10-K 1 r200110k.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 2, 2002 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 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, 2002, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $764,223,728. As of April 6, 2002, there were 53,646,131 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 Operations - 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 29, 2002. 4 This Annual Report on Form 10-K for the year ended February 2, 2002 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 2, 2002, the Company operated 628 stores consisting of 615 SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of 6,507 service bays, as well as 12 non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates approximately 12,841,000 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 "do-it-yourself" (retail) and "do-it-for-me" (service labor, installed merchandise/commercial and tires) customers with the highest quality merchandise and service offerings. 6 As of February 2, 2002 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 1998, 1999, 2000 and 2001 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 1998 THROUGH 2001 1998 1999 2000 2001 Year Year Year Year State End Opened Closed End Opened Closed End Opened Closed End ------ --- ------ ------ --- ------ ------ --- ------ ------ --- Alabama 1 - - 1 - - 1 - - 1 Arizona 23 - - 23 - - 23 - - 23 Arkansas 1 - - 1 - - 1 - - 1 California 132 4 - 136 - 1 135 - - 135 Colorado 8 - - 8 - - 8 - - 8 Connecticut 9 - - 9 - 1 8 - - 8 Delaware 6 - - 6 - - 6 - - 6 Florida 48 - - 48 - 1 47 - - 47 Georgia 26 - - 26 - - 26 - - 26 Illinois 25 - - 25 - 1 24 - - 24 Indiana 12 1 - 13 - 4 9 - - 9 Kansas 2 - - 2 - - 2 - - 2 Kentucky 4 - - 4 - - 4 - - 4 Louisiana 12 - - 12 - 2 10 - - 10 Maine 1 - - 1 - - 1 - - 1 Maryland 19 - - 19 - - 19 - - 19 Massachusetts 8 2 - 10 - 2 8 - - 8 Michigan 15 2 - 17 - 10 7 - - 7 Minnesota 2 1 - 3 - - 3 - - 3 Missouri 1 - - 1 - - 1 - - 1 Nevada 12 - - 12 - - 12 - - 12 New Hampshire 4 - - 4 - - 4 - - 4 New Jersey 25 3 - 28 - - 28 - - 28 New Mexico 8 - - 8 1 1 8 - - 8 New York 30 3 - 33 1 5 29 1 - 30 North Carolina 11 - - 11 - - 11 - - 11 Ohio 15 - - 15 - 2 13 - - 13 Oklahoma 6 - - 6 - - 6 - - 6 Oregon 1 2 - 3 - 3 - - - - Pennsylvania 46 - - 46 - - 46 - 1 45 Puerto Rico 23 2 - 25 2 - 27 - - 27 Rhode Island 3 - - 3 - - 3 - - 3 South Carolina 6 - - 6 - - 6 - - 6 Tennessee 7 - - 7 - - 7 - - 7 Texas 61 - - 61 - 1 60 - - 60 Utah 6 - - 6 - - 6 - - 6 Virginia 16 1 - 17 - - 17 - - 17 Washington 3 3 - 6 1 5 2 - - 2 ---- --- -- --- ---- -- ---- ---- -- ---- Total 638 24 - 662 5 39 628 1 1 628 === == == === == == === == === ===
7 DEVELOPMENT The Company's primary focus in fiscal 2001 was improving the performance of its existing stores. In addition during fiscal 2001, the Company opened 1 SUPERCENTER and closed 1 SUPERCENTER. In fiscal 2002, 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 $4,023,540 in addition to the $674,211 it has already spent as of February 2, 2002 in connection with certain of these locations. The Company expects to fund the new stores from net cash generated by operating activities. PRODUCTS AND SERVICES Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries a similar product line, with variations based on the number and type of cars registered in the markets where the store is located. A full complement of inventory at a typical store includes an average of approximately 25,000 items. 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, mobile video, 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, name brand products, the Company sells an array of high quality products under various private label names. The Company sells tires under the names CORNELL (R) and FUTURA (R); and batteries under the name PROSTART (R). The Company also sells wheel covers under the name FUTURA (R); water pumps and cooling system parts under the name PROCOOL (R); air filters, anti-freeze, chemicals, cv axles, lubricants, oil, oil filters, oil treatments, transmission fluids and wiper blades under the name PROLINE (R); shock absorbers under the name PRO RYDER (R); alternators, battery booster packs, and starters under the name PROSTART (R); power steering hoses and power steering pumps under the name PROSTEER (tm); Brakes under the name PROSTOP (R); temperature gauges under the name PROTEMP (R); and paints under the name VARSITY (R). All products sold by the Company under various private label names accounted for approximately 34% of the Company's merchandise sales in fiscal 2001. Revenues from the sale of tires accounted for approximately 17.0% of the Company's total revenues in fiscal years 2001 and 2000, and 16.0% in fiscal year 1999. No other class of products accounted for as much as 10% of the Company's total revenues. 8 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 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. Revenues from maintaining or repairing automobiles and installing products, accounted for approximately 19.2%, 19.1% and 18.4% of the Company's total revenues in fiscal years 2001, 2000 and 1999, respectively. The Company's commercial automotive parts delivery program was established to increase the Company's market share with the professional installer and to leverage its inventory investment. The program has strengthened the Company's position with the installed merchandise 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 2, 2002, 485 of the Company's stores provide commercial parts delivery, which represents approximately 77% of its stores. 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 and an electronic commercial invoicing system in all of its stores. 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 primarily 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. On occasion, the Company employs a promotional pricing strategy on select items to drive increased customer traffic. 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, television and radio commercials, newspaper advertisements, multi-page catalogs 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 2001, approximately 52% 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. 9 STORE OPERATIONS AND MANAGEMENT All Pep Boys stores are open seven days a week. Each SUPERCENTER generally 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 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 President & Chief Financial Officer, who reports to the Company's Chairman of the Board & 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. 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. 10 SUPPLIERS During fiscal 2001, the Company's ten largest suppliers accounted for approximately 45% 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. COMPETITION The business of the Company is generally highly competitive. The Company encounters competition from nationwide and regional chains and from local independent merchants. The Company's competitors include general, full range, discount or traditional department stores which carry automotive parts and accessories and/or have automotive service centers, as well as specialized automotive retailers similar to the Company. Generally, the specialized automotive retailers focus on either the "Do-it-yourself" or "Do-it-for-me" areas of the business. The Company believes that its operation in both the "Do-it-yourself" and "Do-it-for-me" areas of the business positively differentiates it from most of its competitors. However, 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. 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. REGULATION 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. 11 EMPLOYEES At February 2, 2002, the Company employed 22,201 persons as follows:
Full-time Part-time Total Description Numbers % Numbers % Numbers % ------- ---- ------- ---- ------- ---- Store Sales 7,467 46.5 4,563 74.2 12,030 54.2 Store Service 6,573 41.0 1,472 23.9 8,045 36.2 ------- ----- ----- ----- ------- ----- STORE TOTAL 14,040 87.5 6,035 98.1 20,075 90.4 Warehouses 843 5.3 102 1.7 945 4.3 Offices 1,166 7.2 15 .2 1,181 5.3 ------- ------ ------- ------- ------- ------ TOTAL EMPLOYEES 16,049 100.0 6,152 100.0 22,201 100.0 ====== ===== ===== ===== ====== =====
The Company had no union employees as of February 2, 2002. At the end of fiscal 2000, the Company employed approximately 17,082 full-time and 6,054 part-time employees and at the end of fiscal 1999, the Company employed approximately 20,544 full-time and 7,443 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 56 23 Chairman of the Board since 1994; Chief Executive Officer since 1990 George Babich Jr. 50 6 President since 2002; Chief Financial Officer since 2000 Mark L. Page 45 26 Senior Vice President - Store Operations since 1993 Frederick A. Stampone 46 19 Senior Vice President since 1987; Chief Administrative Officer since 1993; Secretary since 1988 Don Casey 50 2 Senior Vice President - Merchandising since 2000 Jeffrey D. Palmer 54 1 Senior Vice President - Marketing & Advertising since November 2001
