-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pzv6sujOAXl+DxB6zOw0lNchpK6N7tfY3ZOUP4AwiOWFgD96zNAwiBuW+RmbPrTY ESZBENsRc6J0jtgsO5M8WA== 0000077449-03-000020.txt : 20031010 0000077449-03-000020.hdr.sgml : 20031010 20031010152454 ACCESSION NUMBER: 0000077449-03-000020 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031010 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20031010 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEP BOYS MANNY MOE & JACK CENTRAL INDEX KEY: 0000077449 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 230962915 STATE OF INCORPORATION: PA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03381 FILM NUMBER: 03936973 BUSINESS ADDRESS: STREET 1: 3111 W ALLEGHENY AVE CITY: PHILADELPHIA STATE: PA ZIP: 19132 BUSINESS PHONE: 2152299000 8-K 1 r8k1003.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: October 10, 2003 Date of Earliest Event Reported: October 10, 2003 The Pep Boys - Manny, Moe & Jack ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 1-3381 23-0962915 ------------------------------- ----------- --------------------------- (State or other jurisdiction of (Commission (I.R.S. Employer ID number) incorporation or organization) File No.) 3111 W. Allegheny Ave. Philadelphia, PA 19132 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) 215-430-9000 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name or former address, if changed from last report) 1 Item 5. Other Information On October 10, 2003, the Company announced that it filed a shelf registration statement with the Securities and Exchange Commission that, once effective, would allow the Company to complete one or more offerings of up to an aggregate of $300 million of its securities. The related press release is filed herewith as Exhibit 99.1 and is incorporated herein by reference. This Current Report on Form 8-K has been filed to cause Exhibits 99.2 through 99.4 filed herewith and incorporated herein by reference to also be incorporated by reference into the shelf registration statement. Exhibits 99.2 through 99.4 contain information identical to the corresponding sections of the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2003, except that certain of such information has been reclassified as attributable to discontinued operations as a result of the corporate restructuring previously announced on July 31, 2003. In addition, the subsequent events disclosures in the Management's Discussion and Analysis of Results of Operations and Financial Condition and the Notes to Consolidated Financial Statements have been updated to reflect the restructuring and certain other matters occurring subsequent to the filing of the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2003. The reclassification does not change the Company's net income for any period and only affects the presentation of its results of operations. Item 7. Financial Statements and Exhibits (c) Exhibits. The following exhibits are filed with this report: Exhibit No. 23.1 Independent Auditors' Consent Exhibit No. 32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit No. 32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit No. 99.1 Press Release Exhibit No. 99.2 Selected Financial Data Exhibit No. 99.3 Management's Discussion and Analysis of Results of Operations Exhibit No. 99.4 Consolidated Financial Statements Independent Auditors' Report Consolidated Statements of Operations for the years ended February 1, 2003, February 2, 2002, and February 3, 2000 Consolidated Statements of Stockholders' Equity for the years ended February 1, 2003, February 2, 2002, and February 3, 2000 Consolidated Statements of Cash Flows for the years ended February 1, 2003, February 2, 2002, and February 3, 2000 Notes to Consolidated Financial Statements 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE PEP BOYS - MANNY, MOE & JACK By: /s/ George Babich, Jr. -------------------------------------- George Babich, Jr. President and Chief Financial Officer Date: October 10, 2003 3 INDEX TO EXHIBITS Exhibit No. 23.1 Independent Auditors' Consent Exhibit No. 32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit No. 32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit No. 99.1 Press Release Exhibit No. 99.2 Selected Financial Data Exhibit No. 99.3 Management's Discussion and Analysis of Results of Operations Exhibit No. 99.4 Consolidated Financial Statments Independent Auditors' Report Consolidated Statements of Operations for the years ended February 1, 2003, February 2, 2002, and February 3, 2000 Consolidated Statements of Stockholders' Equity for the years ended February 1, 2003, February 2, 2002, and February 3, 2000 Consolidated Statements of Cash Flows for the years ended February 1, 2003, February 2, 2002, and February 3, 2000 Notes to Consolidated Financial Statements 4 EX-23 3 e231.txt Exhibit 23.1 Independent Auditors' Consent INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Numbers 33-31765, 33-64248, 33-35592, 33-61429, 33-32857, 333-40363, 333-51585, 333-81351, 333-89280, 333-100224 and 333-106714 of The Pep Boys - Manny, Moe & Jack and Subsidiaries on Form S-8 and Post-Effective Amendment No. 2 to Registration Statement No. 333-98255 of The Pep Boys - Manny, Moe & Jack and Subsidiaries on Form S-3 of our report on the consolidated financial statements of The Pep Boys-Manny, Moe & Jack and Subsidiaries as of February 1, 2003 and February 2, 2002 and for each of the three years in the period ended February 1, 2003, dated March 13, 2003 (March 26, 2003 as to Note 14 and October 10, 2003 as to Note 15), appearing in this Current Report on Form 8-K dated October 10, 2003. Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedule of The Pep Boys - Manny, Moe & Jack, listed in Item 15 to the Company's Annual Report on Form 10-K for the year ended February 1, 2003. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania October 10, 2003 EX-32 4 e3201.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Current Report of The Pep Boys - Manny, Moe & Jack (the "Company") on Form 8-K dated October 10, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence N. Stevenson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: October 10, 2003 /s/ Lawrence N. Stevenson -------------------- -------------------------- Lawrence N. Stevenson Chief Executive Officer EX-32 5 e3202.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Current Report of The Pep Boys - Manny, Moe & Jack (the "Company") on Form 8-K dated October 10, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George Babich, Jr., President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: October 10, 2003 /s/ George Babich, Jr. -------------------- ----------------------- George Babich, Jr. President and Chief Financial Officer EX-99 6 e991.txt Exhibit 99.1 Press Release issued by the Company dated October 10, 2003 Pep Boys files Shelf Registration Statement Philadelphia - October 10, 2003 - The Pep Boys - Manny, Moe & Jack (NYSE: "PBY"), the nation's leading automotive aftermarket and service chain, announced that it filed a shelf registration statement today with the Securities and Exchange Commission ("SEC") for up to an aggregate of $300 million of its securities. Once the registration statement becomes effective, the Company may complete one or more offerings of its common stock, debt securities, warrants, stock purchase contracts or stock purchase units. The Company intends to use the net proceeds from any offering for repayment of borrowings, capital expenditures, working capital and general corporate purposes. The registration statement relating to these securities has been filed with the SEC, but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Investor Contact: George Babich, President & CFO (215) 430-9270 Media Contact: Bill Furtkevic (215) 430-9676 Pep Boys 3111 West Allegheny Avenue Philadelphia, PA 19132 Internet: http://www.pepboys.com ### EX-99 7 e992.txt Exhibit 99.2 Selected Financial Data 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. 1, 2003 Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 - -------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Merchandise sales $ 1,697,628 $ 1,707,190 $ 1,891,046 $ 1,887,771 $ 1,932,063 Service revenue 400,149 403,505 444,233 424,717 393,669 Total revenues 2,097,777 2,110,695 2,335,279 2,312,488 2,325,732 Gross profit from merchandise sales 514,490 (1) 500,037 (2) 436,033 (3) 520,228 476,893 (4) Gross profit from service revenue 102,056 (1) 101,053 (2) 78,243 (3) 82,295 77,856 Total gross profit 616,546 (1) 601,090 (2) 514,276 (3) 602,523 554,749 (4) Selling, general and administrative expenses 504,163 (1) 497,798 (2) 542,048 (3) 512,434 503,254 (4) Operating profit (loss) 112,383 (1) 103,292 (2) (27,772) (3) 90,089 51,495 (4) Non-operating income 3,097 4,623 7,314 2,327 2,145 Interest expense 47,237 53,709 59,718 51,557 48,930 Earnings (loss) from continuing operations before income taxes 68,243 (1) 54,206 (2) (80,176) (3) 40,859 4,710 (4) Net earnings (loss) from continuing operations 42,992 (1) 34,693 (2) (50,929) (3) 26,625 3,215 (4) Net earnings (loss from discontinued operations, net of tax 808 642 (165) 2,678 1,759 Net earnings (loss) 43,800 (1) 35,335 (2) (51,094) (3) 29,303 4,974 (4) BALANCE SHEET DATA Working capital $ 130,680 $ 115,201 $ 122,741 $ 185,206 $ 251,935 Current ratio 1.24 to 1 1.21 to 1 1.22 to 1 1.35 to 1 1.51 to 1 Merchandise inventories $ 488,882 $ 519,473 $ 547,735 $ 582,898 $ 527,397 Property and equipment - net 1,030,486 1,058,842 1,134,164 1,273,446 1,269,953 Total assets 1,799,910 1,806,135 1,898,084 2,064,948 2,089,993 Long-term debt (includes all convertible debt) 525,577 544,418 654,194 784,024 691,714 Stockholders' equity 649,992 617,790 594,766 658,284 811,784 DATA PER COMMON SHARE Basic earnings (loss) from continuing operations $ .83 (1) $ .68 (2) $ (1.00) (3) $ .53 $ .05 (4) Basic earnings (loss) .85 (1) .69 (2) (1.00) (3) .58 .08 (4) Diluted earnings (loss) from continuing operations .80 (1) .67 (2) (1.00) (3) .53 .05 (4) Diluted earnings (loss) .82 (1) .68 (2) (1.00) (3) .58 .08 (4) Cash dividends .27 .27 .27 .27 .26 Stockholders' equity 12.59 12.01 11.60 12.91 13.18 Common share price range: high 19.38 18.48 7.69 21.63 26.69 low 8.75 4.40 3.31 7.13 12.38 OTHER STATISTICS Return on average stockholders' equity 6.9% 5.8% (8.2)% 4.0% 0.6% Common shares issued and outstanding 51,644,578 51,430,861 51,260,663 50,994,099 61,615,140 Capital expenditures $ 43,911 $ 25,375 $ 57,336 $ 104,446 $ 167,876 Number of retail outlets 629 628 628 662 638 Number of service bays 6,527 6,507 6,498 6,895 6,608 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes pretax charges of $2,529 related to the Profit Enhancement Plan of which $2,014 reduced gross profit from merchandise sales, $491 reduced gross profit from service revenue and $24 was included in selling, general and administrative expenses. (2) 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. (3) 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. (4) 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. EX-99 8 e993.txt Exhibit 99.3 Management's Discussion and Analysis of Results of Operations 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 2002 were attributed to capital maintenance of the Company's existing stores and offices. The Company opened two new stores in fiscal 2002, compared with one new store in fiscal 2001 and five new stores in fiscal 2000. In fiscal 2002, the Company increased its levels of capital expenditures 73.1% compared to fiscal 2001. In fiscal 2002, with an increase in capital expenditures and decrease in accounts payable offset, in part, by a decrease in merchandise inventories, the Company decreased its debt by $41,574,000 and increased its cash and cash equivalents by $26,789,000. In fiscal 2001, with a decrease in merchandise inventories coupled with decreased levels of capital expenditures and an increase in accounts payable the Company decreased its debt by $143,913,000 and increased its cash and cash equivalents by $7,986,000. In fiscal 2000, with a decrease in accounts payable offset, in part, by decreased levels of capital expenditures and merchandise inventories, the Company increased its debt by $28,739,000 and decreased its cash and cash equivalents by $10,490,000. The following table indicates the Company's principal cash requirements for the past three fiscal years:
(dollar amounts Fiscal Fiscal Fiscal in thousands) 2002 2001 2000 Total - --------------------------------------------------------------------------------------------------------------- Cash Requirements: Capital expenditures $ 43,911 $ 25,375 $ 57,336 $126,622 (Decrease) increase in merchandise inventories (30,591) (28,262) (35,163) (94,016) Decrease (increase) in accounts payable 16,032 (11,330) 115,311 120,013 - --------------------------------------------------------------------------------------------------------------- Total $ 29,352 $ (14,217) $137,484 $152,619 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities less change in merchandise inventories and accounts payable $123,841 $128,301 $ 99,739 $351,881 - ---------------------------------------------------------------------------------------------------------------
In fiscal 2002, merchandise inventories decreased as the Company continued its focus on improving inventory management. Additionally, the Company decreased the average number of stock-keeping units per store to approximately 24,000 in fiscal 2002, compared to 25,000 in fiscal 2001 and 26,000 in fiscal 2000. 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. In fiscal 2000, merchandise inventories decreased as the Company decreased its net store count by 34 and closed the two distribution centers. The Company's working capital was $130,680,000 at February 1, 2003, $115,201,000 at February 2, 2002 and $122,741,000 at February 3, 2001. The Company's long-term debt, as a percentage of its total capitalization, was 45% at February 1, 2003, 47% at February 2, 2002 and 52% at February 3, 2001. As of February 1, 2003, the Company had an available line of credit totaling $139,047,000. The Company has no plans to open any new stores in fiscal 2003. Management estimates capital expenditures relating to existing stores, warehouses and offices during fiscal 2003 will be approximately $55,000,000. 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 2003. 1
The following tables represent the Company's total contractual obligations and commercial commitments as of February 1, 2003: (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 (1) $ 626,711 $101,183 $226,579 $298,703 $ 246 Operating leases 500,640 46,640 80,119 72,800 301,081 Capital leases 748 699 49 - - Unconditional purchase obligation 23,393 5,993 17,400 - - Other 4,900 4,900 - - - - --------------------------------------------------------------------------------------------- Total Cash Obligations $1,156,392 $159,415 $324,147 $371,503 $301,327 - ---------------------------------------------------------------------------------------------
(1) Long-term debt includes current maturities.
