puerto Rico. FISCAL YEAR END The Company's fiscal year ends on the Saturday nearest to January 31. Fiscal year 2000 was comprised of 53 weeks, while Fiscal years 1999 and 1998 were comprised of 52 weeks. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily 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 those estimates. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost (last-in, first-out method) or market. If the first-in, first-out method of valuing inventories had been used, inventories would have been approximately the same as using the last-in, first-out method for both fiscal years 2000 and 1999. CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments that are readily convertible to known amounts of cash and so near maturity that they present an insignificant risk to changes in value because of changes in interest rates. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 to 40 years; furniture, fixtures and equipment, 3 to 10 years. SOFTWARE CAPITALIZATION In 1998, the Company adopted Statement of Position(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In accordance with this standard, certain direct development costs associated with internal-use software are capitalized, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection with the construction of certain long-term assets. Capitalized interest amounted to $489, $1,098 and $1,020 in fiscal years 2000, 1999 and 1998, respectively. REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise at the time merchandise is sold. Service revenues are recognized upon completion of the service. The Company records revenue net of an allowance for estimated future returns. Return activity is immaterial to revenue and results of operations in all periods presented. SERVICE REVENUE Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. COSTS OF REVENUES Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. PENSION EXPENSE The Company reports all information on its pension and savings plan benefits in accordance with Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities. ADVERTISING The Company expenses the production costs of advertising the first time the advertising takes place. The Company nets cooperative advertising reimbursements against costs incurred. In fiscal year 2000, the Company's net advertising netted to zero. Net advertising expense for fiscal years 1999, 1998 was $346 and $6,378, respectively. No advertising costs were recorded as assets as of February 3, 2001 or January 29, 2000. STORE OPENING COSTS The costs of opening new stores are expensed as incurred. 30 IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are either held and used or to be disposed of. The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds the fair value. In addition, the Company reports assets to be disposed of at the lower of the carrying amount or the fair market value less selling costs. During fiscal year 2000, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that the carrying value may not be fully recoverable. An impairment charge of $5,735 was recorded for these stores in cost of merchandise sold on the Consolidated Statement of Operations. The charge reflects the difference between carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. EARNINGS PER SHARE Earnings per share for all periods have been computed in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year plus the assumed conversion of dilutive convertible debt and incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company is accounting for employee stock-based compensation plans in accordance with Accounting Principles Board (APB) opinion No. 25, "Accounting for Stock Issued to Employees," and has provided disclosures required by SFAS No. 123. COMPREHENSIVE INCOME Comprehensive income is reported in accordance with SFAS No. 130, "Reporting Comprehensive Income." Other comprehensive income includes minimum pension liability adjustments. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. As amended by SFAS No. 137,"Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of FASB statement No. 133)," this statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has analyzed the impact of the adoption of this statement and it will not have a material effect on the Company upon its adoption on February 4, 2001. SEGMENT INFORMATION The Company reports segment information in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company operates in one industry, the automotive aftermarket. In accordance with SFAS No. 131, the Company aggregates all of its stores and reports one operating segment. Sales by major product categories are as follows:
Year ended Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 ---------------------------------------------------------------------------------------- Parts and Accessories $1,547,020 $1,571,445 $1,649,599 Tires 410,460 382,565 341,741 ---------------------------------------------------------------------------------------- Total Merchandise Sales 1,957,480 1,954,010 1,991,340 Service 460,988 440,523 407,368 ---------------------------------------------------------------------------------------- Total Revenues $2,418,468 $2,394,533 $2,398,708 ========================================================================================
Parts and accessories includes batteries, new and rebuilt parts, chemicals, mobile electronics, tools, and various car, truck, van and sport utility vehicle accessories as well as other automotive related items. Service consists of the labor charge for installing merchandise or maintaining or repairing vehicles. RECENT ACCOUNTING PRONOUNCEMENTS In November 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial statements." SAB 101 summarizes certain of the staff's views in applying Generally Accepted Accounting Principles to revenue recognition issues. The Company has implemented this bulletin in the fourth quarter of fiscal year 2000 with no material effect on its financial statements. NOTE 2 - DEBT SHORT-TERM BORROWINGS In the third quarter of fiscal 2000, the Company in conjunction with the acquiring of a new long-term revolving credit agreement terminated its short-term borrowing line. The Company did have short-term borrowing during the year and the average and maximum month end balances were $4,232 and $13,000, respectively, during fiscal 2000. The Company had no short-term borrowings outstanding at January 29, 2000. The Company had available a short-term line of credit of $15,000 at January 29, 2000. The interest rates on these lines were negotiated based upon market conditions. The average and maximum month end balances on these borrowings were $2,556 and $16,366, respectively, during fiscal 1999. 31
LONG-TERM DEBT ------------------------------------------------------------------------------------------------------------ February 3, 2001 January 29, 2000 ------------------------------------------------------------------------------------------------------------ Medium-term notes, 6.4% to 6.7%, due November 2004 through September 2007 $144,005 $150,000 Medium-term notes, 6.7% to 6.9%, due March 2004 through March 2006 100,000 100,000 7% notes due June 2005 100,000 100,000 6.92% Term Enhanced ReMarketable Securities, Due July 2017 100,000 100,000 Revolving credit agreement 127,718 10,000 6 5/8% notes due May 2003 75,000 75,000 Senior Notes, 7.8% and 7.95%, due January 2009 and January 2011 - 70,000 Other notes payable, 5.8% to 8% 7,668 7,851 ------------------------------------------------------------------------------------------------------------ 654,391 612,851 Less current maturities 197 183 ------------------------------------------------------------------------------------------------------------ Total long-term debt $654,194 $612,668 ------------------------------------------------------------------------------------------------------------