Messrs. Leibovitz, Page and Stampone have been executive officers of the Company for more than the past five years. Mr. Babich was elected to his current position effective March 16, 2002. From March 2001 until March 2002, Mr. Babich served as Executive Vice President and Chief Financial Officer. From March 2000 until March 2001, Mr. Babich served as Senior Vice President - Finance and Chief Financial Officer. From September 1996 through March 2000, Mr. Babich served as Vice President - Finance. 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. Mr. Palmer joined the Company as Senior Vice President-Marketing & Advertising in November, 2001. Prior to joining Pep Boys, Mr. Palmer was Vice President- Advertising for Home Depot from 1998 to 2001. From 1995 through 1998, Mr. Palmer was Vice President of Advertising & Marketing for Circuit City. 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 in which it occupies 7,200 square feet and either leases or intends to lease the remainder to tennants. Of the 628 store locations operated by the Company at February 2, 2002, 344 are owned and 284 are leased. 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 2, 2002:
Warehouse Products Square Owned or Stores States Location Warehoused Footage Leased Serviced Serviced --------- ---------- ------- ------ -------- ------- Los Angeles, CA All except 216,000 Owned 165 AZ, CA, NM, tires NV, UT, WA Los Angeles, CA Tires/parts 73,000 Leased 165 AZ, CA, NM, NV, UT, WA Los Angeles, CA All except 137,000 Leased 165 AZ, CA, NM, tires NV, 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, AZ, CO, LA, NM, OK, TX Plainfield, IN All 403,000 Leased 91 IL, IN, KS, KY, MI, MN, MO, NY, OH, OK, PA, TN, VA Chester, NY All 400,400 Leased 142 CT, DE, MA, ---------- MD, ME, NH, NJ, NY, PA, RI, VA Total 1,865,400 ==========
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 2002. 14 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. During the first quarter of fiscal 2002, an action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs allege that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. The Company became aware of an FTC investigation regarding the accuracy of advertising claims concerning the product's effectiveness. The plaintiffs further allege that they were negotiating with the manufacturer of the product to obtain the exclusive distribution rights throughout the United States and that those negotiations failed. Plaintiffs are seeking damages including payment for the product that they allege Pep Boys ordered and expenses and loss of sales in Puerto Rico and the United States resulting from the alleged breach. The Company believes that 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 2, 2002. 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 3,214 registered shareholders as of February 2, 2002. 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 2, 2002 High Low Per Share ----------------------------------- ---- --- --------- First Quarter $ 7.00 $ 4.40 $.0675 Second Quarter 13.97 5.35 .0675 Third Quarter 13.70 8.80 .0675 Fourth Quarter 18.48 11.88 .0675 Fiscal year ended February 3, 2001 ---------------------------------- First Quarter $ 7.69 $ 5.50 $.0675 Second Quarter 7.63 5.63 .0675 Third Quarter 6.44 4.19 .0675 Fourth Quarter 5.38 3.31 .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. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998 -------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Merchandise sales $ 1,765,314 $ 1,957,480 $ 1,954,010 $ 1,991,340 $ 1,720,670 Service revenue 418,401 460,988 440,523 407,368 335,850 Total revenues 2,183,715 2,418,468 2,394,533 2,398,708 2,056,520 Gross profit from merchandise sales 514,906 (1) 452,038 (2) 538,957 492,443 (3) 474,239 (4) Gross profit from service revenue 102,490 (1) 79,813 (2) 84,078 79,453 66,081 Total gross profit 617,396 (1) 531,851 (2) 623,035 571,896 (3) 540,320 (4) Selling, general and administrative expenses 513,946 (1) 559,883 (2) 528,838 517,827 (3) 429,523 (4) Operating profit (loss) 103,450 (1) (28,032) (2) 94,197 54,069 (3) 110,797 (4) Non-operating income 4,289 2,245 2,327 2,145 4,315 Interest expense 51,335 57,882 51,557 48,930 39,656 Earnings (loss) before income taxes and extraordinary items 56,404 (1) (83,669) (2) 44,967 7,284 (3) 75,456 (4) Net Earnings (loss) before extraordinary items 36,100 (1) (53,148) (2) 29,303 4,974 (3) 49,611 (4) Extraordinary items (765) 2,054 - - - Net earnings (loss) 35,335 (1) (51,094) (2) 29,303 4,974 (3) 49,611 (4) BALANCE SHEET DATA Working capital $ 97,838 $ 109,207 $ 172,332 $ 241,738 $ 151,340 Current ratio 1.17 to 1 1.18 to 1 1.31 to 1 1.47 to 1 1.24 to 1 Merchandise inventories $ 519,473 $ 547,735 $ 582,898 $ 527,397 $ 655,363 Property and equipment-net 1,117,486 1,194,235 1,335,749 1,330,256 1,377,749 Total assets 1,812,652 1,906,204 2,072,672 2,096,112 2,161,360 Long-term debt (includes all convertible debt) 544,418 654,194 784,024 691,714 646,641 Stockholders' equity 617,790 594,766 658,284 811,784 822,635 DATA PER COMMON SHARE Basic earnings (loss) before extraordinary items $ .70 (1) $ (1.04) (2) $ .58 $ .08 (3) $ .81 (4) Basic earnings (loss) .69 (1) (1.00) (2) .58 .08 (3) .81 (4) Diluted earnings (loss) before extraordinary items .69 (1) (1.04) (2) .58 .08 (3) .80 (4) Diluted earnings (loss) .68 (1) (1.00) (2) .58 .08 (3) .80 (4) Cash dividends .27 .27 .27 .26 .24 Stockholders' equity 12.01 11.60 12.91 13.18 13.39 Common share price range: high 18.48 7.69 21.63 26.69 35.63 low 4.40 3.31 7.13 12.38 21.56 OTHER STATISTICS Return on average stockholders' equity 5.8% (8.2)% 4.0% 0.6% 6.2% Common shares issued and outstanding 51,430,861 51,260,663 50,994,099 61,615,140 61,425,228 Capital expenditures $ 25,464 $ 57,336 $ 104,446 $ 167,876 $ 284,084 Number of retail outlets 628 628 662 638 711 Number of service bays 6,507 6,498 6,895 6,608 6,208 ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes pretax charges of $5,197 related to the Profit Enhancement Plan of which $4,169 reduced gross profit from merchandise sales, $813 reduced gross profit from service revenue and $215 was included in selling, general and administrative expenses. (2) Includes pretax charges of $74,945 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 capital expenditures related to existing stores, offices and warehouses, the need to finance the acquisition, construction and equipping of new stores and to purchase inventory. The primary capital expenditures for fiscal 2001 were attributed to capital maintenance of the Company's existing stores and offices. The Company opened one new store in fiscal 2001 compared to 5 stores in fiscal 2000 and 24 stores in fiscal 1999. In fiscal 2001, the Company significantly decreased its levels of capital expenditures by 55.6% as compared to fiscal 2000. In fiscal 2001, with a decrease in net inventory levels coupled with decreased levels of capital expenditures, the Company decreased its debt by $143,913,000 and increased its cash and cash equivalents by $7,986,000. 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, with decreased levels of capital expenditures and 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.
The following table indicates the Company's principal cash requirements for the past three years: (dollar amounts Fiscal Fiscal Fiscal in thousands) 2001 2000 1999 Total --------------------------------------------------------------------------------------------------------------- Cash Requirements: Capital expenditures $ 25,464 $ 57,336 $104,446 $187,246 Net inventory (decrease) increase(1) (39,592) 80,148 (24,174) 16,382 --------------------------------------------------------------------------------------------------------------- Total $(14,128) $137,484 $ 80,272 $203,628 --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities (excluding the change in net inventory) $128,301 $ 99,739 $155,207 $383,247 ---------------------------------------------------------------------------------------------------------------
(1) Net inventory (decrease) increase is the change in inventory less the change in accounts payable. In fiscal 2001, merchandise inventories decreased as the Company maintained its net store count and completed the exit of the two distribution centers closed in fiscal 2000 as part of the Profit Enhancement Plan. Additionally, the Company decreased the average number of stock-keeping units per store to approximately 25,000 in fiscal 2001 compared to 26,000 in fiscal 2000. In fiscal 1999, the average stock-keeping units per store were 25,000. In fiscal 2000, merchandise inventories decreased as the Company decreased its net store count by 34 and closed two distribution centers. In fiscal 1999, merchandise inventories increased, as the Company added an additional 24 stores and a new distribution center in Chester, New York. 18 The Company's working capital was $97,838,000 at February 2, 2002, $109,207,000 at February 3, 2001 and $172,332,000 at January 29, 2000. The Company's long-term debt, as a percentage of its total capitalization, was 47% at February 2, 2002, 52% at February 3, 2001 and 54% at January 29, 2000. As of February 2, 2002, the Company had an available line of credit totaling $100,690,000. The Company currently plans to open two new Supercenters in fiscal 2002. Management estimates the costs of opening the two Supercenters, coupled with capital expenditures relating to existing stores, warehouses and offices during fiscal 2002, will be approximately $43,000,000. The Company anticipates that its net cash provided by operating activities and its existing line of credit will exceed its principal cash requirements for capital expenditures and net inventory in fiscal 2002.