(dollar amounts in thousands) Due in less Due in Due in Due after Commercial Commitments Total than 1 year 1-3 years 3-5 years 5 years - --------------------------------------------------------------------------------------------- Import letters of credit $ 2,399 $ 2,399 $ - $ - $ - Standby letters of credit 40,480 40,480 - - - Surety bonds 9,375 9,375 - - - - --------------------------------------------------------------------------------------------- Total Commercial Commitments $ 52,254 $ 52,254 $ - $ - $ - - ---------------------------------------------------------------------------------------------
The other commitment due in the next year of $4,900,000 is related to the non-renewal of the Chairman and CEO's employment agreement. The letters of credit are used primarily to secure the Company's insurance claims and 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 tables above. In January 2003, the Company reclassified $6,000,000 of other notes payable, due January 1, 2004, to current liabilities on the consolidated balance sheet. In the third quarter of fiscal 2002, the Company retired $42,875,000 aggregate principal amount of the remaining $43,005,000 of the Medium-Term Notes with an original maturity date of September 2007. These notes were redeemed at the option of the holders. The Company repurchased these notes with a portion of the proceeds from the sale of the 4.25% Senior Convertible Notes. In the second quarter of fiscal 2002, the Company reclassified the $75,000,000, 6.625% notes with a stated maturity date of May 15, 2003 to current liabilities on the consolidated balance sheet. The Company anticipates being able to repurchase these notes with cash from operations and its existing line of credit. In the second quarter of fiscal 2002, the Company retired $49,915,000 aggregate principal amount of the $50,000,000 Medium-Term Notes with an original maturity date of July 2007. These notes were redeemed at the option of the holders. The Company repurchased these notes with a portion of the proceeds from the sale of the 4.25% Senior Convertible Notes. 2 On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes is payable by the Company on June 1 and December 1 of each year, beginning December 1, 2002. The proceeds from the sale of the notes were used to retire debt. In fiscal 2001, the Company repurchased the remaining $241,504,000 face value of its Liquid Yield Option Notes (LYONs). The book value of the repurchased LYONs was $161,812,000. 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 1, 2003 of $89,960,000, 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 in fiscal 2001. 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 on the consolidated statement of operations. The Company used the proceeds from the sale to retire debt. In fiscal 2000, the Company repurchased $30,200,000 face value of its LYONs at a price of $520 per LYON. The book value of the repurchased LYONs was $19,226,000. 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. 3 In September 2000, the Company entered into a $143,000,000 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 $143,000,000 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 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 1, 2003, the Company had approximately $132,000,000 of real estate leased under the facility and 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 the $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. See "SUBSEQUENT EVENTS- Debt and Financing Arrangements and Contingencies" for information regarding subsequent events related to debt, leases and other commitments and pending litigation. PENSION PLANS The Company has a defined benefit pension plan covering its full-time employees hired on or before February 1, 1992 and an unfunded Supplemental Executive Retirement Plan (SERP). The pension expense for fiscal 2002, 2001 and 2000 was $3,243,000, $1,754,000 and $1,477,000, respectively. This expense is calculated based upon a number of actuarial assumptions, including an expected return on plan assets of 8.5% and a discount rate of 6.75%. In developing the expected return on asset assumptions, the Company evaluated input from its actuaries, including their review of asset class return expectations. The discount rate utilized by the Company is based on a review of AA bond performance. The Company intends to change the expected rate of return on plan assets to 6.75% for fiscal 2003. Due to the effect of the unrecognized actuarial losses and based upon an expected return on plan assets of 6.75%, a discount rate of 6.75% and various other assumptions, the Company estimates the pension expense, exclusive of settlement accounting discussed below, will approximate $3,750,000 for both plans in fiscal 2003. The Company will continue to evaluate its actuarial assumptions and adjust as necessary. In fiscal 2002, the Company contributed $6,975,000 to the defined benefit pension plan. Based upon the current funded status of the defined benefit pension plan, cash contributions are not anticipated in fiscal 2003. In fiscal 2003, the Company anticipates an approximate settlement of $12,200,000 related to the SERP obligation for the Chairman and CEO. This obligation will result in an expense for settlement accounting under Statement of Financial Accounting Standards (SFAS) No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," of approximately $4,900,000 in fiscal 2003. 4 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 2002, fiscal 2001 or fiscal 2000. IMPAIRMENT CHARGES During fiscal 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 in fiscal 2000 for these stores. The charge is currently presented in cost of merchandise sales and net earnings (loss) from discontinued operations as $2,547,000 and $3,188,000 ($2,024,000, net of tax), respectively. 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's judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates. PROFIT ENHANCEMENT PLAN In the third quarter of fiscal 2000, the Company comprehensively reviewed its field, distribution and Store Support Center infrastructure and the performance of each of its stores. As a result, the Company implemented a number of changes that have improved its performance. These changes included the closure of 38 under-performing stores and two distribution centers and reductions in store operating hours and the Store Support Center infrastructure. PLAN UPDATE The Company is progressing towards the disposal of the 38 stores (11 owned and 27 leased), two distribution centers and two development parcels that were closed or abandoned in connection with the Profit Enhancement Plan. As of February 1, 2003, the Company had disposed of 22 of the closed stores, the two distribution centers and the two development parcels. During fiscal 2002, the Company decided to lease rather than sell three of the closed stores due to changes in the real estate market. As a result, the Company reclassified these three owned properties as assets held for use. The Company estimates that the remaining closed stores (one owned and 12 leased) will be disposed of by the end of the third quarter of fiscal 2003. ASSETS HELD FOR DISPOSAL As of February 1, 2003, the assets held for disposal included the building and land of one remaining closed store owned by the Company, which has a carrying value of $1,146,000. This property was sold in the first quarter of fiscal 2003. The Company has sold nine of the 13 owned properties originally held for sale, which included the two development parcels. Additionally, the Company decided to lease rather than sell three of the closed stores due to changes in the real estate market. As a result, the Company reclassified these three owned properties as assets held for use at their estimated market value. The market value of each such property was lower than cost adjusted for depreciation. In fiscal 2002, the Company sold six and reclassified three (as assets held for use) of the 13 owned properties. The six properties were sold for $8,446,000, net of commissions, and resulted in a loss of $666,000, which was recorded in costs of merchandise sales on the consolidated statement of operations. In addition, the Company adjusted the carrying values of certain assets held for disposal, which resulted in a net decrease of $160,000, which was recorded in costs of merchandise sales on the consolidated statement of operations. 5 In fiscal 2001, the Company sold three of the 13 owned properties for $4,103,000, net of commissions, and 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. In addition, 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. In fiscal 2000, the Company recorded charges related to the write-down of assets to fair value of $58,754,000. These charges were associated with the closure of the 38 stores, two distribution centers, the write-off of certain equipment and the abandonment of two development parcels. LEASE RESERVE As of February 1, 2003, the Company was able to sublease eight and exit the lease of an additional seven of the 27 leased stores. The Company expects the remaining 12 closed stores that are leased to be subleased or otherwise disposed of by the end of the third quarter of fiscal 2003. The Company increased the lease reserve $901,000 during fiscal 2002. This increase is due primarily to an increase in the time that it is expected to take to sublease certain properties, offset, in part, by an increase in the estimated sublease rates. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. The Company increased the lease reserve $1,644,000 during fiscal 2001. This change in the reserve was a result of a $3,834,000 increase due primarily to an increase in the estimated amount of time it was expected to 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 on the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $7,916,000 for leases of properties included in the Profit Enhancement Plan. The Company increased the reserve by $113,000 during the remainder of fiscal 2000. 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. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit the Company's continuing activities. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed. 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. These disposals are expected to be completed by the end of the third quarter of fiscal 2003. In fiscal 2002, the Company increased the on-going expense reserve by $802,000. This increase is due primarily to an increase in the length of time that it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations. 6 In fiscal 2001, the Company increased the on-going expense reserve by $595,000. This increase was due primarily to a $1,214,000 increase in the reserve due to an increase in the estimated time it was 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. This adjustment was recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $3,944,000 for on-going expenses associated with the properties included in the Profit Enhancement Plan. The Company increased the on-going expense reserve by $361,000 during the remainder of fiscal 2000. This increase was due to an increase in the estimated time it was expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations. SEVERANCE RESERVE In fiscal 2001, the severance reserve was completed. Therefore, there was no activity to this reserve in fiscal 2002. In fiscal 2001, the Company reversed $69,000 of severance because certain employees who originally expected to receive severance failed to qualify to receive payments. In addition, final severance payments were lower than estimated. Each of these reversals was recorded through the line it was originally charged in the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $1,694,000 for severance associated with the Profit Enhancement Plan. During the remainder of fiscal 2000, the Company reversed $272,000 of severance due to certain employees' acceptance into other positions within the Company and other employees failing to qualify to receive payments. Each reversal was recorded through the line it was originally charged in the consolidated statement of operations. 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. 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. There were no expenses of this nature incurred in fiscal 2002. In fiscal 2001, expenses of this nature incurred were $678,000. These expenses related to the completion of the removal of inventory and equipment from the closed distribution centers. In fiscal 2000, expenses of this nature incurred were $3,611,000. These expenses were for inventory and equipment handling related to the closure of the 38 stores and the two distribution centers. The fiscal 2000 expenses were offset by a recovery of certain benefit expenses related to the reduction in workforce. 7 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Following are tables summarizing expenses related to the Profit Enhancement Plan for fiscal 2002, 2001 and 2000. The details and reasons for the original charge and changes to the charge are as described above in the respective reserve categories.