In September 2000, the Company entered into a new revolving credit agreement. The new revolving credit agreement provides up to $225,000 of borrowing availability, which is collateralized by inventory and accounts receivable. Funds may be drawn and repaid any time prior to September 10, 2004. Sixty days prior to each anniversary date, the Company may request and, upon agreement with the bank, extend the maturity of this facility an additional year. The interest rate on any loan is equal to the London Interbank Offered Rate ("LIBOR") plus 1.75%, and increases in 0.25% increments as the excess availability falls below $50,000. The revolver is subject to a financial covenant for minimum adjusted tangible net worth. This revolver replaces the previous revolver the Company had with nine major banks, which provided up to $200,000 in borrowings. The Company recorded an after-tax extraordinary charge related to the extinguishment of its previous revolving credit agreement of $931. The weighted average interest rate on borrowings under the revolving credit agreement was 8.5% at February 3, 2001. In fiscal 1999, the Company had a revolving credit agreement with nine major banks providing for borrowings of up to $200,000. The weighted average interest rate on borrowings under the revolving credit agreement was 6.6% at January 29, 2000. The other notes payable have a weighted average interest rate of 5.4% at February 3, 2001 and 6.2% at January 29, 2000, and mature at various times through August 2016. Certain of these notes are collateralized by land and buildings with an aggregate carrying value of approximately $7,398 and $7,446 at February 3, 2001 and January 29, 2000, respectively. In September 2000, the Company retired $70,000 of Senior notes issued as part of the private placement in February 1999,at par, using the proceeds from its new $225,000 revolving credit agreement. The Senior Notes were issued in two series at par, and pay interest semiannually on January 31 and July 31. The Series A 7.8% Senior Notes, with an aggregate principal balance of $25,000, were scheduled to begin repaying principal in equal installments from January 2003 until maturity in January 2009. The Series B 7.95% Senior Notes, with an aggregate principal balance of $45,000, were scheduled to begin repaying principal in equal installments from January 2007 until maturity in January 2011. In addition, the interest rates on the Senior Notes were subject to a 0.50% increase for such time as the credit rating of the Company's long-term unsecured debt securities decreases below investment grade as rated by both Moody's (Ba1) and Standard & Poor's (BB+). The proceeds from the issuance of the notes were used to finance the Company's share repurchase (see Note 4). In February 1998, the Company established a Medium-Term Note program which permitted the Company to issue up to $200,000 of Medium-Term Notes. Under this program the Company sold $100,000 principal amount of Senior Notes, ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006. Additionally, in July 1998, under this note program, the Company sold $100,000 of Term Enhanced ReMarketable Securities with a stated maturity date of July 2017. The Company also sold a call option with the securities, which allows the securities to be remarketed to the public in July 2006 under certain circumstances. If the securities are not remarketed, the Company will be obligated to repay the principal amount in full in July 2017. The level yield to maturity on the securities is approximately 6.85% and the coupon rate is 6.92%. Between July and October 1997, the Company issued $150,000 in Medium Term Notes with interest rates of 6.4% to 6.7% and maturity dates from November 2004 through September 2007. $50,000 of this debt is redeemable at the option of the holder on July 16, 2002 and $49,000 is redeemable at the option of the holder on September 19, 2002. In June 2000,the Company repurchased $5,995 face value of the $49,000 medium-term note, which was redeemable at the option of the holder on September 19, 2002. The after-tax extraordinary gain was $960. 32
CONVERTIBLE DEBT ------------------------------------------------------------------------------------------------------------ February 3, 2001 January 29, 2000 ------------------------------------------------------------------------------------------------------------ Zero Coupon Convertible Subordinated Notes $158,555 $171,356 ------------------------------------------------------------------------------------------------------------ 158,555 171,356 Less current maturities 158,555 - ------------------------------------------------------------------------------------------------------------ Total long-term convertible debt $ - $171,356 ------------------------------------------------------------------------------------------------------------
On September 20, 1996, the Company issued $271,704 principal amount (at maturity) of Liquid Yield Option Notes (LYONs) with a price to the public of $150,000. The net proceeds to the Company were $146,250. The issue price of each such LYON was $552.07 and there will be no periodic payments of interest. The LYONs will mature on September 20, 2011, at $1,000 per LYON, representing a yield to maturity of 4.0% per annum (computed on a semiannual bond equivalent basis). In April 2000, the Company repurchased $30,200 face value of its LYONs at a price of $520 per LYON. The book value of the repurchased LYONs were $19,226 and the after-tax extraordinary gain was $2,025. Each LYON is convertible at the option of the holder at any time on or prior to maturity, unless previously redeemed or otherwise purchased, into common stock of the Company at a conversion rate of 12.929 shares per LYON. The LYONs are redeemable at the option of the holder on September 20, 2001 and September 20, 2006 at the issue price plus accrued original issue discount. The Company, at its option, may elect to pay the purchase price on any such purchase date in cash or common stock, or any combination thereof. As of February 3, 2001, no LYONs have been converted. On or prior to September 20, 2001, the Company will purchase for cash any LYON, at the option of the holder, in the event of a change in control of the Company. The LYONs are subordinated to all existing and future senior indebtedness of the Company. In September 2000, the Company reclassed the LYONs to current liabilities on the Consolidated Balance Sheet. The Company expects to repurchase these notes, which will have a value of $162,525, with cash from operating activities coupled with the proceeds from the sale of assets held for disposal, its existing lines of credit, and additional financing the Company anticipates obtaining in early 2001. In the event that the Company does not secure the financing, the Company has the option to redeem the LYONs with the issuance of common stock. The final number of shares issued would be determined at the time of issuance based upon any cash shortfall and the then current stock price. Several of the Company's debt agreements require the maintenance of a certain level of minimum adjusted tangible net worth. The Company was in compliance with all debt covenants at February 3, 2001. The annual maturities, including accreted value, of all long-term and convertible debt for the next five years are $162,722 in 2001, $93,116 in 2002, $81,014 in 2003, $235,734 in 2004 and $100,017 in 2005. These maturities include amounts for early redemption, which is at the option of the holders. Any compensating balance requirements related to all revolving credit agreements and debt were satisfied by balances available from normal business operations. The Company was contingently liable for outstanding letters of credit in the amount of approximately $20,571 at February 3, 2001. 