The following chart represents the Company's total contractual obligations as of February 2, 2002: (dollar amounts in thousands) Due in less Due in Due in Due after Obligation Total than 1 year 1-3 years 3-5 years 5 years --------------------------------------------------------------------------------------------- Long-term debt $ 669,033 $124,615 $286,583 $257,564 $ 271 Operating leases 539,403 51,887 86,805 71,925 328,786 Unconditional purchase obligation 34,705 7,361 19,887 7,457 - --------------------------------------------------------------------------------------------- Total cash obligations $1,243,141 $183,863 $393,275 $336,946 $329,057 ---------------------------------------------------------------------------------------------
In addition to the amounts shown above, the Company has $37,887,000 of outstanding standby letters of credit used primarily to secure the Company's insurance claims. The letters of credit are renewable on an annual basis. The operating leases shown above are exclusive of any lease obligations for stores for which reserves were created in conjunction with the Profit Enhancement Plan. The Company anticipates that its net cash provided by operating activities, its existing line of credit and its access to capital markets will exceed its cash obligations presented in the table above. In November 2001, the Company repurchased the remaining $1,202,000 face value of its Liquid Yield Option Notes (LYONs) which were redeemed for a price of $677 per LYON. The book value of the repurchased LYONs was $814,000. In the third quarter of 2001, the Company reclassed the $50,000,000 Medium-Term Note and the remaining $43,005,000 of the $49,000,000 Medium-Term Note to current liabilities on the consolidated balance sheet. These Medium-Term Notes are redeemable at the option of the holder on July 16, 2002 and September 19, 2002, respectively. The Company anticipates being able to repurchase these notes with cash from operations and its existing line of credit. In September 2001, the Company repurchased $159,702,000 face value of its LYONs which were redeemed at the option of the holder at a price of $673 per LYON. The book value of the repurchased LYONs was $107,475,000 and the after-tax extraordinary loss was $993,000. In July 2001, the Company repurchased $3,000,000 face value of its LYONs at a price of $656 per LYON. The book value of the repurchased LYONs was $2,006,000. In June 2001, the Company obtained $90,000,000 in a Senior Secured Credit Facility. The facility, which is secured by certain equipment and real estate with a total book value as of February 2, 2002 of $108,663,000, was issued in two tranches. Tranche A is a term loan for $45,000,000 with an interest rate based on London Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is structured as a two-year term loan payable in equal installments with the final payment due in 2003. Tranche B is a term loan for $45,000,000 with an interest rate of LIBOR plus 3.95%. Tranche B is structured as a five-year term loan payable in equal installments with the final payment due in 2006. The Senior Secured Credit Facility is subject to certain financial covenants. The Company used the proceeds from the facility to repurchase the outstanding LYONs that were put back to the Company on the September 20, 2001 put date. 19 In May 2001, the Company sold certain operating assets for $14,000,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease is being accounted for as an operating lease and the gain of $3,817,000 from the sale of the certain operating assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales and costs of service revenue. The Company used the proceeds from the sale to retire debt. In May 2001, the Company repurchased $77,600,000 face value of its LYONs at a price of $649 per LYON. The book value of the repurchased LYONs was $51,517,000 and the after-tax extraordinary gain was $228,000. In September 2000, the Company entered into a new revolving credit agreement. 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 LIBOR plus 1.75%, and increases in 0.25% increments as the excess availability falls below $50,000,000. The revolver is subject to financial covenants. The Company recorded an after-tax extraordinary charge related to the restructuring of its revolving line of credit of $931,000 in the third quarter of fiscal 2000. In September 2000, the Company entered into a new real estate operating lease facility with leased property trusts, established as an unconsolidated special-purpose entity. The $143,000,000 real estate operating lease facility, which has an interest rate of LIBOR plus 1.85%, replaces $143,000,000 of 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 fiscal 2000 earnings of $1,630,000 of unamortized lease costs, which was recorded in the costs of merchandise sales section of the consolidated statement of operations. The $143,000,000 real estate operating lease facility has a four-year term with a guaranteed residual value. At February 2, 2002, the maximum amount of the residual guarantee relative to the real estate under the lease is approximately $92,372,000. The Company expects the fair market value of the leased real estate, subject to the purchase option or sale to a third party, to substantially reduce or eliminate the Company's payment under the residual guarantee at the end of the lease term. 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 LYONs was $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 and retired in September 2000 as stated above. 20 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 2001, fiscal 2000 or fiscal 1999. 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 sales 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 believed would improve its performance and recorded a charge of $71,234,000. The charges included expenses related to the closure of the 38 under-performing stores and two distribution centers, certain equipment write-offs, the abandonment of two development parcels and severance costs. The charges were recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations as $62,665,000, $5,661,000 and $2,908,000, respectively. PLAN UPDATE The Profit Enhancement Plan has been progressing closely to the schedule originally estimated by the Company. Each of the 38 stores and one of the distribution centers identified for closure were closed on or before October 28, 2000. The second distribution center was closed on November 30, 2000. All employees were notified of their separation on or before October 28, 2000. The assets held for disposal were reclassed and depreciation was stopped on October 28, 2000 which was concurrent with the announcement of the Profit Enhancement Plan and the closure of the stores. The Company is progressing towards the disposal of the 38 stores, 11 of which were owned and 27 were leased by the Company, two distribution centers and two development parcels which were closed or abandoned in connection with the Profit Enhancement Plan. As of the end of fiscal 2001, the Company had successfully disposed of ten of the closed stores, the two distribution centers and one of the development parcels. The Company estimates the remaining closed or abandoned properties will be disposed of by the end of fiscal 2002. ASSETS HELD FOR DISPOSAL The assets held for disposal as of the end of fiscal 2001 and 2000 included the building and land of the remaining closed stores owned by the Company, additional development parcels, and equipment from the remaining closed stores. The carrying values of the building, land and equipment were $16,007,000 and $22,629,000 for fiscal years 2001 and 2000, respectively. 21 In fiscal 2001, the Company was able to sell three of the 13 owned properties for net proceeds of $4,103,000. The sales resulted in a loss of $691,000 which was recorded in costs of merchandise sales and selling, general and administrative expenses on the consolidated statement of operations. Additionally, the Company recorded a downward revision in the estimated values for certain properties of $1,496,000 in fiscal 2001. This expense was recorded in costs of merchandise sales on the consolidated statement of operations. In fiscal 2001, the Company recorded a loss for equipment held for disposal of $162,000, which was due primarily to a reduction in the Company's estimated proceeds. The Company is actively marketing the remaining ten owned properties and has made adjustments to property values in accordance with the change in market values. As a result, the Company has extended the original estimated time needed for selling the owned properties. It is expected that seven of these properties with a carrying value of $10,663,000 will be disposed of by the second quarter 2002, with the remaining three properties with a carrying value of $4,746,000 expected to be disposed of by the end of the third quarter 2002. The Company will continue to monitor the status for disposing of its owned properties and make any necessary adjustments. An adjustment was reflected in on-going expenses for the increased time required to maintain these properties. LEASE RESERVE As of the end of fiscal 2001, the Company was able to sublease three and exit the lease of an additional five leased properties. The Company expects the remaining 19 leased properties to be subleased or otherwise disposed of by the end of fiscal 2002. The Company increased the reserve for leases $1,644,000 during fiscal 2001. These changes in the reserve were a result of a $3,834,000 increase due primarily to an increase in the estimated amount of time it will take the Company to sublease certain properties and a decrease in estimated sublease rates. The reserve increase was offset, in part, by a $2,190,000 decrease due primarily to lower than estimated commissions and lease exit costs on subleases for certain properties. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue. In fiscal 2000, the Company increased the lease reserve by $113,000. These changes in the reserve were a result of a $1,176,000 increase due to an increase in the estimated lease payments related to the closed stores. The increase was offset, in part, by a $1,063,000 decrease due primarily to an increase in the estimated sublease rates coupled with lower lease related expenses. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit activities that will be continued. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed of. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed of and such activities are estimated to be completed by the end of fiscal 2002. In fiscal 2001, the Company increased the on-going expense reserve $595,000. This change was a result of a $1,214,000 increase in the reserve due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties offset, in part, by a $619,000 decrease due to lower than anticipated cost for utilities and security costs. In fiscal 2000, the Company increased the on-going expense reserve $361,000. This change was due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. 22 SEVERANCE RESERVE The total number of employees separated due to the Profit Enhancement Plan was approximately 1,000. The 1,000 employees were composed of 76% store employees, 13% distribution employees, and 11% Store Support Center and field administrative employees. The total severance paid in connection with the Profit Enhancement Plan was $1,353,000. In fiscal 2001, the Company reversed $69,000 of severance due primarily to certain employees originally expected to be receiving severance failing to qualify to receive payments and lower than estimated final payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. In fiscal 2000, the Company reversed $272,000 of severance due to employees being accepted into positions in other locations of the Company and employees failing to qualify to receive payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. The expenses of this nature incurred were $678,000 and $3,611,000 for fiscal 2001 and fiscal 2000, respectively. The fiscal 2001 expenses incurred related to the completion of the removal of inventory and equipment from the closed distribution centers. The fiscal 2000 expenses incurred were for inventory and equipment handling related to the closure of the 38 stores and two distribution centers. The fiscal 2000 expenses were offset by a recovery of certain benefit expenses related to the reduction in workforce. 23 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Following are tables summarizing expenses related to the Profit Enhancement Plan for fiscal 2001 and fiscal 2000. The details and reasons for the original charge and changes to the charge are as described above in the respective reserve categories.
FISCAL 2001 (dollar amounts in thousands) Non-Reservable Income Statement Reserve Expense Total Classification Adjustments Incurred Expense ----------------------------------------------------------------- Costs of merchandise sales $3,528 $ 641 $4,169 Costs of service revenue 804 9 813 Selling, general and administrative 187 28 215 ----------------------------------------------------------------- Total expenses $4,519 $ 678 $5,197 -----------------------------------------------------------------
FISCAL 2000 (dollar amounts in thousands) Non-Reservable Income Statement Original Reserve Expense Total Classification Charge Adjustments Incurred Expense ----------------------------------------------------------------------------- Costs of merchandise sales $62,665 $ 939 $3,481 $67,085 Costs of service revenue 5,661 (177) (252) 5,232 Selling, general and administrative 2,908 (662) 382 2,628 ----------------------------------------------------------------------------- Total expenses $71,234 $ 100 $3,611 $74,945 -----------------------------------------------------------------------------
24 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 tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve from the origination of the charge through the fiscal year ended February 2, 2002. All additions and adjustments were charged or credited through the appropriate line items on the statement of operations.