(dollar amounts in thousands) Income Statement Fiscal Fiscal Fiscal Classification 2002 2001 2000 - ----------------------------------------------------------------- Costs of merchandise sales $2,014 $4,169 $67,085 Costs of service revenue 491 813 5,232 Selling, general and administrative 24 215 2,628 - ----------------------------------------------------------------- Total Expenses $2,529 $5,197 $74,945 - -----------------------------------------------------------------
At the end of the third quarter of fiscal 2000, the Company set up a reserve liability account, which is included in accrued expenses 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:
(dollar amounts Lease Fixed On-going in thousands) Expenses Assets Severance Expenses Total - ----------------------------------------------------------------------------------------- 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 Addition 1,825 826 - 802 3,453 Utilization (2,959) (826) - (1,680) (5,465) Adjustment (924) - - - (924) - ----------------------------------------------------------------------------------------- Reserve Balance at Feb. 1, 2003 $ 1,092 $ - $ - $ 442 $ 1,534 - -----------------------------------------------------------------------------------------
8 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. 1, 2003 Feb. 2, 2002 Feb. 3, 2001 Fiscal 2002 vs. Fiscal 2001 vs. Year ended (Fiscal 2002) (Fiscal 2001) (Fiscal 2000) Fiscal 2001 Fiscal 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales 80.9% 80.9% 81.0% (0.6)% (9.7)% Service Revenue(1) 19.1 19.1 19.0 (0.8) (9.2) - ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 100.0 (0.6) (9.6) - ----------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales(2) 69.7 (3) 70.7 (3) 76.9 (3) (2.0) (17.0) Costs of Service Revenue(2) 74.5 (3) 75.0 (3) 82.4 (3) (1.4) (17.4) - ----------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 70.6 71.5 78.0 (1.9) (17.1) - ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 30.3 (3) 29.3 (3) 23.1 (3) 2.9 14.7 Gross Profit from Service Revenue 25.5 (3) 25.0 (3) 17.6 (3) 1.0 29.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 29.4 28.5 22.0 2.6 16.9 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 24.0 23.6 23.2 1.3 (8.2) - ----------------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 5.4 4.9 (1.2) (8.8) 471.9 Non-operating Income 0.1 0.2 0.3 (33.0) 36.8 Interest Expense 2.2 2.5 2.5 (12.1) (10.1) - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations Before Income Taxes 3.3 2.6 (3.4) 25.9 167.6 - ----------------------------------------------------------------------------------------------------------------------------------- Income Taxes 37.0 (4) 36.0 (4) 36.5 (4) 29.4 166.7 - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from Continuing Operations 2.0 1.6 (2.1) 23.9 168.1 - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from Discontinued Operations, Net of Tax 0.1 0.1 (0.1) 25.9 489.1 - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) 2.1 1.7 (2.2) 24.0 169.2 - -----------------------------------------------------------------------------------------------------------------------------------
(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. 9 FISCAL 2002 VS. FISCAL 2001 Total revenues for fiscal 2002 decreased 0.6%. This decrease was due primarily to a decrease in comparable store revenues (revenues generated by stores in operation during the same period) of 0.6%, offset slightly by an increase in the number of stores in operation in fiscal 2002 versus fiscal 2001. Comparable store service revenue decreased 0.9%, while comparable store merchandise sales decreased 0.6%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 30.3% in fiscal 2002 from 29.3% in fiscal 2001. This increase was due primarily to higher merchandise margins, as a percentage of merchandise sales, offset, in part, by a charge related to the Profit Enhancement Plan of $2,014,000 in fiscal 2002 versus $4,169,000 in fiscal 2001. The improved merchandise margins were a result of a combination of an improvement in the mix of sales, selectively higher retail pricing, lower product acquisition costs and improved inventory controls. Selling, general and administrative expenses increased, as a percentage of total revenues, to 24.0% in fiscal 2002 from 23.6% in fiscal 2001. This increase, as a percentage of total revenues, was due primarily to obligations associated with the non-renewal of the Chairman and CEO's employment agreement and related search fees, coupled with $4,905,000, or 72%, higher net media expense. The increase in selling, general and administrative expenses, as a percentage of total revenues, was offset, in part, by a decrease in store operating expenses. The increase in net media expense was due to increases in radio and circular advertising expenses, offset, in part, by a decrease in television advertising expense and an increase in cooperative advertising. The decrease in store expenses, as a percentage of total revenues, was due primarily to decreases in store payroll, as a percentage of total revenues. Interest expense decreased $6,472,000, or 12.1%, due primarily to lower debt levels coupled with lower average interest rates on the Company's borrowings. Net earnings increased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales, as a percentage of merchandise sales, and a decrease in interest expense, offset by an increase in selling, general and administrative expenses, as a percentage of total revenues, and a net charge related to the Profit Enhancement Plan of $1,593,000 in fiscal 2002 versus $3,326,000 in fiscal 2001. FISCAL 2001 VS. FISCAL 2000 Total revenues for fiscal 2001, which included 52 weeks, decreased 9.6% compared to fiscal 2000, which included 53 weeks, due primarily to less stores in operation during fiscal 2001 versus fiscal 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 8.2% 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 fiscal 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. 10 Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 29.3% in fiscal 2001 from 23.1% in fiscal 2000. This increase, as a percentage of merchandise sales, was due primarily to Profit Enhancement Plan charges recorded in fiscal 2001 of $4,169,000 compared to charges recorded in fiscal 2000 of $67,085,000 and $2,547,000 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 25.0% in fiscal 2001 from 17.6% in fiscal 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 fiscal 2001 of $813,000 compared to $5,232,000 recorded in fiscal 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 fiscal 2001 from 23.2% in fiscal 2000. This increase, as a percentage of total revenues, was due primarily to an increase in media expenses from fiscal 2000 to fiscal 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 fiscal 2001 of $215,000 compared to $2,628,000 recorded in fiscal 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 in fiscal 2001 was $6,009,000 or 10.1% lower than fiscal 2000 due primarily to lower debt levels coupled with lower average interest rates. Net earnings increased, as a percentage of total revenues, due primarily to a net Profit Enhancement Plan charge recorded in fiscal 2001 of $3,326,000 compared to net charges recorded in fiscal 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. 11 RECENTLY ADOPTED ACCOUNTING STANDARDS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends SFAS No. 123 to require more prominent and frequent disclosures in financial statements pertaining to the effect on reported net income with respect to stock-based compensation. These provisions are effective for fiscal years ending after December 15, 2002. The Company adopted the provisions of SFAS No. 148 with respect to the disclosure requirements in the fourth quarter of fiscal 2002. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements regarding certain guarantees that it has issued, and requires the guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In addition, FIN 45 requires a reconciliation of changes in an entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted this statement in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor." This consensus addresses the accounting issues pertaining to cash consideration received by a reseller from a vendor, and is applicable for new arrangements or modification of existing arrangements entered into after December 31, 2002. The Company has adopted the provisions of this consensus in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of at the date an entity commits to an exit plan. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted this statement in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In fiscal 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 consensus deals with accounting for certain types of sales incentives and other consideration offered by companies to their customers. This consensus is effective in fiscal years beginning after December 15, 2001. The Company adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements. In August 2001, 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 adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements. 12 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 adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements as it does not have goodwill or other acquired tangible assets on its consolidated balance sheet. NEW ACCOUNTING STANDARDS In January 2003, the FASB issued Financial Interpretation Number (FIN) 46, "Consolidation of Variable Interest Entities." FIN 46, an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of any expected losses from the variable interest entity's activities, is entitled to receive any expected residual returns of the variable interest entity, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and applies in the first fiscal year or interim period beginning after June 15, 2003, for variable interest entities created prior to February 1, 2003. The Company adopted this statement for variable interest entities created after January 31, 2003 in the fourth quarter of 2002 with no material effect on its consolidated financial statements. On August 1, 2003 the Company refinanced its real estate operating lease facility, which qualified as a variable interest entity into a new entity. The Company has evaluated this leasing transaction in accordance with FIN 46 and has determined it does not have to consolidate this leasing entity. The Company will adopt this statement for variable interest entities created prior to January 31, 2003 in the third quarter of 2003 with no material effect on its consolidated financial statements. See "SUBSEQUENT EVENTS - Debt and Financing Arrangements" for further discussion. 13 In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." As a result of rescinding FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, "Reporting the Results of Operations." This statement also amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. For the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001, the Company previously recognized extraordinary items pertaining to the extinguishment of debt, net of tax, of $(239,000), $(765,000), and $2,054,000, respectively. Reclassifications for these items have been made for all periods presented. 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 will adopt the provisions of SFAS No. 143 in the first quarter of fiscal 2003, and will recognize an asset of $2,844,000, accumulated depreciation of $2,247,000, a liability of $4,540,000 and a cumulative effect of a change in accounting principle before taxes of $3,943,000 ($2,484,000, net of tax) on its consolidated financial statements. 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 1, 2003, the Company had outstanding borrowings of $43,135,000 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 1, 2003:
(dollar amounts Average in thousands) Amount Interest Rate - ---------------------------------------------------------------- Fair value at February 1, 2003 $550,491 Expected maturities: 2003 81,000 6.6% 2004 108,000 6.7 2005 100,000 7.0 2006 143,000 6.9 2007 150,215 4.3 - -----------------------------------------------------------------
At February 2, 2002, the Company held fixed rate debt instruments with an aggregate fair value of $491,120,000. See "SUBSEQUENT EVENTS - Interest Rate Swap Agreement" for information regarding subsequent events related to market risk. 14 SUBSEQUENT EVENTS Restructuring Building upon the Profit Enhancement Plan launched in October 2000, the Company conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon the Company's profitability. The Company expects these actions, including the disposal and sublease of the properties, to be substantially completed by the end of the second quarter 2004 and estimates the costs, including future costs that were not accrued, to be approximately $70,100,000. The Company anticipates this restructuring will result in an annual savings of approximately $11,000,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". These initiatives included: Closure of 33 under-performing stores on July 31, 2003 The charges related to these closures, which were recorded in the second quarter of 2003, included a $33,887,000 write down of fixed assets, $1,122,000 in long-term lease and other related obligations, net of subleases, and $980,000 in workforce reduction costs. Discontinuation of certain merchandise offerings In the second quarter of 2003, the Company recorded a $24,580,000 write-down of inventory as a result of a decision to discontinue certain merchandising offerings. Corporate realignment The charges related to this realignment, which were recorded in the second quarter of 2003, included $3,070,000 in workforce reduction costs, $2,543,000 of expenses incurred in the development of the restructuring plan, a $536,000 write-down of certain assets and $467,000 in costs related to two warehouse lease terminations. 15 Discontinued Operations In accordance with SFAS 144, the Company's discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company's corporate restructuring. The results for fiscal years 2002, 2001 and 2000 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results: February 1, February 2, February 3, Year ended 2003 2002 2001 ----------- ------------ ------------ (Dollar amounts in thousands) Amount Amount Amount - ------------------------------------------------------------------------------------- Total Revenues $ 74,711 $ 73,865 $ 83,189 Total Gross Profit 17,565 17,151 17,575 Selling, General and Administrative Expenses 16,283 16,148 17,835 (Loss) Earnings from Discontinued Operations Before Income Taxes 1,282 1,003 (260) Net Earnings (Loss) from Discontinued Operations, Net of Tax $ 808 $ 642 $ (165) - -------------------------------------------------------------------------------------