33 NOTE 3 - LEASE COMMITMENTS In January 2001, the Company sold certain assets for $10,464. The assets were leased back from the purchaser on a month to month renewable term basis with a residual guarantee given by the Company at the end of the lease term. The resulting lease is being accounted for as an operating lease and the gain of $593 from the sale of the certain assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in cost of merchandise sold. In September 2000, the Company entered into a new operating lease for certain real estate properties. The new $143,000 of real estate operating leases, which have an interest rate of LIBOR plus 1.85% replaces $143,000 of real estate operating leases, which had an interest rate of LIBOR plus 2.27%. The company, as a result of replacing the existing real estate operating leases, recorded a pretax charge to earnings of $1,630 of unamortized lease costs, which was recorded in the cost of merchandise sold section of the Consolidated Statement of Operations. The Company leases certain property and equipment under operating leases which contain renewal and escalation clauses. Aggregate minimum rental commitments for leases having noncancelable lease terms of more than one year are approximately: 2001 - $47,453; 2002 - $47,381; 2003 - $40,248; 2004 - $38,895; 2005- $39,002; thereafter - $405,663. Rental expenses incurred for operating leases in 2000, 1999 and 1998 were $63,206, $59,890 and $57,157, respectively. NOTE 4 - STOCKHOLDERS' EQUITY SHARE REPURCHASE - TREASURY STOCK On February 1, 1999, the Company repurchased 11,276,698 of its common shares outstanding pursuant to a Dutch Auction self- tender offer at a price of $16.00 per share. The repurchased shares included 1,276,698 common shares which were repurchased as a result of the Company exercising its option to purchase an additional 2% of its outstanding shares. Expenses related to the share repurchase were approximately $1,638 and were included as part of the cost of the shares acquired. A portion of the treasury shares will be used by the Company to provide benefits to employees under its compensation plans and in conjunction with the Company's dividend reinvestment program. At February 3, 2001, the Company has reflected 10,454,644 shares of its common stock at a cost of $168,793 as "Shares in treasury" on the Company's Consolidated Balance Sheet. RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend one common share purchase right on each of its common shares. The rights will not be exercisable or transferable apart from the Company's common stock until a person or group, as defined in the rights agreement (dated December 5,1997), without the proper consent of the Company's Board of Directors, acquires 15% or more, or makes an offer to acquire 15% or more of the Company's outstanding stock. When exercisable, the rights entitle the holder to purchase one share of the Company's common stock for $125. Under certain circumstances, including the acquisition of 15% of the Company's stock by a person or group, the rights entitle the holder to purchase common stock of the Company or common stock of an acquiring company having a market value of twice the exercise price of the right. The rights do not have voting power and are subject to redemption by the Company's Board of Directors for $.01 per right anytime before a 15% position has been acquired and for 10 days thereafter, at which time the rights become nonredeemable. The rights expire on December 31, 2007. BENEFITS TRUST On April 29, 1994, the Company established a flexible employee benefits trust with the intention of purchasing up to $75,000 worth of the Company's common shares. The repurchased shares will be held in the trust and will be used to fund the Company's existing benefit plan obligations including healthcare programs, savings and retirement plans and other benefit obligations. The trust will allocate or sell the repurchased shares through 2023 to fund these benefit programs. As shares are released from the trust, the Company will charge or credit additional paid-in capital for the difference between the fair value of shares released and the original cost of the shares to the trust. For financial reporting purposes, the trust is consolidated with the accounts of the Company. All dividend and interest transactions between the trust and the Company are eliminated. In connection with the Dutch Auction self-tender offer, 37,230 shares were tendered at a price of $16.00 per share in fiscal 1999. At February 3, 2001, the Company has reflected 2,195,270 shares of its common stock at a cost of $59,264 as "Shares in benefits trust" on the Company's Consolidated Balance Sheet. NOTE 5 - SIGNIFICANT CHARGES During fiscal 1998, the Company recorded pretax charges of $29,451 ($20,109 net of tax), $27,733 of which was recorded as costs of merchandise sales on the Company's Consolidated Statements of Operations and includes the costs associated with the closure and sale of 109 Pep Boys Express stores. The remaining $1,718 of these expenses have been included in Selling, General and Administrative Expenses on the Company's Consolidated Statements of Operations. 34 NOTE 6 - PROFIT ENHANCEMENT PLAN In the third quarter 2000, the Company performed a comprehensive review of its field, distribution, and store support center infrastructure as well as the performance of each store. As a result of this review, the Company implemented a number of changes that it believes will improve its performance. These changes included the closure of 38 underperforming stores and two distribution centers, a decrease of store operating hours and a reduction in the store support center infrastructure. The Company recorded a pretax charge to earnings for fiscal year 2000 as follows:
Non-reservable Total Expense Expense Income Statement Original Reserve Incurred in Year Ended Classification Charge Adjustments 4th Quarter Feb. 3, 2001 ----------------------------------------------------------------------------- Costs of Merchandise Sold $62,665 $ 939 $3,481 $67,085 Costs of Service Revenue 5,661 (177) (252) 5,232 Selling, General and Administrative 2,908 (661) 381 2,628 ----------------------------------------------------------------------------- Total Expenses $71,234 $ 101 $3,610 $74,945 -----------------------------------------------------------------------------
The original third quarter charge totaled $71,234 of which $62,665 was recorded in costs of merchandise sold on the Company's Consolidated Statement of Operations and includes expenses associated with the closure of 38 stores and two distribution centers, certain equipment write-offs and severance costs associated with the contraction of the special order department. The remaining $8,569 was divided with $5,661 recorded as costs of service revenue, which includes service department expenses associated with the store closures, and $2,908 recorded as selling, general and administrative which includes expenses associated with the closure of the two regional offices, the abandonment of future development projects and severance for the reduction of the store support center infrastructure. The fourth quarter reserve adjustments increased by $101 due to additional expenses which were recorded in costs of merchandise sold on the Company's Consolidated Statement of Operations. These additional expenses included write-downs of certain equipment, the on-going expenses associated with the change in estimated time to sublease the properties offset, in part, by decreases in rent expense related to the change in Company's estimated time to sublease the properties, the change in estimated sublease value and a present value interest adjustment, coupled with a reduction in estimated warehouse severance. The increase in reserve adjustment was offset, in part, by a decrease in cost of service revenue related to the reduction of the estimated employee severance and the decrease in rent expense related to the change in the Company's estimated time to sublease the properties, the change in the estimated sublease value, and a present value interest adjustment offset, in part, by an increase in on-going expenses associated with the changes in estimated time to sublease the properties. In addition, selling, general and administrative expense was reduced due to a change in estimated cost to exit leases for abandoned projects coupled with a reduction of employee severance. In the fourth quarter of 2000, the Company incurred expenses related to the closure of the 38 stores and two distribution centers, for inventory and equipment handling which was offset, in part, by a recovery of certain benefits expenses related to the reduction of workforce. These expenses which totaled $3,610 were not reserved and were recorded as incurred. The Company estimates additional expenses of approximately $1,200 to be incurred during first quarter of 2001. Approximately 1,300 of the Company's employees were notified of their separation from the Company prior to the end of the third quarter. As of February 3, 2001, the number of employees to be separated was reduced to approximately 1,000 of which 97% have left their positions and the remaining 3% are anticipated to leave the Company during the first quarter of 2001. The 1,000 employees were composed of 76% store employees, 13% distribution center employees, and 11% store support center and field administrative employees. The reduction in employees to be separated was primarily a result of some of the notified store employees being transferred to other stores within the Company. The total severance paid during fiscal 2000 in connection with the Profit Enhancement Plan was $1,213. 