(dollar amounts Lease Fixed On-going in thousands) Expenses Assets Severance Expenses Total ----------------------------------------------------------------------------------------- Original charges $ 7,916 $57,680 $ 1,694 $ 3,944 $71,234 Addition 1,176 1,074 - 361 2,611 Utilization (975) (58,754) (1,213) (1,345) (62,287) Adjustment (1,063) - (272) - (1,335) ----------------------------------------------------------------------------------------- Reserve balance at Feb. 3, 2001 7,054 - 209 2,960 10,223 ----------------------------------------------------------------------------------------- Addition 3,834 2,440 - 1,214 7,488 Utilization (5,548) (2,349) (140) (2,235) (10,272) Adjustment (2,190) (91) (69) (619) (2,969) ----------------------------------------------------------------------------------------- Reserve balance at Feb. 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470 -----------------------------------------------------------------------------------------
25 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. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Fiscal 2001 vs. Fiscal 2000 vs. Year ended (Fiscal 2001) (Fiscal 2000) (Fiscal 1999) Fiscal 2000 Fiscal 1999 ----------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales 80.8% 80.9% 81.6% (9.8)% 0.2% Service Revenue(1) 19.2 19.1 18.4 (9.2) 4.6 ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 100.0 (9.7) 1.0 ----------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales(2) 70.8 (3) 76.9 (3) 72.4 (3) (16.9) 6.4 Costs of Service Revenue(2) 75.5 (3) 82.7 (3) 80.9 (3) (17.1) 6.9 ----------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 71.7 78.0 74.0 (17.0) 6.5 ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 29.2 (3) 23.1 (3) 27.6 (3) 13.9 (16.1) Gross Profit from Service Revenue 24.5 (3) 17.3 (3) 19.1 (3) 28.4 (5.1) ----------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 28.3 22.0 26.0 16.1 (14.6) ----------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 23.6 23.2 22.1 (8.2) 5.9 ----------------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 4.7 (1.2) 3.9 469.0 (129.8) Non-operating Income 0.2 0.1 0.1 91.0 (3.5) Interest Expense 2.3 2.4 2.1 (11.3) 12.3 ----------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 2.6 (3.5) 1.9 167.4 (286.1) ----------------------------------------------------------------------------------------------------------------------------------- Income Taxes 36.0 (4) 36.5 (4) 34.8 (4) 166.5 (294.8) ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) Before Extraordinary Items 1.7 (2.2) 1.2 167.9 (281.4) ----------------------------------------------------------------------------------------------------------------------------------- Extraordinary Items - 0.1 - (137.2) N/A ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) 1.7 (2.1) 1.2 169.2 (274.4) -----------------------------------------------------------------------------------------------------------------------------------
(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 (loss) before income taxes. 26 FISCAL 2001 VS. FISCAL 2000 Total revenues for fiscal 2001, which included 52 weeks, decreased 10% compared to fiscal 2000, which included 53 weeks, due primarily to less stores in operation during 2001 vs. 2000 coupled with a decrease in comparable store revenues (revenues generated by stores in operation during the same months of each period) of 6%. Total revenues for fiscal 2001 compared to fiscal 2000, excluding the extra week, decreased by 8% on an overall basis and remained at a decrease of 6% on a comparable store basis. Comparable store merchandise sales decreased 6% while comparable store service revenue decreased 5% compared to 2000 on a 52 week basis. This decline in total and comparable revenue reflected the impact of the closure of the 38 stores and other steps taken in October 2000 in conjunction with implementing the Company's Profit Enhancement Plan. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 29.2% in 2001 from 23.1% in 2000. This increase, as a percentage of merchandise sales, was due primarily to Profit Enhancement Plan charges recorded in 2001 of $4,169,000 compared to charges recorded in 2000 of $67,085,000 and $5,735,000 associated with the Profit Enhancement Plan and asset impairments, respectively. Higher merchandise margins and a decrease in warehousing costs, as a percentage of merchandise sales, offset, in part, by an increase in store occupancy costs, as a percentage of merchandise sales, also contributed to the increase in gross profit from merchandise sales. The improved merchandise margins, as a percentage of merchandise sales, were a result of a combination of improvement in the mix of sales, selectively higher retail pricing and lower product acquisition costs. The decrease in warehousing costs, as a percentage of merchandise sales, were a result of the effects of a supply chain initiative implemented in late fiscal 2000 to improve efficiencies. The increase in store occupancy costs, as a percentage of merchandise sales, was a result of higher utilities costs, particularly in California. Gross profit from service revenue increased, as a percentage of service revenue, to 24.5% in 2001 from 17.3% in 2000. This increase, as a percentage of service revenue, was due primarily to a decrease in service personnel costs, as a percentage of service revenue, coupled with Profit Enhancement Plan charges recorded in 2001 of $813,000 compared to $5,232,000 recorded in 2000. The decrease in service center personnel costs, as a percentage of service revenue, was a result of the steps taken in the Profit Enhancement Plan. Selling, general and administrative expenses increased, as a percentage of total revenues, to 23.6% in 2001 from 23.2% in 2000. This increase, as a percentage of total revenues, was due primarily to an increase in media expenses from 2000 to 2001 of $6,828,000 or 0.3% of total revenues, offset, in part, by a decrease in general office expense, as a percentage of total revenues, and Profit Enhancement Plan charges recorded in 2001 of $215,000 compared to $2,628,000 recorded in 2000. The increase in media expense, as a percentage of total revenues, was a result of lower vendor reimbursements. The decrease in general office expense, as a percentage of total revenues, was a result of lower legal expense, as a percentage of total revenues. Interest expense was $6,547,000 or 11.3% lower than last year due primarily to lower debt levels coupled with lower average interest rates. 27 Net earnings increased, as a percentage of total revenues, due primarily to a net Profit Enhancement Plan charge recorded in 2001 of $3,326,000 compared to net charges recorded in 2000 of $47,609,000 and $3,643,000 associated with Profit Enhancement Plan and asset impairments, respectively. Also contributing to the net earnings increase, as a percentage of total revenues, were increases in both gross profit from merchandise sales and service revenue, as a percentage of merchandise sales and service revenue, respectively, and a decrease in interest expense, as a percentage of total revenues. These gross profit increases were offset, in part, by an increase in selling, general and administrative expenses, as a percentage of total revenues, coupled with a net extraordinary loss of $765,000 in 2001 compared to a $2,054,000 net extraordinary gain in 2000. 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 1%. Total revenues for fiscal 2000, excluding the extra week, decreased 1% on an overall basis and remained a decrease of 1% 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. Gross profit from merchandise sales decreased, as a percentage of merchandise sales, to 23.1% in 2000 from 27.6% in 1999. This decrease, as a percentage of merchandise sales, was due primarily to the pretax charge from the Profit Enhancement Plan of $67,085,000 coupled with a $5,735,000 impairment charge, increases in warehousing and store occupancy costs offset, in part, by higher merchandise margins, as a percentage of merchandise sales. Gross profit from service revenue decreased, as a percentage of service revenue, to 17.3% in 2000 from 19.1% in 1999. The decrease 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. Selling, general and administrative expenses increased, as a percentage of total revenues, to 23.2% in 2000 from 22.1% in 1999. This increase was due primarily to increases in store and general office expenses, as a percentage of total revenues, coupled with the pretax charges from the Profit Enhancement Plan of $2,628,000. Interest expense was $6,325,000 or 12.3% higher than last year, 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. NEW ACCOUNTING STANDARDS In 2001, the Emerging Issues Task Force (EITF) issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." This pronouncement deals with accounting for certain types of sales incentives and other consideration offered by companies to their customers. This pronouncement is effective in fiscal years beginning after December 15, 2001. The Company has analyzed the impact of adoption of this statement and it will have no material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. 28 In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the reporting provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has analyzed the impact of adoption of this statement and it will have no material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business combinations should be accounted for using the purchase method of accounting; use of the pooling-of-interests method is prohibited. The provisions of the statement apply to all business combinations initiated after June 30, 2001. SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. Adoption of SFAS 142 will result in ceasing amortization of goodwill. All of the provisions of the statement are effective in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company has analyzed the impact of adoption of this statement and it will have no material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. In September 2000, the EITF issued EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. (FIN) 44." This pronouncement addressed practice issues and questions related to accounting for stock compensation primarily under APB No. 25 and FIN 44. The Company has incorporated the guidance provided by the interpretation with no material effect on its consolidated financial statements. In June 2000, the FASB issued FIN 44, "Accounting for Certain Transactions involving Stock Compensation." This interpretation provides additional guidance for application of APB No. 25, "Accounting for Stock Issued to Employees." The Company has incorporated the guidance provided by the interpretation with no material effect on its consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. 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. The Company has adopted this statement in the first quarter of fiscal 2001 with no material effect on its consolidated financial statements. 29 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 and senior secured credit facility, changes in the lenders' prime rate or LIBOR could affect the rates at which the Company could borrow funds thereunder. At February 2, 2002, the Company had outstanding borrowings of $142,467,000 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 2, 2002:
(dollar amounts Average in thousands) Amount Interest Rate ---------------------------------------------------------------- Fair value at February 2, 2002 $491,120 Expected maturities: 2002 93,103 6.5% 2003 81,000 6.6 2004 108,000 6.7 2005 100,000 7.0 2006 143,000 6.9 -----------------------------------------------------------------
At February 3, 2001, the Company held fixed rate debt instruments with an aggregate fair value of $472,770. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 30 The Company believes that the following represent its more critical estimates and assumptions used in the preparation of the consolidated financial statements, although not inclusive: *The Company evaluates whether inventory is stated at the lower of cost or market based on historical experience with the carrying value and life of inventory. The assumptions used in this evaluation are based on current market conditions and the Company believes inventory is stated at the lower of cost or market in the consolidated financial statements. In addition, historically the Company has been able to return excess items to vendors for credit. Future changes by vendors in their policies or willingness to accept returns of excess inventory could require a revision in the estimates. *The Company has risk participation arrangements with respect to casualty and health care insurance. The amounts included in the Company's costs related to these arrangements are estimated and can vary based on changes in assumptions, claims experience or the providers included in the associated insurance programs. *The Company records reserves for future product returns and warranty claims. The reserves are based on current sales of products and historical claim experience. If claims experience differs from historical levels, revisions in the Company's estimates may be required. 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 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The material in Item 7 of this filing titled "Quantitative and Qualitative Disclosures about Market Risk" are hereby incorporated herein by reference. 31 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 2, 2002 and February 3, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 2, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial 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 as of February 2, 2002 and February 3, 2001, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2002, 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, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 21, 2002 32