In addition, property, plant and equipment-net associated with the 33 stores of $57,551,000 and $58,644,000 as of February 1, 2003 and February 2, 2002, respectively, has been reclassified to Assets from discontinued operations on the consolidated balance sheets. 16 Debt and Financing Arrangements On August 1, 2003, the Company extended its revolving line of credit, which was set to expire September 22, 2004, to August 1, 2008. Thereafter, it automatically renews for annual periods, unless terminated by either party on 60 days notice prior to the applicable termination date. The line of credit provides up to $226,000,000 of borrowing availability, subject to certain required reserves, and is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to August 1, 2008. The loans bear interest at a rate equal to the LIBOR plus 2.00%, subject to 0.25% incremental increases as excess availability under the line of credit falls below $50,000,000. The line of credit is subject to financial covenants. On August 1, 2003, the Company refinanced $132,000,000 operating leases. These leases, which expire on August 1, 2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in accordance with FIN 46 and has determined that it is not required to consolidate the leasing entity. The leases include a residual value guarantee with a maximum value of approximately $105,000,000. The Company expects the fair market value of the leased real estate to substantially reduce or eliminate the Company's payment under the residual guarantee at the end of the lease term. In accordance with FIN 45, in the second quarter of 2003, the Company has recorded a $4,987,000 liability for the fair value of the guarantee related to this operating lease. Interest Rate Swap Agreement On June 3, 2003, the Company entered into an interest rate swap for a notional amount of $130,000,000. The Company has designated the swap as a cash flow hedge of the Company's real estate operating lease payments. The interest rate swap converts the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. Contingencies The Company reached an agreement in the second quarter of 2003, subject to court approval, to submit the action entitled "Dubrow et al vs The Pep Boys - Manny, Moe & Jack" to binding arbitration. The Company expects to have sufficient available cash to satisfy the maximum liability that may be imposed on the Company by the arbitrator under the terms of the agreement. 17 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. 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 information contained herein may contain statements that are forward-looking. Such statements may relate to trends in the automotive aftermarket, competition, business development activities, future capital expenditures, financing sources and availability, and the effects of regulation. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. 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 automotive aftermarket, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, location and number of competitors' stores, product and labor costs and the additional factors described in the Company's filings with the Securities and Exchange Commission. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. 18 EX-99 9 e994.txt Exhibit 99.4 Consolidated Financial Statements 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 (the "Company") as of February 1, 2003 and February 2, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 1, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 1, 2003 and February 2, 2002, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 13, 2003 (March 26, 2003 as to Note 14 and October 10, 2003 as to Note 15) 1
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 1, February 2, 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 42,770 $ 15,981 Accounts receivable, less allowance for uncollectible accounts of $422 and $725 17,916 18,052 Merchandise inventories 488,882 519,473 Prepaid expenses 43,746 42,170 Deferred income taxes 13,723 9,303 Other 56,687 52,308 Assets held for disposal 1,146 16,007 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 664,870 673,294 - ---------------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 264,101 262,721 Buildings and improvements 890,898 877,683 Furniture, fixtures and equipment 580,746 561,000 Construction in progress 19,450 10,619 - ---------------------------------------------------------------------------------------------------------------------------------- 1,755,195 1,712,023 Less accumulated depreciation and amortization 724,709 653,181 - ---------------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment - Net 1,030,486 1,058,842 - ---------------------------------------------------------------------------------------------------------------------------------- Other 47,003 15,355 Assets from discontinued operations 57,551 58,644 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,799,910 $ 1,806,135 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 200,053 $ 216,085 Accrued expenses 232,255 217,393 Current maturities of long-term debt and obligations under capital leases 101,882 124,615 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 534,190 558,093 - ---------------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 375,577 544,418 Convertible long-term debt 150,000 - Other long-term liabilities 25,156 23,880 Deferred income taxes 60,663 57,510 Deferred gain on sale leaseback 4,332 4,444 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 630,847 601,944 Accumulated other comprehensive loss (151) - - ---------------------------------------------------------------------------------------------------------------------------------- 871,851 843,099 Less cost of shares in treasury - 10,070,729 shares and 10,284,446 shares 162,595 166,045 Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264 - ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 649,992 617,790 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,799,910 $ 1,806,135 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 2
CONSOLIDATED STATEMENTS OF OPERATIONS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 1, February 2, February 3, Year ended 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $1,697,628 $1,707,190 $1,891,046 Service Revenue 400,149 403,505 444,233 - ---------------------------------------------------------------------------------------------------------------------------------- Total Revenues 2,097,777 2,110,695 2,335,279 - ---------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 1,183,138 1,207,153 1,455,013 Costs of Service Revenue 298,093 302,452 365,990 - ---------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 1,481,231 1,509,605 1,821,003 - ---------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 514,490 500,037 436,033 Gross Profit from Service Revenue 102,056 101,053 78,243 - ---------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 616,546 601,090 514,276 - ---------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 504,163 497,798 542,048 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 112,383 103,292 (27,772) Non-operating Income 3,097 4,623 7,314 Interest Expense 47,237 53,709 59,718 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations Before Income Taxes 68,243 54,206 (80,176) Income Tax Expense (Benefit) 25,251 19,513 (29,247) - ---------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from Continuing Operations 42,992 34,693 (50,929) Net Earnings (Loss) from Discontinued Operations, Net of Tax of $474, $361 and $(95) 808 642 (165) Net Earnings (Loss) $ 43,800 $ 35,335 $ (51,094) - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share: Net Earnings (Loss) from Continuing Operations $ .83 $ .68 $ (1.00) Net Earnings (Loss) from Discontinued Operations, Net of Tax .02 .01 - - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share $ .85 $ .69 $ (1.00) - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) per Share: Net Earnings (Loss) from Continuing Operations $ .80 $ .67 $ (1.00) Net Earnings (Loss) from Discontinued Operations, Net of Tax .02 .01 - - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) per Share $ .82 $ .68 $ (1.00) - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 3
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 Loss Trust Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 29, 2000 63,910,577 $63,911 $177,247 $649,487 (10,721,208) $(173,097) $ - $(59,264) $658,284 Comprehensive loss - Net loss (51,094) Total Comprehensive Loss (51,094) Cash dividends ($.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 Total Comprehensive Income 35,335 Cash dividends ($.27 per share) (13,864) (13,864) Exercise of stock options and related tax benefits (94) 17,000 275 181 Dividend reinvestment plan (1,101) 153,198 2,473 1,372 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 2, 2002 63,910,577 63,911 177,244 601,944 (10,284,446) (166,045) - (59,264) 617,790 Comprehensive income - Net earnings 43,800 Minimum pension liability adjustment, net of tax (151) Total Comprehensive Income 43,649 Cash dividends ($.27 per share) (13,911) (13,911) Exercise of stock options and related tax benefits (21) (632) 111,000 1,792 1,139 Dividend reinvestment plan 21 (354) 102,717 1,658 1,325 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 1, 2003 63,910,577 $63,911 $177,244 $630,847 (10,070,729) $(162,595) $ (151) $(59,264) $649,992 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 1, February 2, February 3, Year ended 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Earnings (Loss) $ 43,800 $ 35,335 $ (51,094) Net Earnings (Loss) from discontinued operations 808 642 (165) - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from continuing operations 42,992 34,693 (50,929) Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by Continuing Operations: Depreciation and amortization 75,933 80,990 95,507 Deferred income taxes (1,176) 7,424 (24,575) Deferred gain on sale leaseback (112) (26) - Accretion of bond discount - 3,256 6,425 Loss on assets held for disposal 826 2,349 53,740 Loss on asset impairment - - 2,547 (Gain) Loss from sale of assets (1,909) (1,096) 3,751 Gain from extinguishment of debt - (755) (2,985) Changes in operating assets and liabilities: (Increase) Decrease in accounts receivable, prepaid expenses and other (13,031) (17,206) 10,733 Decrease in merchandise inventories 30,591 28,262 35,163 (Decrease) Increase in accounts payable (16,032) 11,330 (115,311) Increase (Decrease) in accrued expenses 14,145 11,734 (2,160) Increase in other long-term liabilities 1,276 2,226 1,056 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Continuing Operations 133,503 163,181 12,962 Net Cash Provided by Discontinued Operations 4,897 4,712 6,629 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 138,400 167,893 19,591 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures from continuing operations (41,889) (23,361) (51,244) Capital expenditures from discontinued operations (2,022) (2,014) (6,092) Proceeds from sales of assets 11,058 26,760 14,380 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Investing Activities (32,853) 1,385 (42,956) - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net (payments) borrowings under line of credit agreements (70,295) (56,876) 117,535 Repayment of life insurance policy loan (20,686) - - Payments on capital lease obligations (642) - - Reduction of long-term debt (121,938) (18,571) (75,028) Reduction of convertible debt - (161,056) (17,208) Net proceeds from issuance of notes 146,250 87,522 - Dividends paid (13,911) (13,864) (13,793) Proceeds from exercise of stock options 1,139 181 - Proceeds from dividend reinvestment plan 1,325 1,372 1,369 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (78,758) (161,292) 12,875 - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 26,789 7,986 (10,490) Cash and Cash Equivalents at Beginning of Year 15,981 7,995 18,485 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 42,770 $ 15,981 $ 7,995 - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Income taxes $ 22,856 $ 6,570 $ - Interest, net of amounts capitalized 44,840 47,081 53,415 Non-cash financing activities: Equipment capital leases 1,301 88 - - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 5 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 1, 2003, February 2, 2002 and February 3, 2001 (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. 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 2002 and 2001 were comprised of 52 weeks, while fiscal 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 1, 2003 and February 2, 2002. 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 $44, $1 and $489 in fiscal 2002, 2001 and 2000, 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. 6 WARRANTY RESERVE The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by its vendors, with the Company covering any costs above the vendor's stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions. Components of the reserve for warranty costs for fiscal years ending February 1, 2003 and February 2, 2002 are as follows:
- ------------------------------------------------------------------------ Beginning balance at February 3, 2001 $ 553 Additions related to current year sales 12,006 Warranty costs incurred in current year (10,282) Adjustments to accruals related to prior year sales - - ------------------------------------------------------------------------ Ending Balance at February 2, 2002 2,277 Additions related to current year sales 8,813 Warranty costs incurred in current year (10,179) Adjustments to accruals related to prior year sales - - ------------------------------------------------------------------------ Ending Balance at February 1, 2003 $ 911 - ------------------------------------------------------------------------
SERVICE REVENUE Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. COSTS OF REVENUES Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. PENSION EXPENSE The Company reports all information on its pension and savings plan benefits in accordance with Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities. 7 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 2002, 2001 and 2000 was $11,733, $6,828 and $0, respectively. No advertising costs were recorded as assets as of February 1, 2003 or February 2, 2002. 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. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." 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 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 in fiscal 2000 for these stores. The charge is currently presented in cost of merchandise sales and net earnings (loss) from discontinued operations as $2,547 and $3,188 ($2,024, net of tax), respectively. 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's judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates. 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. 8 ACCOUNTING FOR STOCK-BASED COMPENSATION At February 1, 2003, the Company has two stock-based employee compensation plans, which are described in full in Note 10, "Stock Option Plans." The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
February 1, February 2, February 3, 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------- Net earnings (loss): As reported $ 43,800 $ 35,335 $ (51,094) Less: Total stock-based compensation expense determined under fair value-based method, net of tax (3,510) (3,892) (4,217) - ----------------------------------------------------------------------------------------------------------- Pro forma $ 40,290 $ 31,443 $ (55,311) - ----------------------------------------------------------------------------------------------------------- Net earnings (loss) per share: Basic: As reported $ .85 $ .69 $ (1.00) Pro forma $ .78 $ .62 $ (1.08) - ----------------------------------------------------------------------------------------------------------- Diluted: As reported $ .82 $ .68 $ (1.00) Pro forma $ .75 $ .61 $ (1.08) - -----------------------------------------------------------------------------------------------------------
The fair value of each option granted during fiscal 2002, 2001 and 2000 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
- ------------------------------------------------------------------------------- February 1, February 2, February 3, Year ended 2003 2002 2001 - ------------------------------------------------------------------------------- Dividend yield 1.44% 1.29% .90% Expected volatility 41% 39% 40% Risk-free interest rate range: high 5.4% 5.5% 6.7% low 2.3% 2.8% 5.8% Ranges of expected lives in years 4-8 4-8 4-8 - -------------------------------------------------------------------------------
9 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 The Company accounts for derivative instruments and hedging activities in accordance with 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. GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Interpretation Number (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements regarding certain guarantees that it has issued, and requires the guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In addition, FIN 45 requires a reconciliation of changes in an entity's product warranty liabilities. 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 from continuing operations by major product categories are as follows:
February 1, February 2, February 3, Year ended 2003 2002 2001 - ---------------------------------------------------------------------------------------- Parts and accessories $1,362,112 $1,357,603 $1,494,100 Tires 335,516 349,587 396,946 - ---------------------------------------------------------------------------------------- Total merchandise sales 1,697,628 1,707,190 1,891,046 Service 400,149 403,505 444,233 - ---------------------------------------------------------------------------------------- Total Revenues $2,097,777 $2,110,695 $2,335,279 ========================================================================================
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. 10 RECENTLY ADOPTED ACCOUNTING STANDARDS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends SFAS No. 123 to require more prominent and frequent disclosures in financial statements pertaining to the effect on reported net income with respect to stock-based compensation. These provisions are effective for fiscal years ending after December 15, 2002. The Company adopted the provisions of SFAS No. 148 with respect to the disclosure requirements in the fourth quarter of fiscal 2002. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements regarding certain guarantees that it has issued, and requires the guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In addition, FIN 45 requires a reconciliation of changes in an entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted this statement in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor." This consensus addresses the accounting issues pertaining to cash consideration received by a reseller from a vendor, and is applicable for new arrangements or modification of existing arrangements entered into after December 31, 2002. The Company has adopted the provisions of this consensus in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of at the date an entity commits to an exit plan. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted this statement in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In fiscal 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 consensus deals with accounting for certain types of sales incentives and other consideration offered by companies to their customers. This consensus is effective in fiscal years beginning after December 15, 2001. The Company adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements. In August 2001, 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 adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements. 11 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 adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements as it does not have goodwill or other acquired tangible assets on its consolidated balance sheet. NEW ACCOUNTING STANDARDS In January 2003, the FASB issued Financial Interpretation Number (FIN) 46, "Consolidation of Variable Interest Entities." FIN 46, an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of any expected losses from the variable interest entity's activities, is entitled to receive any expected residual returns of the variable interest entity, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and applies in the first fiscal year or interim period beginning after June 15, 2003, for variable interest entities created prior to February 1, 2003. The Company adopted this statement for variable interest entities created after January 31, 2003 in the fourth quarter of 2002 with no material effect on its consolidated financial statements. On August 1, 2003 the Company refinanced its real estate operating lease facility, which qualified as a variable interest entity into a new entity. The Company has evaluated this leasing transaction in accordance with FIN 46 and has determined it does not have to consolidate this leasing entity. The Company will adopt this statement for variable interest entities created prior to January 31, 2003 in the third quarter of 2003 with no material effect on its consolidated financial statements. See Note 15 to the Consolidated Financial Statements for information regarding subsequent events related to leasing. 12 In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." As a result of rescinding FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, "Reporting the Results of Operations." This statement also amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. For the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001, the Company previously recognized extraordinary items pertaining to the extinguishment of debt, net of tax, of $(239), $(765), and $2,054, respectively. Reclassifications for these items have been made for all periods presented. 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 will adopt the provisions of SFAS No. 143 in the first quarter of fiscal 2003, and will recognize an asset of $2,844, accumulated depreciation of $2,247, a liability of $4,540 and a cumulative effect of a change in accounting principle before taxes of $3,943 ($2,484, net of tax) on its consolidated financial statements. RECLASSIFICATIONS The Company has made reclassifications to the consolidated financial statements and notes thereto to reflect the discontinued operations presentation required by the subsequent events described in Note 15 "Subsequent Events - Discontinued Operations". The Company has also reclassified previously recognized extraordinary items pertaining to the extinguishment of debt. Certain reclassifications have been made to the prior years' consolidated financial statements to provide comparability with the current year's presentation. NOTE 2 - DEBT
LONG-TERM DEBT - ------------------------------------------------------------------------------------------------------------ February 1, 2003 February 2, 2002 - ------------------------------------------------------------------------------------------------------------ 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 2016 100,000 100,000 6.625% notes due May 2003 75,000 75,000 Medium-term notes, 6.4% to 6.7%, due November 2004 through September 2007 51,215 144,005 Senior secured credit facility, payable through July 2003 and July 2006 42,588 71,625 Other notes payable, 3.8% to 8% 7,361 7,472 Capital lease obligations, payable through July 2004 748 89 Revolving credit agreement 547 70,842 - ------------------------------------------------------------------------------------------------------------ 477,459 669,033 Less current maturities 101,882 124,615 - ------------------------------------------------------------------------------------------------------------ Total Long-Term Debt $375,577 $544,418 - ------------------------------------------------------------------------------------------------------------
13 In January 2003, the Company reclassified $6,000 of other notes payable, due January 1, 2004, to current liabilities on the consolidated balance sheet. In the third quarter of fiscal 2002, the Company retired $42,875 aggregate principal amount of the remaining $43,005 of the Medium-Term Notes with an original maturity date of September 2007. These notes were redeemed at the option of the holders. In the second quarter of fiscal 2002, the Company reclassified the $75,000, 6.625% notes with a stated maturity date of May 15, 2003 to current liabilities on the consolidated balance sheet. In the second quarter of fiscal 2002, the Company retired $49,915 aggregate principal amount of the $50,000 Medium-Term Note with an original maturity date of July 2007. These notes were redeemed at the option of the holders. 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 1, 2003 of $89,960, 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 fiscal 2003. The weighted average interest rate on Tranche A was 5.5% at February 1, 2003 and 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 5.8% at February 1, 2003 and 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 financial covenants. This revolver replaces the previous revolver the Company had with nine major banks, which provided up to $200,000 in borrowings. The weighted average interest rate on borrowings under the revolving credit agreement was 3.8% and 6.2% at February 1, 2003 and February 2, 2002, respectively. 14 In June 2000, the Company repurchased $5,995 face value of the $49,000 Medium-Term Note. 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%. The other notes payable have a weighted average interest rate of 5.7% at February 1, 2003 and 4.9% at February 2, 2002, 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 $7,116 and $7,260 at February 1, 2003 and February 2, 2002, respectively.