35 At the end of the third quarter 2000, the Company set up a reserve liability account which is included in accrued liabilities on the Consolidated Balance Sheet. This liability account will track all accruals including remaining rent on leases net of sublease income, severance and on-going expenses for the closed facilities. The following chart reconciles the charge since its initial recording to the reserve balance at February 3, 2001. Lease Fixed On-Going Expenses Assets(3) Severance Expenses Total ------------------------------------------------------------------------------------------------------------- Original Charges $ 7,916 $57,680 $ 1,694 $ 3,944 $71,234 ------------------------------------------------------------------------------------------------------------- Addition(1) - 1,074 - 361 1,435 ------------------------------------------------------------------------------------------------------------- Utilization (975) (58,754) (1,213) (1,345) (62,287) ------------------------------------------------------------------------------------------------------------- Adjustments(2) 113 - (272) - (159) ------------------------------------------------------------------------------------------------------------- Reserve Balance at February 3,2001 $ 7,054 $ - $ 209 $ 2,960 $10,223 -------------------------------------------------------------------------------------------------------------
(1) Additions are composed of additional equipment write-offs and an increase in on-going expenses related to the change in estimated time required to sublet or sell the properties held for disposal. (2) Adjustments are composed of a decrease in employee severance offset, in part, by an increase in lease expenses due to a reclass of a portion of the reserve to offset a lease liability previously accrued of $1,176 offset, in part, by a decrease in estimated lease expenses of $1,063 due to a change in fair value of the sublease payments offset, in part, by a change in estimated time required to sublet properties and a change in present value interest on the lease expenses. (3) The total carrying costs related to assets held for disposal or written-off were $81,384 of which the Company recorded a loss of $58,754. NOTE 7 - PENSION AND SAVINGS PLANS The Company has a defined benefit pension plan covering substantially all of its full-time employees hired on or before February 1, 1992. Normal retirement age is 65. Pension benefits are based on salary and years of service. The Company's policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA. The actuarial computations are made using the "projected unit credit method." Variances between actual experience and assumptions for costs and returns on assets are amortized over the remaining service lives of employees under the plan. As of December 31, 1996, the Company froze the accrued benefits under the plan and active participants became fully vested. The plan's trustee will continue to maintain and invest plan assets and will administer benefit payments. Pension expense (income) includes the following:
Feb. 3, Jan. 29, Jan. 30, Year ended 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Interest cost $ 1,848 $ 1,826 $ 1,711 Expected return on plan assets (2,261) (1,915) (1,703) Amortization of transition asset (214) (214) (214) Recognized actuarial loss 890 597 - ----------------------------------------------------------------------------------------------------------------------------------- Total pension expense (income) $ 263 $ 294 $ (206) -----------------------------------------------------------------------------------------------------------------------------------
Pension plan assets are stated at fair market value and are composed primarily of money market funds, stock index funds, fixed income investments with maturities of less than five years and the Company's common stock. 36 The following table sets forth the reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company's defined benefit plan.
Feb. 3, Jan. 29, 2001 2000 -------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $26,955 $28,615 Interest cost 1,848 1,826 Actuarial gain (2,041) (2,213) Benefits paid (1,036) (1,273) --------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $25,726 $26,955 --------------------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year $26,974 $20,236 Actual return on plan assets (net of expenses) (84) 2,077 Employer contributions - 5,934 Benefits paid (1,036) (1,273) --------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $25,854 $26,974 --------------------------------------------------------------------------------------------------------------- Reconciliation of the Funded Status Funded status $ 128 $ 19 Unrecognized transition asset (214) (428) Unrecognized actuarial loss 3,663 4,249 --------------------------------------------------------------------------------------------------------------- Net amount recognized at year-end as prepaid benefit cost $ 3,577 $ 3,840 --------------------------------------------------------------------------------------------------------------- Weighted-Average Assumptions Discount rate: 7.40% 6.90% Expected return on plan assets: 8.50% 8.50% ---------------------------------------------------------------------------------------------------------------
The Company had no comprehensive income attributable to the change in the minimum pension liability in fiscal year 2000. The Company recorded other comprehensive income (expense), net of tax, attributable to the change in the minimum pension liability of $4,210 and $(2,844) in fiscal years 1999 and 1998, respectively. The Company has 401(k) savings plans which covers all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant's contributions or 3% of the participant's compensation. The Company's savings plans' contribution expense was $4,947, $5,644 and $5,274 in fiscal years 2000, 1999 and 1998, respectively. 37 NOTE 8 - NET EARNINGS PER SHARE For fiscal years 2000, 1999 and 1998, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. Diluted earnings per share assumes conversion of convertible subordinated notes, zero coupon convertible subordinated notes and the dilutive effects of stock options. Adjustments for convertible securities were antidilutive in 2000, 1999 and 1998, and therefore excluded from the computation of diluted EPS; however, these securities could potentially be dilutive in the future. Options to purchase 5,032,772, 4,755,657 and 3,572,946 shares of common stock were outstanding at February 3, 2001, January 29, 2000 and January 30, 1999, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market prices of the common shares on such dates. The following schedule presents the calculation of basic and diluted earnings per share for income from continuing operations: ------------------------------------------------------------------------------- (In thousands, except per share amounts)
Fiscal 2000 Fiscal 1999 Fiscal 1998 ---------------------------------- ---------------------------------- --------------------------------- Earnings Shares Per share Earnings Shares Per share Earnings Shares Per share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator)(Denominator) Amount ----------- ------------ ------ ----------- ------------ ------ ---------- ------------ ------ Basic EPS Earnings available to common stockholders $(53,148) 51,088 $(1.04) $ 29,303 50,665 $.58 $ 4,974 61,543 $.08 ==== ==== ==== Effect of Dilutive Securities Common shares assumed issued upon exercise of dilutive stock options - - - 175 - 197 ------- ------ ------- ------ ------- ------ Diluted EPS Earnings available to common stockholders assuming conversion $(53,148) 51,088 $(1.04) $ 29,303 50,840 $.58 $ 4,974 61,740 $.08 ========= ====== ======= ======== ====== ==== ======= ====== ====
NOTE 9 - INCOME TAXES The provision for income taxes includes the following:
Feb. 3, Jan. 29, Jan. 30, Year ended 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- Current: Federal $ (6,300) $ 12,653 $ (10,295) State 353 788 (537) Deferred: Federal (22,776) 2,074 12,266 State (1,798) 149 876 ---------------------------------------------------------------------------------------------------------------------------------- $(30,521) $ 15,664 $ 2,310 ---------------------------------------------------------------------------------------------------------------------------------- A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows: Feb. 3, Jan. 29, Jan. 30, Year ended 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 1.2 1.4 3.0 Job credits 0.3 (1.1) (5.8) Other, net - (0.5) (0.5) ----------------------------------------------------------------------------------------------------------------------------------- 36.5% 34.8% 31.7% -----------------------------------------------------------------------------------------------------------------------------------