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 2, February 3, 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 15,981 $ 7,995 Accounts receivable, less allowance for uncollectible accounts of $725 and $639 18,052 16,792 Merchandise inventories 519,473 547,735 Prepaid expenses 42,170 28,705 Deferred income taxes 15,820 25,409 Other 52,308 50,401 Assets held for disposal 16,007 22,629 ---------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 679,811 699,666 ---------------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 277,726 278,017 Buildings and improvements 922,065 918,031 Furniture, fixtures and equipment 583,918 618,959 Construction in progress 10,741 15,032 ---------------------------------------------------------------------------------------------------------------------------------- 1,794,450 1,830,039 Less accumulated depreciation and amortization 676,964 635,804 ---------------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment 1,117,486 1,194,235 ---------------------------------------------------------------------------------------------------------------------------------- Other 15,355 12,303 ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,812,652 $ 1,906,204 ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 216,085 $ 204,755 Accrued expenses 241,273 226,952 Current maturities of convertible debt - 158,555 Current maturities of long-term debt 124,615 197 ---------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 581,973 590,459 ---------------------------------------------------------------------------------------------------------------------------------- Long-term debt, less current maturities 544,418 654,194 Deferred income taxes 64,027 66,192 Deferred gain on sale leaseback 4,444 593 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 177,244 177,244 Retained earnings 601,944 581,668 ---------------------------------------------------------------------------------------------------------------------------------- 843,099 822,823 Less cost of shares in treasury - 10,284,446 and 10,454,644 shares 166,045 168,793 Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264 ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 617,790 594,766 ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,812,652 $ 1,906,204 ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 33
CONSOLIDATED STATEMENTS OF OPERATIONS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 2, February 3, January 29, Year ended 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $1,765,314 $1,957,480 $1,954,010 Service Revenue 418,401 460,988 440,523 ---------------------------------------------------------------------------------------------------------------------------------- Total Revenues 2,183,715 2,418,468 2,394,533 ---------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 1,250,408 1,505,442 1,415,053 Costs of Service Revenue 315,911 381,175 356,445 ---------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 1,566,319 1,886,617 1,771,498 ---------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 514,906 452,038 538,957 Gross Profit from Service Revenue 102,490 79,813 84,078 ---------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 617,396 531,851 623,035 ---------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 513,946 559,883 528,838 ---------------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 103,450 (28,032) 94,197 Non-operating Income 4,289 2,245 2,327 Interest Expense 51,335 57,882 51,557 ---------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 56,404 (83,669) 44,967 Income Tax Expense (Benefit) 20,304 (30,521) 15,664 ---------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) Before Extraordinary Items 36,100 (53,148) 29,303 Extraordinary Items, Net of Tax of $(430) and $1,180 (765) 2,054 - Net Earnings (Loss) $ 35,335 $ (51,094) $ 29,303 ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share: Before Extraordinary Items $ .70 $ (1.04) $ .58 Extraordinary Items, Net of Tax (.01) .04 - --------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share $ .69 $ (1.00) $ .58 --------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) per Share: Before Extraordinary Items $ .69 $ (1.04) $ .58 Extraordinary Items, Net of Tax (.01) .04 - --------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) per Share $ .68 $ (1.00) $ .58 ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 34
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 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 Comprehensive income - Net earnings 35,335 35,335 Cash dividends ($.27 per share) (13,864) (13,864) Exercise of stock options and related tax benefits (94) 17,000 275 181 Dividend reinvestment plan (1,101) 153,198 2,473 1,372 ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 2, 2002 63,910,577 $63,911 $177,244 $601,944 (10,284,446) $(166,045) $ - $(59,264) $617,790 -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 35
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 2, February 3, January 29, Year ended 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Earnings (Loss) $ 35,335 $ (51,094) $ 29,303 Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by Operating Activities: Extraordinary item, net of tax 765 (2,054) - Depreciation and amortization 84,693 99,308 97,012 Deferred income taxes 7,424 (24,575) 2,223 Accretion of bond discount 3,256 6,425 6,493 Loss on assets held for disposal 2,349 53,740 - Loss on asset impairment - 5,735 - (Gain) loss from sale of assets (1,116) 3,651 (538) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable, prepaid expenses and other (18,726) 9,802 (12,096) Decrease (increase) in merchandise inventories 28,262 35,163 (55,501) Increase (decrease) in accounts payable 11,330 (115,311) 79,675 Increase (decrease) in accrued expenses 14,321 (1,199) 32,810 ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 167,893 19,591 179,381 ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (25,464) (57,336) (104,446) Proceeds from sales of assets 26,760 14,380 2,479 ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities 1,296 (42,956) (101,967) ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net (payments) borrowings under line of credit agreements (56,876) 117,535 10,000 Reduction of long-term debt (18,482) (75,028) (170) Reduction of convertible debt (161,056) (17,208) (72,294) Net proceeds from issuance of notes 87,522 - 76,000 Dividends paid (13,864) (13,793) (13,693) Purchase of treasury shares - - (181,470) Proceeds from exercise of stock options 181 - 6,998 Proceeds from dividend reinvestment plan 1,372 1,369 1,152 ----------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (161,203) 12,875 (173,477) ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 7,986 (10,490) (96,063) Cash and Cash Equivalents at Beginning of Year 7,995 18,485 114,548 ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 15,981 $ 7,995 $ 18,485 ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Income taxes paid $ 6,570 $ - $ - Interest paid, net of amounts capitalized 47,081 53,415 43,449 -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 36 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (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 2, 2002. 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 years 2001 and 1999 were comprised of 52 weeks, while fiscal year 2000 was comprised of 53 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 accounting principles generally accepted in the United States 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 consolidated 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) or market. If the first-in, first-out method of valuing inventories had been used by the Company, the inventory valuation difference would have been immaterial on both February 2, 2002 and February 3, 2001. CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments with a maturity of three months or less when purchased. 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 $1, $489 and $1,098 in fiscal years 2001, 2000 and 1999, respectively. REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise at the time the 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. 37 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. Net advertising expense for fiscal years 2001, 2000 and 1999 was $6,828, $0 and $346, respectively. No advertising costs were recorded as assets as of February 2, 2002 or February 3, 2001. STORE OPENING COSTS The costs of opening new stores are expensed as incurred. 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 costs of merchandise sales 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," incorporating the guidance of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 44 "Accounting for Certain Transactions involving Stock Compensation" and Emerging Issues Task Force (EITF) 00-23 "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FIN 44" and has provided disclosures required by SFAS No. 123. 38 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 FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. 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. The Company has adopted this statement in the first quarter of fiscal 2001 with no material effect on its consolidated financial statements. 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. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 ---------------------------------------------------------------------------------------- Parts and Accessories $1,403,775 $1,547,020 $1,571,445 Tires 361,539 410,460 382,565 ---------------------------------------------------------------------------------------- Total Merchandise Sales 1,765,314 1,957,480 1,954,010 Service 418,401 460,988 440,523 ---------------------------------------------------------------------------------------- Total Revenues $2,183,715 $2,418,468 $2,394,533 ========================================================================================
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 2001, the EITF issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." This pronouncement deals with accounting for certain types of sales incentives and other consideration offered by companies to their customers. This guidance is effective in fiscal years beginning after December 15, 2001. The Company has analyzed the impact of the adoption of this statement and it will not have a material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company has analyzed the impact of the adoption of this statement and it will not have a material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. 39 In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business combinations should be accounted for using the purchase method of accounting; use of the pooling-of-interests method is prohibited. The provisions of the statement apply to all business combinations initiated after June 30, 2001. SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. Adoption of SFAS 142 will result in ceasing amortization of goodwill. All of the provisions of the statement are effective in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company has analyzed the impact of the adoption of this statement and it will not have a material effect on the Company's consolidated financial statements upon its adoption on February 3, 2002. In September 2000, the EITF issued EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FIN 44." This pronouncement addressed practice issues and questions related to accounting for stock compensation primarily under APB No. 25 and FIN 44. The Company has incorporated the guidance provided by the interpretation with no material effect on its consolidated financial statements. In June 2000, the FASB issued FIN 44, "Accounting for Certain Transactions involving Stock Compensation." This interpretation provides additional guidance for APB No. 25, "Accounting for Stock Issued to Employees." The Company has incorporated the guidance provided by the interpretation with no material effect on its consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to provide comparability with the current year's presentation. NOTE 2 - DEBT SHORT-TERM BORROWINGS In fiscal 2001, the Company had no short-term borrowing lines. 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 borrowings during fiscal 2000 and the average and maximum month end balances were $4,232 and $13,000, respectively. 40
LONG-TERM DEBT ------------------------------------------------------------------------------------------------------------ February 2, 2002 February 3, 2001 ------------------------------------------------------------------------------------------------------------ Medium-term notes, 6.4% to 6.7%, due November 2004 through September 2007 $144,005 $144,005 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 6.625% notes due May 2003 75,000 75,000 Senior Secured Credit Facility, due July 2003 and July 2006 71,625 - Revolving credit agreement 70,842 127,718 Other notes payable, 3.8% to 8% 7,561 7,668 ------------------------------------------------------------------------------------------------------------ 669,033 654,391 Less current maturities 124,615 197 ------------------------------------------------------------------------------------------------------------ Total long-term debt $544,418 $654,194 ------------------------------------------------------------------------------------------------------------
In June 2001, the Company obtained $90,000 in a Senior Secured Credit Facility. The Facility, which is secured by certain equipment and real estate with a total book value as of February 2, 2002 of $108,633, was issued in two tranches. Tranche A is a term loan for $45,000 with an interest rate based on London Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is structured as a two-year term loan payable in equal installments with the final payment due in 2003. The weighted average interest rate on Tranche A was 6.7% at February 2, 2002. Tranche B is a term loan for $45,000 with an interest rate of LIBOR plus 3.95%. Tranche B is structured as a five-year term loan payable in equal installments with the final payment due in 2006. The weighted average interest rate on Tranche B was 6.9% at February 2, 2002. The Senior Secured Credit Facility is subject to certain financial covenants. 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 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 LIBOR plus 1.75%, and increases in 0.25% increments as the excess availability falls below $50,000. The revolver is subject to certain financial covenants. 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 6.2% and 8.5% at February 2, 2002 and February 3, 2001, respectively. 41 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. In the third quarter of 2001, the Company reclassed the $50,000 Medium-Term Note and the remaining $43,005 of the $49,000 Medium-Term Note to current liabilities on the consolidated balance sheet. These Medium-Term Notes are redeemable at the option of the holder on July 16, 2002 and September 19, 2002, respectively. The other notes payable have a weighted average interest rate of 4.9% at February 2, 2002 and 5.4% at February 3, 2001, 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 $7,260 and $7,398 at February 2, 2002 and February 3, 2001, respectively.