CONVERTIBLE DEBT - ---------------------------------------------------------------------------------- February 1, 2003 February 2, 2002 - ---------------------------------------------------------------------------------- 4.25% Senior convertible notes, due June 2007 $150,000 $ - Less current maturities - - - ---------------------------------------------------------------------------------- Total Long-Term Convertible Debt $150,000 $ - - ----------------------------------------------------------------------------------
On May 21, 2002, the Company issued $150,000 aggregate principal amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes is payable by the Company on June 1 and December 1 of each year, beginning December 1, 2002. In fiscal 2001, the Company repurchased the remaining $241,504 face value of its Liquid Yield Option Notes (LYONs). The book value of the repurchased LYONs was $161,812. In fiscal 2000, the Company repurchased $30,200 face value of its LYONs. The book value of the repurchased LYONs was $19,226. On September 20, 1996, the Company issued $271,704 principal amount (at maturity) of LYONs with a price to the public of $150,000. The net proceeds to the Company were $146,250. These notes were retired in fiscal 2001 as stated above. 15 Several of the Company's debt agreements require the maintenance of certain financial ratios and compliance with covenants. Approximately $37,319 of the Company's net worth was not restricted by these covenants as of February 1, 2003. The Company was in compliance with all such ratios and covenants at February 1, 2003. The annual maturities of all long-term debt and capital lease commitments for the next five years are:
Long-Term Capital Year Debt Leases Total - ------------------------------------------------------------------------------ 2003 $ 101,183 $ 699 $ 101,882 2004 117,562 49 117,611 2005 109,017 - 109,017 2006 148,468 - 148,468 2007 150,235 - 150,235 Thereafter 246 - 246 - ------------------------------------------------------------------------------ Total $ 626,711 $ 748 $ 627,459 - ------------------------------------------------------------------------------
The Company was contingently liable for outstanding letters of credit in the amount of approximately $42,879 at February 1, 2003. The Company was also contingently liable for surety bonds in the amount of approximately $9,375 at February 1, 2003. See Note 15 to the consolidated financial statements for information regarding subsequent events related to debt and credit facilities. NOTE 3 - ACCRUED EXPENSES The Company's accrued expenses for fiscal years ended February 1, 2003 and February 2, 2002 were as follows:
February 1, February 2, Year ended 2003 2002 - ----------------------------------------------------------- Medical and casualty insurance $ 124,571 $ 111,136 Accrued compensation and related taxes 49,923 45,494 Other 57,761 60,763 - ----------------------------------------------------------- Total $ 232,255 $ 217,393 - -----------------------------------------------------------
16 NOTE 4 - 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 on the consolidated statement of operations. 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 on the consolidated statement of operations. 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 1, 2003, the Company had approximately $132,000 of real estate leased under the facility and 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. 17 The Company leases certain property and equipment under operating leases and capital leases which contain renewal and escalation clauses. Future minimum rental commitments for noncancelable operating leases and capital leases in effect as of February 1, 2003 are shown in the table 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:
- ------------------------------------------------------------------------------- Operating Capital Year Leases Leases - ------------------------------------------------------------------------------- 2003 $ 46,640 $ 734 2004 43,485 49 2005 36,634 - 2006 36,487 - 2007 36,313 - Thereafter 301,081 - -------- -------- Aggregate minimum lease commitments $500,640 783 ======== Less: Interest on capital leases 35 ------- Present Value of Net Minimum Lease Commitments $ 748 ======== - -------------------------------------------------------------------------------
Rental expenses incurred for operating leases in fiscal 2002, 2001 and 2000 were $64,266, $64,434 and $63,206, respectively. In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773 over four years. As of February 1, 2003, the Company was obligated to purchase an outstanding balance of $23,393. The minimum required purchases for each of the remaining three years of this commitment are as follows: 2003 - $5,993; 2004 - $9,943; 2005 - $7,457. The Company has a commitment due in the next year of $4,900 related to the non-renewal of the Chairman and CEO's employment agreement. See Note 15 to the consolidated financial statements for information regarding subsequent events related to lease and other commitments. NOTE 5 - 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 1, 2003, the Company has reflected 10,070,729 shares of its common stock at a cost of $162,595 as "cost of shares in treasury" on the Company's consolidated balance sheet. 18 RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend one common share purchase right on each of its common shares. The rights will not be exercisable or transferable apart from the Company's common stock until a person or group, as defined in the rights agreement (dated December 5, 1997), without the proper consent of the Company's Board of Directors, acquires 15% or more, or makes an offer to acquire 15% or more of the Company's outstanding stock. When exercisable, the rights entitle the holder to purchase one share of the Company's common stock for $125. Under certain circumstances, including the acquisition of 15% of the Company's stock by a person or group, the rights entitle the holder to purchase common stock of the Company or common stock of an acquiring company having a market value of twice the exercise price of the right. The rights do not have voting power and are subject to redemption by the Company's Board of Directors for $.01 per right anytime before a 15% position has been acquired and for 10 days thereafter, at which time the rights become nonredeemable. The rights expire on December 31, 2007. BENEFITS TRUST On April 29, 1994, the Company established a flexible employee benefits trust with the intention of purchasing up to $75,000 worth of the Company's common shares. The repurchased shares will be held in the trust and will be used to fund the Company's existing benefit plan obligations including healthcare programs, savings and retirement plans and other benefit obligations. The trust will allocate or sell the repurchased shares through 2023 to fund these benefit programs. As shares are released from the trust, the Company will charge or credit additional paid-in capital for the difference between the fair value of shares released and the original cost of the shares to the trust. For financial reporting purposes, the trust is consolidated with the accounts of the Company. All dividend and interest transactions between the trust and the Company are eliminated. In connection with the Dutch Auction self-tender offer, 37,230 shares were tendered at a price of $16.00 per share in fiscal 1999. At February 1, 2003, 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 6 - PROFIT ENHANCEMENT PLAN In the third quarter of fiscal 2000, the Company comprehensively reviewed its field, distribution and Store Support Center infrastructure and the performance of each of its stores. As a result, the Company implemented a number of changes that have improved its performance. These changes included the closure of 38 under-performing stores and two distribution centers and reductions in store operating hours and the Store Support Center infrastructure. PLAN UPDATE The Company is progressing towards the disposal of the 38 stores (11 owned and 27 leased), two distribution centers and two development parcels that were closed or abandoned in connection with the Profit Enhancement Plan. As of February 1, 2003, the Company had disposed of 22 of the closed stores, the two distribution centers and the two development parcels. During fiscal 2002, the Company decided to lease rather than sell three of the closed stores due to changes in the real estate market. As a result, the Company reclassified these three owned properties as assets held for use. The Company estimates that the remaining closed stores (one owned and 12 leased) will be disposed of by the end of the third quarter of fiscal 2003. ASSETS HELD FOR DISPOSAL As of February 1, 2003, the assets held for disposal included the building and land of one remaining closed store owned by the Company, which has a carrying value of $1,146. This property was sold in the first quarter of fiscal 2003. The Company has sold nine of the 13 owned properties originally held for sale, which included the two development parcels. Additionally, the Company decided to lease rather than sell three of the closed stores due to changes in the real estate market. As a result, the Company reclassified these three owned properties as assets held for use at their estimated market value. The market value of each such property was lower than cost adjusted for depreciation. 19 In fiscal 2002, the Company sold six and reclassified three (as assets held for use) of the 13 owned properties. The six properties were sold for $8,446, net of commissions, and resulted in a loss of $666, which was recorded in costs of merchandise sales on the consolidated statement of operations. In addition, the Company adjusted the carrying values of certain assets held for disposal, which resulted in a net decrease of $160, which was recorded in costs of merchandise sales on the consolidated statement of operations. In fiscal 2001, the Company sold three of the 13 owned properties for $4,103, net of commissions, and 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. In addition, 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. In fiscal 2000, the Company recorded charges related to the write-down of assets to fair value of $58,754. These charges were associated with the closure of the 38 stores, two distribution centers, the write-off of certain equipment and the abandonment of two development parcels. LEASE RESERVE As of February 1, 2003, the Company was able to sublease eight and exit the lease of an additional seven of the 27 leased stores. The Company expects the remaining 12 closed stores that are leased to be subleased or otherwise disposed of by the end of the third quarter of fiscal 2003. The Company increased the lease reserve $901 during fiscal 2002. This increase is due primarily to an increase in the time that it is expected to take to sublease certain properties, offset, in part, by an increase in the estimated sublease rates. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. The Company increased the lease reserve $1,644 during fiscal 2001. This change in the reserve was a result of a $3,834 increase due primarily to an increase in the estimated amount of time it was expected to 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 on the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $7,916 for leases of properties included in the Profit Enhancement Plan. The Company increased the reserve by $113 during the remainder of fiscal 2000. 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. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit the Company's continuing activities. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed. 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. These disposals are expected to be completed by the end of the third quarter of fiscal 2003. 20 In fiscal 2002, the Company increased the on-going expense reserve by $802. This increase is due primarily to an increase in the length of time that it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of operations. In fiscal 2001, the Company increased the on-going expense reserve by $595. This increase was due primarily to a $1,214 increase in the reserve due to an increase in the estimated time it was 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. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $3,944 for on-going expenses associated with the properties included in the Profit Enhancement Plan. The Company increased the on-going expense reserve by $361 during the remainder of fiscal 2000. This increase was due to an increase in the estimated time it was expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of operations. SEVERANCE RESERVE In fiscal 2001, the severance reserve was completed. Therefore, there was no activity to this reserve in fiscal 2002. In fiscal 2001, the Company reversed $69 of severance because certain employees who originally expected to receive severance failed to qualify to receive payments. In addition, final severance payments were lower than estimated. Each of these reversals was recorded through the line it was originally charged in the consolidated statements of operations. In fiscal 2000, the Company recorded a reserve of $1,694 for severance associated with the Profit Enhancement Plan. During the remainder of fiscal 2000, the Company reversed $272 of severance due to certain employees' acceptance into other positions within the Company and other employees failing to qualify to receive payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. 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. 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. There were no expenses of this nature incurred in fiscal 2002. In fiscal 2001, expenses of this nature incurred were $678. These expenses related to the completion of the removal of inventory and equipment from the closed distribution centers. In fiscal 2000, expenses of this nature incurred were $3,611. These expenses were for inventory and equipment handling related to the closure of the 38 stores and the two distribution centers. The fiscal 2000 expenses were offset by a recovery of certain benefit expenses related to the reduction in workforce. 21 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Following are tables summarizing expenses related to the Profit Enhancement Plan for fiscal 2002, 2001 and 2000. The details and reasons for the original charge and changes to the charge are as described above in the respective reserve categories.