38 Items that gave rise to significant portions of the deferred tax accounts are as follows: Feb. 3, Jan. 29, 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Inventories $ 8,431 $ 7,851 Vacation accrual 5,014 5,542 Minimum pension liability adjustment 820 (1,548) Store closing reserves 5,661 2,238 Other, net 5,483 2,523 ----------------------------------------------------------------------------------------------------------------------------------- $ 25,409 $16,606 ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 89,706 $82,908 Other, net (23,514) (944) ----------------------------------------------------------------------------------------------------------------------------------- $ 66,192 $81,964 ----------------------------------------------------------------------------------------------------------------------------------- Net deferred tax liability $ 40,783 $65,358 -----------------------------------------------------------------------------------------------------------------------------------
At February 3, 2001 the company has state net operating losses of approximately $5,000 that begin to expire in 2006. In addition the company has general business credits of $1,083 which expire beginning in 2019 and minimum tax credits of $1,381 which have no expiration date. NOTE 10 - STOCK OPTION PLANS Options to purchase the Company's common stock have been granted to key employees and members of the Board of Directors. The option prices are at least 100% of the fair market value of the common stock on the grant date. On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan which authorized the issuance of restricted stock and/or options to purchase up to 1,000,000 shares of the Company's common stock. Additional shares in the amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by stockholders on June 4, 1997, May 31, 1995 and June 1, 1993, respectively. Under this plan, both incentive and nonqualified stock options may be granted to eligible participants. Incentive stock options are fully exercisable on the second or third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Nonqualified options become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of February 3, 2001, no shares remain available for grant. On June 2, 1999 the stockholders approved the 1999 Stock Incentive Plan which authorized the issuance of restricted stock and/or options to purchase up to 2,000,000 shares of the Company's common stock. Under this plan, both incentive and nonqualified stock options may be granted to eligible participants. The incentive stock options and nonqualified stock options are fully exercisable on the third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of February 3, 2001, 383,000 shares remain available for grant. 39 Stock option transactions for the Company's stock option plans are summarized as follows:
Fiscal 2000 Fiscal 1999 Fiscal 1998 ------------------------ ----------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 5,413,622 $22.05 4,982,761 $23.02 3,465,194 $25.40 Granted 1,160,450 6.34 1,558,450 16.08 2,515,150 21.06 Exercised - - (519,850) 12.50 (107,825) 17.09 Canceled (1,534,300) 18.10 (607,739) 22.75 (889,758) 27.23 --------------------------------------------------------------------------------------------------------------------------- Outstanding - end of year 5,039,772 19.63 5,413,662 22.05 4,982,761 23.02 --------------------------------------------------------------------------------------------------------------------------- Options exercisable - at year end 2,501,678 24.93 2,489,162 24.66 2,359,724 21.94 Weighted average estimated fair value of options granted 2.54 6.60 8.44 ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at February 3, 2001:
Options Outstanding Options Exercisable ---------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 2/3/01 Life Price at 2/3/01 Price ---------------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $20.00 2,447,215 9 years $12.00 562,885 $14.16 $20.01 to $25.00 1,384,325 6 years 22.93 747,251 22.86 $25.01 to $30.00 115,967 3 years 27.98 115,967 27.98 $30.01 to $37.38 1,092,265 5 years 31.68 1,075,575 31.68 ---------------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $37.38 5,039,772 2,501,678 ----------------------------------------------------------------------------------------------------------------------------------
The Company applies APB No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates and recognized as compensation expense on a straight-line basis over the vesting period of the grant consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net (loss) earnings and net (loss) earnings per share would have been reduced to the pro forma amounts indicated as follows:
----------------------------------------------------------------------------------------------------------- Fiscal 2000 Fiscal 1999 Fiscal 1998 ----------------------------------------------------------------------------------------------------------- Net (loss) earnings: (Loss)income before extraordinary items $(57,365) $24,450 $ (757) Extraordinary items 2,054 - - ----------------------------------------------------------------------------------------------------------- Net (loss) income $(55,311) $24,450 $ (757) ----------------------------------------------------------------------------------------------------------- (Loss)earnings per share - basic: (Loss)income before extraordinary items $ (1.12) $ .48 $ (.01) Extraordinary items .04 - - ----------------------------------------------------------------------------------------------------------- Net (loss) income $ (1.08) $ .48 $ (.01) ----------------------------------------------------------------------------------------------------------- (Loss)earnings per share - diluted: (Loss)income before extraordinary items $ (1.12) $ .48 $ (.01) Extraordinary items .04 - - ----------------------------------------------------------------------------------------------------------- Net (loss) income $ (1.08) $ .48 $ (.01) -----------------------------------------------------------------------------------------------------------
The pro forma effects on net earnings for fiscal years 2000, 1999 and 1998 are not representative of the pro forma effect on net earnings in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The fair value of each option granted during fiscal years 2000, 1999 and 1998 is estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions: (i) dividend yield of 0.90%,0.78% and 0.70%, respectively, (ii) expected volatility of 40%, 34% and 35%,respectively, (iii) risk-free interest rate ranges of 5.8% to 6.7%, 5.0% to 6.5% and 4.0% to 5.7%, respectively, and (iv) ranges of expected lives of 4 years to 8 years for fiscal years 2000, 1999 and 1998. 40 NOTE 11 - CONTINGENCIES The Company is a defendant in an action entitled "Coalition for a Level Playing Field, L.L.C., et al. v. AutoZone, Inc., et al.," in the United States District Court for the Eastern District of New York. There are over 100 plaintiffs, consisting of automotive jobbers, warehouse distributors and a coalition of several trade associations; the defendants are AutoZone, Inc., Wal-Mart Stores, Inc., Advance Stores Company, Inc., CSK Auto, Inc., the Company, Discount Auto Parts, Inc., O'Reilly Automotive, Inc. and Keystone Automotive Operations, Inc. The plaintiffs allege that the defendants violated various provisions of the Robinson-Patman Act by, among other things, knowingly inducing and receiving various forms of discriminatory prices from automotive parts manufacturers. The plaintiffs are seeking compensatory damages, which would be trebled under applicable law, as well as injunctive and other equitable relief. The Company believes the claims are without merit and intends to vigorously defend this action. The Company is also party to various other lawsuits and claims, including purported class actions, arising in the normal course of business. In the opinion of management, these lawsuits and claims, including the cases above, are not, singularly or in the aggregate, material to the Company's financial position or results of operations. NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