CONVERTIBLE DEBT ------------------------------------------------------------------------------------------------------------ February 2, 2002 February 3, 2001 ------------------------------------------------------------------------------------------------------------ Zero Coupon Convertible Subordinated Notes $ - $158,555 ------------------------------------------------------------------------------------------------------------ - 158,555 Less current maturities - 158,555 ------------------------------------------------------------------------------------------------------------ Total long-term convertible debt $ - $ - ------------------------------------------------------------------------------------------------------------
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 required no periodic payments of interest. The LYONs had a maturity date of 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). 42 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 was $19,226 and the after-tax extraordinary gain was $2,025. In May 2001, the Company repurchased $77,600 face value of its LYONs at a price of $649 per LYON. The book value of the repurchased LYONs was $51,517 and the after-tax extraordinary gain was $228. In July 2001, the Company repurchased $3,000 face value of its LYONs at a price of $656 per LYON. The book value of the repurchased LYONs was $2,006. In September 2001, the Company repurchased $159,702 face value of its LYONs which were redeemed at the option of the holder at a price of $673 per LYON. The book value of the repurchased LYONs was $107,475 and the after-tax extraordinary loss was $993. In November 2001, the Company repurchased the remaining $1,202 face value of its LYONs which were redeemed for a price of $677 per LYON. The book value of the repurchased LYONs was $814. Several of the Company's debt agreements require the maintenance of certain financial ratios and compliance with covenants. Approximately $36,133 of the Company's net worth was not restricted by these covenants as of February 2, 2002. The Company was in compliance with all such ratios and covenants at February 2, 2002. The annual maturities, of all long-term debt for the next five years are $124,615 in 2002, $98,714 in 2003, $187,869 in 2004, $109,016 in 2005 and $148,548 in 2006. 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 $37,887 at February 2, 2002. NOTE 3 - LEASE AND OTHER COMMITMENTS In May 2001, the Company sold certain operating assets for $14,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease is being accounted for as an operating lease and the gain of $3,817 from the sale of the certain operating assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales and costs of service revenue. 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 costs of merchandise sales. 43 In September 2000, the Company entered into a $143,000 real estate operating lease facility with leased property trusts, established as an unconsolidated special-purpose entity. The real estate operating lease facility, which has an interest rate of LIBOR plus 1.85%, replaces $143,000 of 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 fiscal 2000 earnings of $1,630 of unamortized lease costs, which was recorded in the costs of merchandise sales section of the consolidated statement of operations. The $143,000 real estate operating lease facility has a four-year term with a guaranteed residual value. At February 2, 2002, the maximum amount of the residual guarantee relative to the real estate under the lease is approximately $92,372. The Company expects the fair market value of the leased real estate, subject to the purchase option or sale to a third party, to substantially reduce or eliminate the Company's payment under the residual guarantee at the end of the lease term. The Company leases certain property and equipment under operating leases which contain renewal and escalation clauses. Future minimum rental commitments for noncancelable operating leases in effect as of February 2, 2002 are shown below. All amounts are exclusive of lease obligations and sublease rentals applicable to stores for which reserves in conjunction with the Profit Enhancement Plan have previously been established. The aggregate minimum rental commitments for such leases having terms of more than one year are approximately: 2002-$51,887; 2003-$44,925; 2004-$41,880; 2005-$35,888; 2006-$36,037; thereafter-$328,786. Rental expenses incurred for operating leases in 2001, 2000 and 1999 were $64,434, $63,206 and $59,890. In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773 over the next four years. As of February 2, 2002, the remaining balance for this commitment was $34,705. 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. As of February 2, 2002, the Company has reflected 10,284,446 shares of its common stock at a cost of $166,045 as "cost of 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. 44 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 2, 2002, the Company has reflected 2,195,270 shares of its common stock at a cost of $59,264 as "cost of shares in benefits trust" on the Company's consolidated balance sheet. NOTE 5 - 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 believed would improve its performance and recorded a charge of $71,234. The charges included expenses related to the closure of the 38 under-performing stores and two distribution centers, certain equipment write-offs, the abandonment of two development parcels and severance costs. The charges were recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations as $62,665, $5,661 and $2,908, respectively. PLAN UPDATE The Profit Enhancement Plan has been progressing closely to the schedule originally estimated by the Company. Each of the 38 stores and one of the distribution centers identified for closure were closed on or before October 28, 2000. The second distribution center was closed on November 30, 2000. All employees were notified of their separation on or before October 28, 2000. The assets held for disposal were reclassed and depreciation was stopped on October 28, 2000 which was concurrent with the announcement of the Profit Enhancement Plan and the closure of the stores. The Company is progressing towards the disposal of the 38 stores, 11 of which were owned and 27 were leased by the Company, two distribution centers and two development parcels which were closed or abandoned in connection with the Profit Enhancement Plan. As of the end of fiscal 2001, the Company had successfully disposed of ten of the closed stores, the two distribution centers and one of the development parcels. The Company estimates the remaining closed or abandoned properties will be disposed of by the end of fiscal 2002. ASSETS HELD FOR DISPOSAL The assets held for disposal as of the end of fiscal 2001 and 2000 included the building and land of the remaining closed stores owned by the Company, additional development parcels, and equipment from the remaining closed stores. The carrying values of the building, land and equipment were $16,007 and $22,629 for fiscal years 2001 and 2000, respectively. In fiscal 2001, the Company was able to sell three of the 13 owned properties for net proceeds of $4,103. The sales resulted in a loss of $691 which was recorded in costs of merchandise sales and selling, general and administrative expenses on the consolidated statement of operations. Additionally, the Company recorded a downward revision in the estimated values for certain properties of $1,496 in fiscal 2001. This expense was recorded in costs of merchandise sales on the consolidated statement of operations. In fiscal 2001, the Company recorded a loss for equipment held for disposal of $162, which was due primarily to a reduction in the Company's estimated proceeds. 45 The Company is actively marketing the remaining ten owned properties and has made adjustments to property values in accordance with the change in market values. As a result, the Company has extended the original estimated time needed for selling the owned properties. It is expected that seven of these properties with a carrying value of $10,663 will be disposed of by the second quarter 2002, with the remaining three properties with a carrying value of $4,746 expected to be disposed of by the end of the third quarter 2002. The Company will continue to monitor the status for disposing of its owned properties and make any necessary adjustments. An adjustment was reflected in on-going expenses for the increased time required to maintain these properties. LEASE RESERVE As of the end of fiscal 2001, the Company was able to sublease three and exit the lease of an additional five leased properties. The Company expects the remaining 19 leased properties to be subleased or otherwise disposed of by the end of fiscal 2002. The Company increased the reserve for leases $1,644 during fiscal 2001. These changes in the reserve were a result of a $3,834 increase due primarily to an increase in the estimated amount of time it will take the Company to sublease certain properties and a decrease in estimated sublease rates. The reserve increase was offset, in part, by a $2,190 decrease due primarily to lower than estimated commissions and lease exit costs on subleases for certain properties. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue. In fiscal 2000, the Company increased the lease reserve by $113. These changes in the reserve were a result of a $1,176 increase due to an increase in the estimated lease payments related to the closed stores. The increase was offset, in part, by a $1,063 decrease due primarily to an increase in the estimated sublease rates coupled with lower lease related expenses. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit activities that will be continued. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed of. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed of and such activities are estimated to be completed by the end of fiscal 2002. In fiscal 2001, the Company increased the on-going expense reserve $595. This change was a result of a $1,214 increase in the reserve due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties offset, in part, by a $619 decrease due to lower than anticipated cost for utilities and security costs. In fiscal 2000, the Company increased the on-going expense reserve $361. This change was due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. SEVERANCE RESERVE The total number of employees separated due to the Profit Enhancement Plan was approximately 1,000. The 1,000 employees were composed of 76% store employees, 13% distribution employees, and 11% Store Support Center and field administrative employees. The total severance paid in connection with the Profit Enhancement Plan was $1,353. In fiscal 2001, the Company reversed $69 of severance due primarily to certain employees originally expected to be receiving severance failing to qualify to receive payments and lower than estimated final payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. 46 In fiscal 2000, the Company reversed $272 of severance due to employees being accepted into positions in other locations of the Company and employees failing to qualify to receive payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. The expenses of this nature incurred were $678 and $3,611 for fiscal 2001 and fiscal 2000, respectively. The fiscal 2001 expenses incurred related to the completion of the removal of inventory and equipment from the closed distribution centers. The fiscal 2000 expenses were incurred for inventory and equipment handling related to the closure of the 38 stores and two distribution centers. The fiscal 2000 expenses were offset by a recovery of certain benefit expenses related to the reduction in workforce. 47 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Below are tables summarizing expenses related to the Profit Enhancement Plan for fiscal 2001 and fiscal 2000. The details and reasons for the original charge and changes to the charge are as described above in the respective reserve categories.