Income Statement Fiscal Fiscal Fiscal Classification 2002 2001 2000 - ----------------------------------------------------------------- Costs of merchandise sales $2,014 $4,169 $67,085 Costs of service revenue 491 813 5,232 Selling, general and administrative 24 215 2,628 - ----------------------------------------------------------------- Total Expenses $2,529 $5,197 $74,945 - -----------------------------------------------------------------
At the end of the third quarter of fiscal 2000, the Company set up a reserve liability account, which is included in accrued expenses 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:
Lease Fixed On-going Expenses Assets Severance Expenses Total - ----------------------------------------------------------------------------------------- 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 Addition 1,825 826 - 802 3,453 Utilization (2,959) (826) - (1,680) (5,465) Adjustment (924) - - - (924) - ----------------------------------------------------------------------------------------- Reserve Balance at Feb. 1, 2003 $ 1,092 $ - $ - $ 442 $ 1,534 - -----------------------------------------------------------------------------------------
22 NOTE 7 - SUPPLEMENTAL GUARANTOR INFORMATION - CONVERTIBLE SENIOR NOTES On May 21, 2002, the Company issued $150,000 aggregate principal amount of 4.25% Convertible Senior Notes. The notes are jointly and severally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The following are consolidating balance sheets of the Company as of February 1, 2003 and February 2, 2002 and the related consolidating statements of operations and consolidating statements of cash flows for the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001:
CONSOLIDATING BALANCE SHEET Non- Subsidiary guarantor Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 32,654 $ 9,714 $ 402 $ - $ 42,770 Accounts receivable, net 8,122 9,794 - - 17,916 Merchandise inventories 166,166 322,716 - - 488,882 Prepaid expenses 29,176 16,308 17,637 (19,375) 43,746 Deferred income taxes 6,812 (819) 7,730 - 13,723 Other 107 - 56,580 - 56,687 Assets held for disposal - 1,146 - - 1,146 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 243,037 358,859 82,349 (19,375) 664,870 - ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 88,271 175,830 - - 264,101 Buildings and improvements 303,200 587,698 - - 890,898 Furniture, fixtures and equipment 279,884 300,862 - - 580,746 Construction in progress 14,764 4,686 - - 19,450 - ----------------------------------------------------------------------------------------------------------------------------- 686,119 1,069,076 - - 1,755,195 Less accumulated depreciation and amortization 319,005 405,704 - - 724,709 - ----------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment - Net 367,114 663,372 - - 1,030,486 - ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,455,877 - 1,121,299 (2,577,176) - Intercompany receivable - 631,438 335,640 (967,078) - Other 41,972 5,031 - - 47,003 Assets from discontinued operations 14,219 43,332 - - 57,551 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,122,219 $ 1,702,032 $ 1,539,288 $ (3,563,629) $ 1,799,910 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 200,044 $ 9 $ - $ - $ 200,053 Accrued expenses 59,625 48,567 143,438 (19,375) 232,255 Current maturities of long-term debt and obligations under capital leases 101,882 - - - 101,882 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 361,551 48,576 143,438 (19,375) 534,190 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 375,216 361 - - 375,577 Convertible long-term debt, less current maturities 150,000 - - - 150,000 Other long-term liabilities 5,955 19,201 - - 25,156 Intercompany liabilities 544,877 422,201 - (967,078) - Deferred income taxes 33,322 27,341 - - 60,663 Deferred gain on sale leaseback 1,306 3,026 - - 4,332 Stockholders' Equity: Common stock 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital 177,244 240,359 200,398 (440,757) 177,244 Retained earnings 630,847 939,466 1,195,351 (2,134,817) 630,847 Accumulated other comprehensive loss (151) - - - (151) - ----------------------------------------------------------------------------------------------------------------------------- 871,851 1,181,326 1,395,850 (2,577,176) 871,851 Less: Cost of shares in treasury 162,595 - - - 162,595 Cost of shares in benefits trust 59,264 - - - 59,264 - ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 649,992 1,181,326 1,395,850 (2,577,176) 649,992 - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,122,219 $ 1,702,032 $ 1,539,288 $ (3,563,629) $ 1,799,910 - -----------------------------------------------------------------------------------------------------------------------------
23
CONSOLIDATING BALANCE SHEET Non- Subsidiary guarantor Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 4,796 $ 10,874 $ 311 $ - $ 15,981 Accounts receivable, net 17,124 928 - - 18,052 Merchandise inventories 176,696 342,777 - - 519,473 Prepaid expenses 42,384 (15,815) 17,851 (2,250) 42,170 Deferred income taxes 6,581 (4,220) 6,942 - 9,303 Other 3 - 67,305 (15,000) 52,308 Assets held for disposal 2,755 13,252 - - 16,007 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 250,339 347,796 92,409 (17,250) 673,294 - ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 88,392 174,329 - - 262,721 Buildings and improvements 297,798 579,885 - - 877,683 Furniture, fixtures and equipment 266,031 294,969 - - 561,000 Construction in progress 5,380 5,239 - - 10,619 - ----------------------------------------------------------------------------------------------------------------------------- 657,601 1,054,422 - - 1,712,023 Less accumulated depreciation and amortization 286,706 366,475 - - 653,181 - ----------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment - Net 370,895 687,947 - - 1,058,842 - ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,388,724 - 1,050,494 (2,439,218) - Intercompany receivable - 567,825 301,321 (869,146) - Other 13,355 2,000 - - 15,355 Assets from discontinued operations 14,914 43,730 - - 58,644 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,038,227 $ 1,649,298 $ 1,444,224 $ (3,325,614) $ 1,806,135 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 216,076 $ 9 $ - $ - $ 216,085 Accrued expenses 56,065 48,093 130,485 (17,250) 217,393 Current maturities of long-term debt and obligations under capital leases 124,615 - - - 124,615 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 396,756 48,102 130,485 (17,250) 558,093 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 497,603 46,815 - - 544,418 Other long-term liabilities 6,339 17,541 - - 23,880 Intercompany liabilities 488,066 381,080 - (869,146) - Deferred income taxes 30,357 27,153 - - 57,510 Deferred gain on sale leaseback 1,316 3,128 - - 4,444 Stockholders' Equity: Common stock 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital 177,244 240,359 200,398 (440,757) 177,244 Retained earnings 601,944 883,619 1,113,240 (1,996,859) 601,944 - ----------------------------------------------------------------------------------------------------------------------------- 843,099 1,125,479 1,313,739 (2,439,218) 843,099 Less: Cost of shares in treasury 166,045 - - - 166,045 Cost of shares in benefits trust 59,264 - - - 59,264 - ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 617,790 1,125,479 1,313,739 (2,439,218) 617,790 - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,038,227 $ 1,649,298 $ 1,444,224 $ (3,325,614) $ 1,806,135 - -----------------------------------------------------------------------------------------------------------------------------
24
CONSOLIDATING STATEMENT OF OPERATIONS Non- Subsidiary guarantor Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 585,819 $ 1,111,809 $ - $ - $ 1,697,628 Service Revenue 140,419 259,730 - - 400,149 Other Revenue - - 26,075 (26,075) - - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 726,238 1,371,539 26,075 (26,075) 2,097,777 - ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 406,192 776,946 - - 1,183,138 Costs of Service Revenue 101,443 196,650 - - 298,093 Costs of Other Revenue - - 29,498 (29,498) - - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 507,635 973,596 29,498 (29,498) 1,481,231 - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 179,627 334,863 - - 514,490 Gross Profit from Service Revenue 38,976 63,080 - - 102,056 Gross Loss from Other Revenue - - (3,423) 3,423 - - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 218,603 397,943 (3,423) 3,423 616,546 - ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 168,327 332,096 317 3,423 504,163 - ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 50,276 65,847 (3,740) - 112,383 Equity in Earnings of Subsidiaries 67,153 - 70,805 (137,958) - Non-operating (Expense) Income (16,977) 47,332 21,113 (48,371) 3,097 Interest Expense 70,099 25,509 - (48,371) 47,237 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from Continuing Operations Before Income Taxes 30,353 87,670 88,178 (137,958) 68,243 Income Tax (Benefit) Expense (12,828) 32,013 6,066 - 25,251 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings from Continuing Operations 43,181 55,657 82,112 (137,958) 42,992 Net Earnings from Discontinued Operations, Net of Tax 619 189 - - 808 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 43,800 $ 55,846 $ 82,112 $ (137,958) $ 43,800 - -----------------------------------------------------------------------------------------------------------------------------
25
CONSOLIDATING STATEMENT OF OPERATIONS Non- Subsidiary guarantor Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 587,319 $ 1,119,871 $ - $ - $ 1,707,190 Service Revenue 143,267 260,238 - - 403,505 Other Revenue - - 22,588 (22,588) - - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 730,586 1,380,109 22,588 (22,588) 2,110,695 - ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 415,805 791,348 - - 1,207,153 Costs of Service Revenue 105,848 196,604 - - 302,452 Costs of Other Revenue - - 26,118 (26,118) - - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 521,653 987,952 26,118 (26,118) 1,509,605 - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 171,514 328,523 - - 500,037 Gross Profit from Service Revenue 37,419 63,634 - - 101,053 Gross Loss from Other Revenue - - (3,530) 3,530 - - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 208,933 392,157 (3,530) 3,530 601,090 - ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 167,733 326,231 304 3,530 497,798 - ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 41,200 65,926 (3,834) - 103,292 Equity in Earnings of Subsidiaries 65,109 - 73,910 (139,019) - Non-operating (Expense) Income (15,616) 49,962 22,979 (52,702) 4,623 Interest Expense 74,617 31,794 - (52,702) 53,709 - ----------------------------------------------------------------------------------------------------------------------------- Earnings from Continuing Operations, Before Income Taxes 16,076 84,094 93,055 (139,019) 54,206 Income Tax (Benefit) Expense (18,754) 31,566 6,701 - 19,513 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings from Continuing Operations 34,830 52,528 86,354 (139,019) 34,693 Net Earnings from Discontinued Operations, Net of Tax 505 137 - - 642 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 35,335 $ 52,665 $ 86,354 $ (139,019) $ 35,335 - -----------------------------------------------------------------------------------------------------------------------------
26
CONSOLIDATING STATEMENT OF OPERATIONS Non- Subsidiary guarantor Year ended February 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 649,360 $ 1,241,686 $ - $ - $ 1,891,046 Service Revenue 158,383 285,850 - - 444,233 Other Revenue - - 22,672 (22,672) - - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 807,743 1,527,536 22,672 (22,672) 2,335,279 - ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 489,508 965,505 - - 1,455,013 Costs of Service Revenue 127,707 238,283 - - 365,990 Costs of Other Revenue - - 24,097 (24,097) - - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 617,215 1,203,788 24,097 (24,097) 1,821,003 - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 159,852 276,181 - - 436,033 Gross Profit from Service Revenue 30,676 47,567 - - 78,243 Gross Loss from Other Revenue - - (1,425) 1,425 - - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 190,528 323,748 (1,425) 1,425 514,276 - ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 240,468 299,846 309 1,425 542,048 - ----------------------------------------------------------------------------------------------------------------------------- Operating (Loss) Profit (49,940) 23,902 (1,734) - (27,772) Equity in Earnings of Subsidiaries 52,268 - 85,390 (137,658) - Non-operating (Expense) Income (14,673) 68,461 23,977 (70,451) 7,314 Interest Expense 95,648 34,521 - (70,451) 59,718 - ----------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings from Continuing Operations Before Income Taxes (107,993) 57,842 107,633 (137,658) (80,176) Income Tax (Benefit) Expense (57,750) 20,718 7,785 - (29,247) - ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings from Continuing Operations (50,243) 37,124 99,848 (137,658) (50,929) Net (Loss) Earnings from Discontinued Operations, Net of Tax (851) 686 - - (165) - ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings $ (51,094) $ 37,810 $ 99,848 $ (137,658) $ (51,094) - -----------------------------------------------------------------------------------------------------------------------------
27