February 3, 2001 January 29, 2000 ------------------------ --------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 7,995 $ 7,995 $ 18,485 $ 18,485 Accounts receivable 16,792 16,792 17,281 17,281 Liabilities: Accounts payable 204,755 204,755 320,066 320,066 Long-term debt including current maturities 654,391 472,770 612,851 489,824 Zero coupon convertible subordinated notes 158,555 148,525 171,356 148,079 --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE The carrying amounts approximate fair value because of the short maturity of these items. LONG-TERM DEBT INCLUDING CURRENT MATURITIES AND ZERO COUPON CONVERTIBLE SUBORDINATED NOTES INCLUDING CURRENT MATURITIES Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The fair value estimates presented herein are based on pertinent information available to management as of February 3, 2001 and January 29, 2000. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from amounts presented herein. 41
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings(Loss) Net Earnings Per Share Before Earnings Operating (Loss) Before Net Extraordinary (Loss) Cash Market Price Year Ended Total Gross Profit Extraordinary Earnings Gain (Loss) Per Share Dividends Per Share Feb. 3, 2001 Revenues Profit (Loss) Gain (Loss) (Loss) Basic Diluted Basic Diluted Per Share High Low ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $614,809 $159,816 $19,501 $ 4,407 $6,447 $ .09 $ .09 $ .13 $ .13 $.0675 $ 7 11/16 5 1/2 2nd Quarter 633,887 157,622 18,593 3,409 4,376 .07 .07 .09 .09 .0675 7 5/8 5 5/8 3rd Quarter 622,382 66,358 (82,571) (62,271) (63,209) (1.22) (1.22) (1.24) (1.24) .0675 6 7/16 4 3/16 4th Quarter(1) 547,390 148,055 16,445 1,292 1,292 .03 .03 .03 .03 .0675 5 3/8 3 5/16 ----------------------------------------------------------------------------------------------------------------------------------- Year Ended Jan. 29, 2000 ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $598,316 $162,027 $29,040 $ 10,093 $10,093 $ .20 $ .20 $ .20 $ .20 $.0675 20 3/16 14 1/4 2nd Quarter 635,403 176,520 43,852 20,065 20,065 .40 .39 .40 .39 .0675 21 5/8 14 3/16 3rd Quarter 605,833 157,769 27,575 9,930 9,930 .20 .20 .20 .20 .0675 17 7/16 11 5/16 4th Quarter 554,981 126,719 (6,270) (10,785) (10,785) (.21) (.21) (.21) (.21) .0675 13 7 1/8 -----------------------------------------------------------------------------------------------------------------------------------
(1) Included 14 weeks due to 53 week fiscal year Under the Company's present accounting system, actual gross profit from merchandise sales can be determined only at the time of physical inventory, which is taken at the end of the fiscal year. Gross profit from merchandise sales for the first, second and third quarters is estimated by the Company based upon recent historical gross profit experience and other appropriate factors. Any variation between estimated and actual gross profit from merchandise sales for the first three quarters is reflected in the fourth quarter's results. 42 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The material contained in the registrant's definitive proxy statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year (the "Proxy Statement"), under the caption "Election of Directors" is hereby incorporated herein by reference. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G(3) to Form 10-K. ITEM 11 EXECUTIVE COMPENSATION The material in the Proxy Statement under the caption "Executive Compensation" other than the material under the caption "Executive Compensation - Report of Compensation Committee of the Board of Directors on Executive Compensation" and "Executive Compensation - Performance Graph" is hereby incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The material in the Proxy Statement under the caption "Outstanding Shares, Voting Rights and Shareholdings of Certain Persons - Share Ownership of Certain Beneficial Owners and Management" is hereby incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The material in the Proxy Statement under the caption "Executive Compensation - Certain Relationships and Related Transactions" is hereby incorporated herein by reference. 43 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a). Page ---- 1. The following consolidated financial statements of The Pep Boys - Manny, Moe & Jack are included in Item 8. Independent Auditors' Report 25 Consolidated Balance Sheets - February 3, 2001 and January 29, 2000 26 Consolidated Statements of Operations - Years ended February 3, 2001, January 29, 2000 and January 30, 1999 27 Consolidated Statements of Stockholders' Equity Years ended February 3, 2001, January 29, 2000 and January 30, 1999 28 Consolidated Statements of Cash Flows - Years ended February 3, 2001, January 29, 2000, and January 30, 1999 29 Notes to Consolidated Financial Statements 30 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves 51 All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits
(3.1) Articles of Incorporation, Incorporated by reference from as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (3.2) By-Laws, as amended Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-39225). (3.3) Amendment to By-Laws Incorporated by reference from (Declassification of Board of Directors) the Company's Form 10-K for the fiscal year ended January 29, 2000. (4.1) Indenture, dated as of March 22, Incorporated by reference from 1991 between the Company and the Registration Statement on Bank America Trust Company of Form S-3 (File No. 33-39225). New York as Trustee, including Form of Debt Security
44
(4.2) Indenture, dated as of August Incorporated by reference from 31, 1994, between the Company the Registration Statement on and First Fidelity Bank, Form S-3 (File No. 33-55115). National Association as Trustee, including Form of Debenture (4.3) Indenture, dated as of June Incorporated by reference from 12, 1995, between the Company the Registration Statement on and First Fidelity Bank, Form S-3 (File No. 33-59859). National Association as Trustee, including Form of Debenture (4.4) Indenture, dated as of September Incorporated by reference from 20, 1996, between the Company and the Registration Statement on the Trustee, providing for the Form S-3 (File No. 333-00985). Issuance of the LYONs (4.5) Indenture, dated as of July 15, 1997, Incorporated by reference from between the Company and PNC the Registration Statement on Bank, National Association, as Form S-3 (File No. 333-30295). Trustee, providing for the issuance of Senior Debt Securities, and form of security (4.6) Indenture, dated as of July 15, 1997, Incorporated by reference from between the Company and PNC the Registration Statement on Bank, National Association, as Form S-3 (File No. 333-30295) Trustee, providing for the issuance of Subordinated Debt Securities, and form of security (10.1)* Medical Reimbursement Plan of Incorporated by reference from the Company the Company's Form 10-K for the fiscal year ended January 31, 1982. (10.2) Rights Agreement dated as of Incorporated by reference from December 5, 1997 between the the Company's Form 8-K dated Company and First Union December 8, 1997. National Bank (10.3)* Directors' Deferred Compensation Incorporated by reference from Plan, as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (10.4) Dividend Reinvestment and Stock Purchase Incorporated by reference from Plan dated January 4, 1990 the Registration Statement on Form S-3 (File No. 33-32857). (10.5)* The Pep Boys - Manny, Moe & Incorporated by reference from Jack Trust Agreement for the the Company's Form 10-K for the Executive Supplemental Pension fiscal year ended February 1, Plan and Certain Contingent 1992. Compensation Arrangements, dated as of February 13, 1992 (10.6)* Amendment to the Executive Incorporated by reference from Supplemental Pension Plan the Company's Form 10-K for the (amended and restated effective fiscal year ended February 1, January 1, 1988), dated as of 1992. February 13, 1992 (10.7)* Consulting and Retirement Incorporated by reference from Agreement by and between the the Company's Form 10-K for the Company and Benjamin Strauss, fiscal year ended February 1, dated as of February 2, 1992 1992.