FISCAL 2001 Non-Reservable Income Statement Reserve Expense Total Classification Adjustments Incurred Expense ----------------------------------------------------------------- Costs of merchandise sales $3,528 $ 641 $4,169 Costs of service revenue 804 9 813 Selling, general and administrative 187 28 215 ----------------------------------------------------------------- Total expenses $4,519 $ 678 $5,197 -----------------------------------------------------------------
FISCAL 2000 Non-Reservable Income Statement Original Reserve Expense Total Classification Charge Adjustments Incurred Expense ----------------------------------------------------------------------------- Costs of merchandise sales $62,665 $ 939 $3,481 $67,085 Costs of service revenue 5,661 (177) (252) 5,232 Selling, general and administrative 2,908 (662) 382 2,628 ----------------------------------------------------------------------------- Total expenses $71,234 $ 100 $3,611 $74,945 -----------------------------------------------------------------------------
48 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 tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve from the origination of the charge through the fiscal year ended February 2, 2002. All additions and adjustments were charged or credited through the appropriate line items on the statement of operations.
Lease Fixed On-going Expenses Assets Severance Expenses Total ----------------------------------------------------------------------------------------- Original charges $ 7,916 $57,680 $ 1,694 $ 3,944 $71,234 Addition 1,176 1,074 - 361 2,611 Utilization (975) (58,754) (1,213) (1,345) (62,287) Adjustment (1,063) - (272) - (1,335) ----------------------------------------------------------------------------------------- Reserve balance at Feb. 3, 2001 7,054 - 209 2,960 10,223 ----------------------------------------------------------------------------------------- Addition 3,834 2,440 - 1,214 7,488 Utilization (5,548) (2,349) (140) (2,235) (10,272) Adjustment (2,190) (91) (69) (619) (2,969) ----------------------------------------------------------------------------------------- Reserve balance at Feb. 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470 -----------------------------------------------------------------------------------------
NOTE 6 - 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. 49 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. 2, Feb. 3, Jan. 29, Year ended 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------------- Interest cost $ 1,895 $ 1,848 $ 1,826 Expected return on plan assets (2,162) (2,261) (1,915) Amortization of transition asset (214) (214) (214) Recognized actuarial loss 992 890 597 ----------------------------------------------------------------------------------------------------------------------------- Total pension expense $ 511 $ 263 $ 294 -----------------------------------------------------------------------------------------------------------------------------
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. 50 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. 2, Feb. 3, Year ended 2002 2001 -------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of year $25,726 $26,955 Interest cost 1,895 1,848 Actuarial loss (gain) 944 (2,041) Benefits paid (1,056) (1,036) --------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $27,509 $25,726 --------------------------------------------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of year $25,854 $26,974 Actual return on plan assets (net of expenses) 1,816 (84) Employer contributions 895 - Benefits paid (1,056) (1,036) --------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $27,509 $25,854 --------------------------------------------------------------------------------------------------------------- Reconciliation of the Funded Status: Funded status $ - $ 128 Unrecognized transition asset - (214) Unrecognized actuarial loss 3,960 3,663 --------------------------------------------------------------------------------------------------------------- Net amount recognized at year-end as prepaid benefit cost $ 3,960 $ 3,577 --------------------------------------------------------------------------------------------------------------- Weighted-Average Assumptions: Discount rate 7.25% 7.40% 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 years 2001 and 2000. The Company recorded other comprehensive income, net of tax, attributable to the change in the minimum pension liability of $4,210 in fiscal year 1999. The Company has 401(k) savings plans which cover 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 $4,516, $4,947 and $5,644 in fiscal years 2001, 2000 and 1999, respectively. 51 NOTE 7 - NET EARNINGS PER SHARE For fiscal years 2001, 2000 and 1999, 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 2001, 2000 and 1999, and therefore excluded from the computation of diluted EPS; all of these securities were retired as of the end of fiscal 2001 and will not effect future calculations. Options to purchase 3,940,587, 5,032,772 and 4,755,657 shares of common stock were outstanding at February 2, 2002, February 3, 2001 and January 29, 2000, 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 before extraordinary items: (In thousands, except per share amounts)
Fiscal 2001 Fiscal 2000 Fiscal 1999 ---------------------------------- ---------------------------------- --------------------------------- Earnings Shares Per share Earnings Shares Per share Earnings Shares Per share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator)(Denominator) Amount ----------- ------------ ------ ----------- ------------- ------ ---------- ------------ ------ Basic EPS Before Extraordinary Items Earnings available to common shareholders $36,100 51,348 $ .70 $(53,148) 51,088 $(1.04) $ 29,303 50,665 $.58 ====== ====== ==== Effect of Dilutive Securities Common shares assumed issued upon exercise of dilutive stock options - 687 - - - 175 ------- ------ ------- ------ ------- ------ Diluted EPS Before Extraordinary Items Earnings available to common shareholders assuming conversion $36,100 52,035 $ .69 $(53,148) 51,088 $(1.04) $ 29,303 50,840 $.58 ======= ====== ====== ======== ====== ====== ======== ====== ====
52 NOTE 8 - 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. In April 2001, the Board of Directors amended the 1990 Stock Incentive Plan to extend the expiration date for the grant of non-qualified stock options and restricted stock thereunder to directors, officers and employees until March 31, 2005. 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 are fully exercisable on the third anniversary of their 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 2, 2002, 478,367 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 2, 2002, 102,000 shares remain available for grant.
Equity Equity compensation compensation plans approved plans not approved by shareholders by shareholders Total -------------------------------------------------------------------------------------- Number of securities to be issued upon exercise of outstanding options 6,316,787 - 6,316,787 Weighted average exercise price of outstanding options $ 16.48 $ - $ 16.48 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in top row) 580,367 - 580,367 --------------------------------------------------------------------------------------
53 Stock option transactions for the Company's stock option plans are summarized as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999 ------------------------ ----------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 5,039,772 $19.63 5,413,622 $22.05 4,982,761 $23.02 Granted 1,757,000 6.75 1,160,450 6.34 1,558,450 16.08 Exercised (19,400) 8.77 - - (519,850) 12.50 Cancelled (460,585) 14.26 (1,534,300) 18.10 (607,739) 22.75 --------------------------------------------------------------------------------------------------------------------------- Outstanding - end of year 6,316,787 16.48 5,039,772 19.63 5,413,622 22.05 --------------------------------------------------------------------------------------------------------------------------- Options exercisable at year end 3,422,187 22.29 2,501,678 24.93 2,489,162 24.66 Weighted average estimated fair value of options granted 2.85 2.54 6.60 ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at February 2, 2002:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at Feb. 2, 2002 Life Price at Feb.2, 2002 Price --------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $13.00 2,447,200 9 years $ 6.56 379,200 $ 6.56 $13.01 to $21.00 1,397,230 7 years 15.58 747,630 15.53 $21.01 to $29.00 1,436,792 5 years 23.30 1,259,792 23.34 $29.01 to $37.38 1,035,565 4 years 31.65 1,035,565 31.65 --------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $37.38 6,316,787 3,422,187 ---------------------------------------------------------------------------------------------------------------------------
54 The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and the guidance of FIN 44 "Accounting for Certain Transactions involving Stock Compensation" and EITF 00-23 "Issues Related to Accounting for Stock Compensation under APB Opinion No. 25 and FIN 44" 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 earnings (loss) and net earnings (loss) per share would have been reduced to the pro forma amounts indicated as follows:
----------------------------------------------------------------------------------------------------------- Fiscal 2001 Fiscal 2000 Fiscal 1999 ----------------------------------------------------------------------------------------------------------- Net earnings (loss): Income (loss) before extraordinary items $32,208 $(57,365) $24,450 Extraordinary items (765) 2,054 - ----------------------------------------------------------------------------------------------------------- Net income (loss) $31,443 $(55,311) $24,450 ----------------------------------------------------------------------------------------------------------- Earnings (loss) per share - basic: Income (loss) before extraordinary items $ .63 $ (1.12) $ .48 Extraordinary items (.01) .04 - ----------------------------------------------------------------------------------------------------------- Net income (loss) $ .62 $ (1.08) $ .48 ----------------------------------------------------------------------------------------------------------- Earnings (loss) per share - diluted: Income (loss) before extraordinary items $ .62 $ (1.12) $ .48 Extraordinary items (.01) .04 - ----------------------------------------------------------------------------------------------------------- Net income (loss) $ .61 $ (1.08) $ .48 -----------------------------------------------------------------------------------------------------------
The pro forma effects on net earnings for fiscal years 2001, 2000 and 1999 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 2001, 2000 and 1999 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: (i) dividend yield of 1.29%, 0.90% and 0.78%, respectively; (ii) expected volatility of 39%, 40% and 34%, respectively; (iii) risk-free interest rate ranges of 2.8% to 5.5%, 5.8% to 6.7% and 5.0% to 6.5%, respectively; and (iv) ranges of expected lives of 4 years to 8 years for fiscal years 2001, 2000 and 1999. 55 NOTE 9 - INCOME TAXES The provision for income taxes includes the following:
Feb. 2, Feb. 3, Jan. 29, Year ended 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- Current: Federal $ 12,640 $ (6,300) $ 12,653 State 240 353 788 Deferred: Federal 6,680 (22,776) 2,074 State 744 (1,798) 149 ---------------------------------------------------------------------------------------------------------------------------------- $ 20,304 $(30,521) $ 15,664 ---------------------------------------------------------------------------------------------------------------------------------- A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows: Feb. 2, Feb. 3, Jan. 29, Year ended 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 1.2 1.2 1.4 Job credits (0.3) 0.3 (1.1) Other, net 0.1 - (0.5) ----------------------------------------------------------------------------------------------------------------------------------- 36.0% 36.5% 34.8% -----------------------------------------------------------------------------------------------------------------------------------
Items that gave rise to significant portions of the deferred tax accounts are as follows: Feb. 2, Feb. 3, 2002 2001 ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Inventories $ 3,841 $ 8,431 Vacation accrual 4,990 5,014 Store closing reserves 1,968 5,661 Accrued leases 7,737 7,966 Real estate tax (2,188) (2,091) Insurance 4,621 4,009 Benefit accruals (5,693) (2,347) Carry forward credits - (2,401) Other 544 1,167 ----------------------------------------------------------------------------------------------------------------------------------- $ 15,820 $ 25,409 ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 69,093 $ 68,709 State taxes (2,643) (2,040) Legal (2,438) - Other 15 (477) ----------------------------------------------------------------------------------------------------------------------------------- $ 64,027 $ 66,192 ----------------------------------------------------------------------------------------------------------------------------------- Net deferred tax liability $ 48,207 $ 40,783 -----------------------------------------------------------------------------------------------------------------------------------
56 NOTE 10 - 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 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
February 2, 2002 February 3, 2001 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 15,981 $ 15,981 $ 7,995 $ 7,995 Accounts receivable 18,052 18,052 16,792 16,792 Liabilities: Accounts payable 216,085 216,085 204,755 204,755 Long-term debt including current maturities 669,033 635,080 654,391 472,770 Zero coupon convertible subordinated notes - - 158,555 148,525 --------------------------------------------------------------------------------------------------------------------------
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 2, 2002 and February 3, 2001. 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. 57
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings(Loss) Net Net Earnings Per Share Before Earnings Operating (Loss) Before Net Extraordinary (Loss) Cash Market Price Year Ended Total Gross Profit Extraordinary Earnings Items Per Share Dividends Per Share Feb. 2, 2002 Revenues Profit (Loss) Items (Loss) Basic Diluted Basic Diluted Per Share High Low ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $551,383 $155,537 $27,039 $ 9,108 $ 9,108 $ .18 $ .18 $ .18 $ .18 $.0675 $ 7.00 $ 4.40 2nd Quarter 572,874 164,104 31,964 12,285 12,519 .24 .24 .24 .24 .0675 13.97 5.35 3rd Quarter 551,255 155,706 27,362 11,016 10,022 .21 .21 .19 .19 .0675 13.70 8.80 4th Quarter 508,203 142,049 17,085 3,691 3,686 .07 .07 .07 .07 .0675 18.48 11.88 ----------------------------------------------------------------------------------------------------------------------------------- Year Ended Feb. 3, 2001 ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $614,809 $159,816 $19,501 $ 4,407 $6,447 $ .09 $ .09 $ .13 $ .13 $.0675 $ 7.69 $ 5.50 2nd Quarter 633,887 157,622 18,593 3,409 4,376 .07 .07 .09 .09 .0675 7.63 5.63 3rd Quarter 622,382 66,358 (82,571) (62,271) (63,209) (1.22) (1.22) (1.24) (1.24) .0675 6.44 4.19 4th Quarter(1) 547,390 148,055 16,445 1,292 1,292 .03 .03 .03 .03 .0675 5.38 3.31 -----------------------------------------------------------------------------------------------------------------------------------
(1) Included 14 weeks due to the 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. 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 captions "(ITEM 1) ELECTION OF DIRECTORS," other than "-Report of the Audit Committee of the Board of Directors," and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" 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 "-Report of the Compensation Committee of the Board of Directors on Executive Compensation" and "-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 "SHARE OWNERSHIP" 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. 58 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 32 Consolidated Balance Sheets - February 2, 2002 and February 3, 2001 33 Consolidated Statements of Operations - Years ended February 2, 2002, February 3, 2001 and January 29, 2000 34 Consolidated Statements of Stockholders' Equity Years ended February 2, 2002, February 3, 2001 and January 29, 2000 35 Consolidated Statements of Cash Flows - Years ended February 2, 2002, February 3, 2001, and January 29, 2000 36 Notes to Consolidated Financial Statements 37 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves 65 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 (4.2) 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 59 (4.3) 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 (4.4) Indenture, dated as of February 18, 1998 Incorporated by reference from between the Company and PNC the Registration Statement on Bank, National Association, as Form S-3/A (File No. 333-45793). Trustee, providing for the issuance of Senior 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. (10.8) Flexible Employee Benefits Trust Incorporated by reference from the Company's Form 8-K dated May 6, 1994. (10.9)* The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from the Company's Form 10-K for the year ended January 31, 1998. 60 (10.10)* 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. (10.11)* 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. (10.12) 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. (10.13) 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. (10.14)* 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. (10.15) 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. (10.16) 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. (10.17) 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. (10.18) Sale-leaseback agreement between the Company Incorporated by reference from and ARI Fleet LT dated January 31, 2001. the Company's Form 10-K for the year ended February 3, 2001. (10.19)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from 1990 Stock Incentive Plan - Amended the Company's Form 10-K for the and Restated as of March 26, 2001. year ended February 3, 2001. (10.20) Credit Agreement between the Company Incorporated by reference from and GMAC Business Credit, LLC dated the Company's Form 8-K filed June 29, 2001. July 13, 2001. (10.21)* The Pep Boys Savings Plan - Amended and Restated as of April 25, 2001. (10.22) Amendment No. 1 dated as of June 29, 2001 to the Loan and Security Agreement dated September 22, 2000 between the Company and Congress Financial Corporation. (10.23)* The Pep Boys - Manny, Moe & Jack Pension Plan - Amended and Restated as of September 10, 2001. (10.24) Advertising Purchase Agreement between the Company and ICON International, Inc. dated October 3, 2001. (10.25) Amendment No. 2 dated as of December 13, 2001 to the Loan and Security Agreement dated September 22, 2000 between the Company and Congress Financial Corporation (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent
* Management contract or compensatory plan or arrangement. (b) None 61 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 3, 2002 by: /s/ George Babich Jr. -------------- --------------------- George Babich Jr., President and Chief Financial Officer 62 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 May 3, 2002 Mitchell G. Leibovitz and Chief Executive Officer (Principal Executive Officer) /s/ George Babich Jr. President and May 3, 2002 George Babich Jr. Chief Financial Officer (Principal Financial Officer) /s/ Bernard K. McElroy Chief Accounting Officer May 3, 2002 Bernard K. McElroy and Treasurer (Principal Accounting Officer) /s/ Peter A. Bassi Director May 3, 2002 Peter A. Bassi /s/ Lennox K. Black Director May 3, 2002 Lennox K. Black /s/ Bernard J. Korman Director May 3, 2002 Bernard J. Korman /s/ J. Richard Leaman, Jr. Director May 3, 2002 J. Richard Leaman, Jr. /s/ William Leonard Director May 3, 2002 William Leonard /s/ Malcolmn D. Pryor Director May 3, 2002 Malcolmn D. Pryor /s/ Lester Rosenfeld Director May 3, 2002 Lester Rosenfeld /s/ Jane Scaccetti Director May 3, 2002 Jane Scaccetti /s/ Benjamin Strauss Director May 3, 2002 Benjamin Strauss /s/ John T. Sweetwood Director May 3, 2002 John T. Sweetwood
63 FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K 64
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 2, 2002 $639 $1,674 $ - $1,588 $725 ---------------------------------------------------------------------------------------------------------------------------- Year Ended February 3, 2001 $826 $1,859 $ - $2,046 $639 ---------------------------------------------------------------------------------------------------------------------------- Year Ended January 29, 2000 $996 $3,254 $ - $3,424 $826 ----------------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off. 65 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 32 Consolidated Balance Sheets - February 2, 2002 and February 3, 2001 33 Consolidated Statements of Operations- Years ended February 2, 2002, February 3, 2001 and January 29, 2000 34 Consolidated Statements of Stockholders' Equity Years ended February 2, 2002, February 3, 2001 and January 29, 2000 35 Consolidated Statements of Cash Flows - Years ended February 2, 2002, February 3, 2001 and January 29, 2000 36 Notes to Consolidated Financial Statements 37 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 (10.21) The Pep Boys Savings Plan - Amended and Restated as of April 25, 2001. (10.22) Amendment No. 1 dated as of June 29, 2001 to the Loan and Security Agreement dated September 22, 2000 between the Company and Congress Financial Corporation. (10.23) The Pep Boys - Manny, Moe & Jack Pension Plan - Amended and Restated as of September 10, 2001. (10.24) Advertising Purchase Agreement between the Company and ICON International, Inc. dated October 3, 2001. (10.25) Amendment No. 2 dated as of December 13, 2001 to the Loan and Security Agreement dated September 22, 2000 between the Company and Congress Financial Corporation (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent 66