45
(10.8) Flexible Employee Benefits Trust Incorporated by reference from the Company's Form 8-K dated May 6, 1994. (10.9) Credit Agreement dated as of Incorporated by reference from April 21, 1995 between the the Company's Form 10-Q for the Company and The Chase Manhattan quarter ended April 29, 1995. Bank (Agent) (10.10) Transaction Agreement, including Incorporated by reference from amendments, among The Pep Boys - the Company's Form 10-K for the Manny, Moe & Jack, State Street year ended February 1, 1997. Bank and Trust Company (Trustee) and Citicorp Leasing, Inc., dated as of November 13, 1995 (10.11) Master Lease, including amendments, Incorporated by reference from between State Street Bank and Trust the Company's Form 10-K for the Company (Trustee) and The Pep Boys - Manny, year ended February 1, 1997. Moe & Jack, dated as of November 13, 1995 (10.12) Master Lease, including amendments, Incorporated by reference from between State Street Bank and Trust the Company's Form 10-K for the Company (Trustee) and The Pep Boys - Manny, year ended January 31, 1998. Moe & Jack dated as of February 28, 1997 (10.13) Transaction Agreement, including Incorporated by reference from amendments, between State Street the Company's Form 10-K for the Bank and Trust Company (Trustee) and The year ended January 31, 1998. Pep Boys - Manny, Moe & Jack dated as of February 28, 1997 (10.14) Amendment No. 1 to the Credit Incorporated by reference from Agreement dated as of April 21, 1995 the Company's Form 10-K for the between the Company and The Chase year ended January 31, 1998. Manhattan Bank (Agent) (10.15)* The Pep Boys - Manny, Moe & Jack Incorporated by reference from Pension Plan the Company's Form 10-K for the year ended January 31, 1998. (10.16)* The Pep Boys Savings Plan Incorporated by reference from the Company's Form 10-K for the year ended January 31, 1998. (10.17)* The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from the Company's Form 10-K for the year ended January 31, 1998. (10.18) Amendment No. 2 dated as of July 31,1998 Incorporated by reference from to the Credit Agreement dated as of April the Company's Form 10-Q for the 21, 1995 between the Company, the Banks quarter ended August 1, 1998. signatory thereto and The Chase Manhattan Bank (Agent) (10.19) Amendment to Transaction Agreement between Incorporated by reference from the Company and State Street Bank and Trust the Company's Form 10-Q for the Company (Trustee) dated as of February 28, 1997 quarter ended August 1, 1998. (10.20) Amendment dated as of July 31, 1998 to Master Incorporated by reference from Lease between the Company and State Street the Company's Form 10-Q for the Bank and Trust Company (Trustee) dated as of quarter ended August 1, 1998. November 13, 1995 (10.21) Amendment dated as of July 31, 1998 to Master Incorporated by reference from Lease between the Company and State Street the Company's Form 10-Q for the Bank and Trust Company (Trustee) dated as of quarter ended August 1, 1998. February 28, 1997 (10.22) Amendment No. 3 dated as of October 31, 1998 Incorporated by reference from to the Amended and Restated Credit Agreement the Company's Form 10-Q for the dated as of April 21, 1995 among the Company, quarter ended October 31, 1998. the Banks signatory thereto and The Chase Manhattan Bank, as Agent. (10.23) Third Amendment dated as of October 31, 1998 Incorporated by reference from to Transaction Agreement between the Company and the Company's Form 10-Q for the State Street Bank and Trust Company (Trustee) dated quarter ended October 31, 1998. as of February 28, 1997. (10.24) Third Amendment dated as of October 31, 1998 Incorporated by reference from to Master Lease between the Company and State the Company's Form 10-Q for the Street Bank and Trust Company (Trustee) dated as of quarter ended October 31, 1998. November 13, 1995. (10.25) Second Amendment dated as of October 31, 1998 Incorporated by reference from to Master Lease between the Company and State the Company's Form 10-Q for the Street Bank and Trust Company (Trustee) dated as of quarter ended October 31, 1998. February 28, 1997. (10.26) Fourth Amendment dated as of October 31, 1998 Incorporated by reference from to Transaction Agreement between the Company the Company's Form 10-Q for the and State Street Bank and Trust Company (Trustee) quarter ended October 31, 1998. dated as of November 13, 1995. (10.27)* Form of Employment Agreement dated as of Incorporated by reference from June 1998 between the Company and certain the Company's Form 10-Q for the officers of the Company. quarter ended October 31, 1998.
46
(10.28)* Employment Agreement between Mitchell G. Leibovitz Incorporated by reference from and the Company dated as of June 3, 1998. the Company's Form 10-Q for the quarter ended October 31, 1998. (10.29) Third Amendment dated as of January 21, 1999 Incorporated by reference from to Master Lease between the Company and State the Company's Form 10-K for the Street Bank and Trust Company (Trustee) dated as of year ended January 30, 1999. February 28, 1997. (10.30) Fourth Amendment dated as of January 21, 1999 Incorporated by reference from to Transaction Agreement between the Company the Company's Form 10-K for the and State Street Bank and Trust Company (Trustee) year ended January 30, 1999. dated as of February 28, 1997. (10.31) Fifth Amendment dated as of January 21, 1999 Incorporated by reference from to Transaction Agreement between the Company the Company's Form 10-K for the and State Street Bank and Trust Company (Trustee) year ended January 30, 1999. dated as of November 13, 1995. (10.32) Fourth Amendment dated as of January 21, 1999 Incorporated by reference from to Master Lease between the Company and State the Company's Form 10-K for the Street Bank and Trust Company (Trustee) dated year ended January 30, 1999. as of November 13, 1995. (10.33) Amendment No. 4 dated as of January 22, 1999 Incorporated by reference from to the Amended and Restated Credit Agreement the Company's Form 10-K for the dated as of April 21, 1995 among the Company, year ended January 30, 1999. the Banks signatory thereto and The Chase Manhattan Bank, as Agent. (10.34) Note purchase agreement dated January 26, 1999 The Company hereby agrees to relating to the sale of the Company's Series A file such document upon request and Series B Senior Notes used for the financing of the Securities and Exchange of the Company's self tender offer. Commission. (10.35) The Pep Boys - Manny, Moe & Jack Incorporated by reference from Annual Incentive Bonus Plan, as amended and restated. the Company's Form 10-K for the year ended January 30, 1999. (10.36) Amendments to The Pep Boys Savings Plan Incorporated by reference from the Company's Form 10-Q for the quarter ended May 1, 1999. (10.37) Amendments to The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from the Company's Form 10-Q for the quarter ended May 1, 1999. (10.38) Amendment No. 5 dated as of July 23, 1999 Incorporated by reference from to the Amended and Restated Credit the Company's Form 10-Q for the Agreement dated as of April 21, 1995 among quarter ended July 31, 1999. the Pep Boys - Manny, Moe & Jack, the Banks signatory thereto and the Chase Manhattan Bank, as Agent. (10.39)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from 1999 Stock Incentive Plan - Amended the Company's Form 10-Q for the and Restated as of August 31, 1999. quarter ended October 30, 1999. (10.40) Amendment No. 6 and waiver dated as of July 28, 2000 Incorporated by reference from to the amended and restated credit agreement dated the Company's Form 10-Q for the as of April 21, 1995 between the Company, the quarter ended July 29, 2000. guarantors signatory thereto, the banks signatory thereto and The Chase Manhattan Bank, as agent. (10.41) Amendment and waiver dated as of August 10, 2000 to Incorporated by reference from Master Lease between the Company and State Street the Company's Form 10-Q for the Bank and Trust Company dated as of November 13, 1995. quarter ended July 29, 2000. (10.42) Amendment and waiver dated as of August 10, 2000 to Incorporated by reference from Master Lease between the Company and State Street the Company's Form 10-Q for the Bank and Trust Company dated as of February 28, 1997. quarter ended July 29, 2000. (10.43) Loan and Security Agreement between the Company and Incorporated by reference from Congress Financial Corporation dated September 22, 2000. the Company's Form 8-K filed October 18, 2000. (10.44) Participation Agreement between the Company and Incorporated by reference from The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed September 22, 2000. October 18, 2000. (10.45) Master Lease Agreement between the Company and Incorporated by reference from The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed September 22, 2000. October 18, 2000. (10.46)* The Pep Boys - Manny, Moe and Jack 1990 Stock Incentive Plan - Amended and Restated as of March 26, 2001. (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent
(b) None * Management contract or compensatory plan or arrangement. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PEP BOYS - MANNY, MOE & JACK (Registrant) Dated: May 4, 2001 by: /s/ George Babich Jr. -------------- --------------------- George Babich Jr. Executive Vice President and Chief Financial Officer 48 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE ---------- -------- ---- /s/ Mitchell G. Leibovitz Chairman of the Board, President May 4, 2001 Mitchell G. Leibovitz and Chief Executive Officer (Principal Executive Officer) /s/ George Babich Jr. Executive Vice President - May 4, 2001 George Babich Jr. Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Lennox K. Black Director May 4, 2001 Lennox K. Black /s/ Bernard J. Korman Director May 4, 2001 Bernard J. Korman /s/ J. Richard Leaman, Jr. Director May 4, 2001 J. Richard Leaman, Jr. /s/ Malcolmn D. Pryor Director May 4, 2001 Malcolmn D. Pryor /s/ Lester Rosenfeld Director May 4, 2001 Lester Rosenfeld /s/ Benjamin Strauss Director May 4, 2001 Benjamin Strauss /s/ Myles H. Tanenbaum Director May 4, 2001 Myles H. Tanenbaum
49 FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K 50
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) ---------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E ---------------------------------------------------------------------------------------------------------------------------- Additions Additions Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Descriptions Period Expenses Accounts Deductions* Period ---------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year Ended February 3, 2001 $826 $1,859 $ - $2,046 $639 ---------------------------------------------------------------------------------------------------------------------------- Year Ended January 29, 2000 $996 $3,254 $ - $3,424 $826 ---------------------------------------------------------------------------------------------------------------------------- Year Ended January 30, 1999 $265 $1,643 $ - $912 $996 ----------------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off. 51 INDEX TO EXHIBITS Index of Financial Statements, Financial Statement Schedule and Exhibits Page ---- 1. The following consolidated financial statements of The Pep Boys - Manny, Moe & Jack are included in Item 8. Independent Auditors' Report 25 Consolidated Balance Sheets - February 3, 2001 and January 29, 2000 26 Consolidated Statements of Operations- Years ended February 3, 2001, January 29, 2000 and January 30, 1999 27 Consolidated Statements of Stockholders' Equity Years ended February 3, 2001, January 29, 2000 and January 30, 1999 28 Consolidated Statements of Cash Flows - Years ended February 3, 2001, January 29, 2000 and January 30, 1999 29 Notes to Consolidated Financial Statements 30 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits (10.46) The Pep Boys - Manny, Moe and Jack 1990 Stock Incentive Plan - Amended and Restated as of March 26, 2001. (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent 52