CONSOLIDATING STATEMENT OF CASH FLOWS Non- Subsidiary guarantor Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Earnings $ 43,800 $ 55,846 $ 82,112 $ (137,958) $ 43,800 Net Earnings from Discontinued Operations 619 189 - - 808 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings from Continuing Operations 43,181 55,657 82,112 (137,958) 42,992 Adjustments to Reconcile Net Earnings to Net Cash Provided By Continuing Operations: Depreciation and amortization 32,928 43,005 - - 75,933 Deferred income taxes 2,823 (3,211) (788) - (1,176) Deferred gain on sale leaseback (11) (101) - - (112) Equity in earnings of subsidiaries (67,153) - (70,805) 137,958 - Loss on assets held for disposal 11 815 - - 826 Gain from sale of assets (216) (1,693) - - (1,909) Change in current assets and liabilities Decrease (Increase) in accounts receivable, prepaid expenses and other 15,147 (41,241) 10,938 2,125 (13,031) Decrease in merchandise inventories 10,530 20,061 - - 30,591 Decrease in accounts payable (16,032) - - - (16,032) Increase in accrued expenses 2,956 361 12,953 (2,125) 14,145 (Decrease) Increase in other long-term liabilities (384) 1,660 - - 1,276 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Continuing Operations 23,780 75,313 34,410 - 133,503 Net Cash Provided by Discontinued Operations 1,911 2,986 - - 4,897 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 25,691 78,299 34,410 - 138,400 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures from continuing operations (27,005) (14,884) - - (41,889) Capital expenditures from discontinued operations (163) (1,859) - - (2,022) Proceeds from sales of assets 2,050 9,008 - - 11,058 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (25,118) (7,735) - - (32,853) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net payments under line of credit agreements (23,841) (46,454) - - (70,295) Repayment of life insurance policy loan (17,908) (2,778) - - (20,686) Payments on capital lease obligations (642) - - - (642) Reduction of long-term debt (121,938) - - - (121,938) Net proceeds from issuance of notes 146,250 - - - 146,250 Intercompany loan 56,811 (22,492) (34,319) - - Dividends paid (13,911) - - - (13,911) Proceeds from exercise of stock options 1,139 - - - 1,139 Proceeds from dividend reinvestment plan 1,325 - - - 1,325 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 27,285 (71,724) (34,319) - (78,758) - ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 27,858 (1,160) 91 - 26,789 Cash and Cash Equivalents at Beginning of Year 4,796 10,874 311 - 15,981 - ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 32,654 $ 9,714 $ 402 $ - $ 42,770 - -----------------------------------------------------------------------------------------------------------------------------
28
CONSOLIDATING STATEMENT OF CASH FLOWS Non- Subsidiary guarantor Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Earnings $ 35,335 $ 52,665 $ 86,354 $ (139,019) $ 35,335 Net Earnings from Discontinued Operations 505 137 - - 642 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings from Continuing Operations 34,830 52,528 86,354 (139,019) 34,693 Adjustments to Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing Operations: Depreciation and amortization 35,657 45,333 - - 80,990 Deferred income taxes 1,110 6,730 (416) - 7,424 Deferred gain on sale leaseback (12) (14) - - (26) Equity in earnings of subsidiaries (65,109) - (73,910) 139,019 - Accretion of bond discount 3,256 - - - 3,256 Loss on assets held for disposal 24 2,325 - - 2,349 Gain from sale of assets (47) (1,049) - - (1,096) Gain from extinguishment of debt (755) - - - (755) Change in current assets and liabilities (Increase) Decrease in accounts receivable, prepaid expenses and other (33,052) 35,258 (18,087) (1,325) (17,206) Decrease in merchandise inventories 9,674 18,588 - - 28,262 Increase in accounts payable 11,330 - - - 11,330 (Decrease) Increase in accrued expenses (16,831) 18,176 9,064 1,325 11,734 Increase in other long-term liabilities 219 2,007 - - 2,226 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Continuing Operations (19,706) 179,882 3,005 - 163,181 Net Cash Provided by Discontinued Operations 1,808 2,904 - - 4,712 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Operating Activities (17,898) 182,786 3,005 - 167,893 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures from continuing operations (14,133) (9,228) - - (23,361) Capital expenditures from discontinued operations (259) (1,755) - - (2,014) Proceeds from sales of assets 7,205 19,555 - - 26,760 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Investing Activities (7,187) 8,572 - - 1,385 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net payments under line of credit agreements (19,147) (37,729) - - (56,876) Reduction of long-term debt (18,571) - - - (18,571) Reduction of convertible debt (161,056) - - - (161,056) Net proceeds from issuance of notes 87,522 - - - 87,522 Intercompany loan 152,962 (149,793) (3,169) - - Dividends paid (13,864) - - - (13,864) Proceeds from exercise of stock options 181 - - - 181 Proceeds from dividend reinvestment plan 1,372 - - - 1,372 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 29,399 (187,522) (3,169) - (161,292) - ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 4,314 3,836 (164) - 7,986 Cash and Cash Equivalents at Beginning of Year 482 7,038 475 - 7,995 - ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 4,796 $ 10,874 $ 311 $ - $ 15,981 - -----------------------------------------------------------------------------------------------------------------------------
29
CONSOLIDATING STATEMENT OF CASH FLOWS Non- Subsidiary guarantor Year ended February 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net (Loss) Earnings $ (51,094) $ 37,810 $ 99,848 $ (137,658) $ (51,094) Net (Loss) Earnings from Discontinued Operations (851) 686 - - (165) - ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings from Continuing Operations (50,243) 37,124 99,848 (137,658) (50,929) Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing Operations: Depreciation and amortization 40,313 55,194 - - 95,507 Deferred income taxes (4,459) (19,657) (459) - (24,575) Equity in earnings of subsidiaries (52,268) - (85,390) 137,658 - Accretion of bond discount 6,425 - - - 6,425 Loss on assets held for disposal 4,527 49,213 - - 53,740 Loss on asset impairment 174 2,373 - - 2,547 Loss from sale of assets 879 2,872 - - 3,751 Gain from extinguishment of debt (2,985) - - - (2,985) Change in current assets and liabilities Decrease (Increase) in accounts receivable, prepaid expenses and other 14,093 (171) (3,339) 150 10,733 Decrease in merchandise inventories 324 34,839 - - 35,163 Decrease in accounts payable (114,964) - (347) - (115,311) Increase (Decrease) in accrued expenses 4,307 (12,548) 6,231 (150) (2,160) Increase in other long-term liabilities 116 940 - - 1,056 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Continuing Operations (153,761) 150,179 16,544 - 12,962 Net Cash Provided by Discontinued Operations 1,963 4,666 - - 6,629 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Operating Activities (151,798) 154,845 16,544 - 19,591 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures from continuing operations (24,057) (27,187) - - (51,244) Capital expenditures from discontinued operations (239) (5,853) - - (6,092) Proceeds from sales of assets 4,803 9,577 - - 14,380 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (19,493) (23,463) - - (42,956) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net borrowings under line of credit agreements 33,446 84,089 - - 117,535 Reduction of long-term debt (75,028) - - - (75,028) Reduction of convertible debt (17,208) - - - (17,208) Intercompany loan 233,972 (217,590) (16,382) - - Dividends paid (13,793) - - - (13,793) Proceeds from dividend reinvestment plan 1,369 - - - 1,369 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 162,758 (133,501) (16,382) - 12,875 - ----------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash (8,533) (2,119) 162 - (10,490) Cash and Cash Equivalents at Beginning of Year 9,015 9,157 313 - 18,485 - ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 482 $ 7,038 $ 475 $ - $ 7,995 - -----------------------------------------------------------------------------------------------------------------------------
30 NOTE 8 - PENSION AND SAVINGS PLANS The Company has a defined benefit pension plan covering substantially all of its full-time employees hired on or before February 1, 1992. Normal retirement age is 65. Pension benefits are based on salary and years of service. The Company's policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA. The actuarial computations are made using the "projected unit credit method." Variances between actual experience and assumptions for costs and returns on assets are amortized over the remaining service lives of employees under the plan. As of December 31, 1996, the Company froze the accrued benefits under the plan and active participants became fully vested. The plan's trustee will continue to maintain and invest plan assets and will administer benefit payments. The Company also has a Supplemental Executive Retirement Plan (SERP). This unfunded plan provides key employees designated by the Board of Directors with retirement and death benefits. Retirement benefits are based on salary and bonuses; death benefits are based on salary. Benefits paid to a participant under the defined pension plan are deducted from the benefits otherwise payable under the SERP. Effective March 25, 2002, the Company modified the benefit formula of the SERP. These modifications resulted in a $2,101 change in benefit obligation in fiscal 2002. In fiscal 2003, the Company anticipates an approximate settlement of $12,200 related to the SERP obligation for the Chairman and CEO. This obligation will result in an expense for settlement accounting under SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," of approximately $4,900 in fiscal 2003. Pension expense includes the following:
February 1, February 2, February 3, Year ended 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Service cost $ 587 $ 328 $ 335 Interest cost 2,934 2,526 2,443 Expected return on plan assets (2,300) (2,162) (2,261) Amortization of transition obligation 274 60 60 Amortization of prior service cost 297 10 10 Recognized actuarial loss 1,451 992 890 - ----------------------------------------------------------------------------------------------------------------------------- Total Pension Expense $ 3,243 $ 1,754 $ 1,477 - -----------------------------------------------------------------------------------------------------------------------------
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. 31 The following table sets forth the reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company's plans:
February 1, February 2, Year ended 2003 2002 - -------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of year $ 37,098 $34,517 Service cost 587 328 Interest cost 2,934 2,526 Plan amendments 2,101 - Actuarial loss 5,202 1,014 Benefits paid (1,335) (1,287) - --------------------------------------------------------------------------------------------------------------- Benefit Obligation at End of Year $ 46,587 $37,098 - --------------------------------------------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of year $ 27,314 $25,854 Actual return on plan assets (net of expenses) (1,867) 1,816 Employer contributions 6,975 931 Benefits paid (1,335) (1,287) - --------------------------------------------------------------------------------------------------------------- Fair Value of Plan Assets at End of Year $ 31,087 $27,314 - --------------------------------------------------------------------------------------------------------------- Reconciliation of the Funded Status: Funded status $(15,500) $(9,785) Unrecognized transition obligation 2,194 2,468 Unrecognized prior service cost 1,829 26 Unrecognized actuarial loss 11,857 3,933 Amount contributed after measurement date 5 214 - --------------------------------------------------------------------------------------------------------------- Net Amount Recognized at Year-End $ 385 $(3,144) - --------------------------------------------------------------------------------------------------------------- Amounts Recognized on Consolidated Balance Sheets Consist of: Prepaid benefit cost $ 9,438 $ 3,960 Accrued benefit liability (13,318) (8,144) Intangible asset 4,023 1,040 Accumulated other comprehensive loss 242 - - --------------------------------------------------------------------------------------------------------------- Net Amount Recognized at Year-End $ 385 $(3,144) - --------------------------------------------------------------------------------------------------------------- Weighted-Average Assumptions: Discount rate 6.75% 7.25% Expected return on plan assets 8.50% 8.50% - ---------------------------------------------------------------------------------------------------------------
The following table sets forth additional fiscal year-end information for the Company's SERP for which the accumulated benefit obligation is in excess of plan assets:
February 1, February. 2, Year ended 2003 2002 - --------------------------------------------------------------------------------------------------------------- Projected benefit obligation $15,752 $9,590 Accumulated benefit obligation 13,318 8,144 Fair value of plan assets - - - ---------------------------------------------------------------------------------------------------------------
The Company recorded an other comprehensive loss attributable to the change in the minimum pension liability of $242 ($151, net of tax) in fiscal 2002. The Company had no other comprehensive loss or income attributable to the change in the minimum pension liability in fiscal 2001 and 2000. 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 $4,417, $4,516 and $4,947 in fiscal 2002, 2001 and 2000, respectively. 32 NOTE 9 - EARNINGS PER SHARE For fiscal 2002, 2001 and 2000, 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 senior notes, zero coupon convertible subordinated notes and the dilutive effects of stock options. Adjustments for the zero coupon convertible subordinated notes were antidilutive in fiscal 2001 and 2000, and therefore excluded from the computation of diluted EPS; the zero coupon convertible subordinated notes were retired as of the end of fiscal 2001 and will not effect future calculations. Options to purchase 4,588,670, 3,940,587 and 5,032,772 shares of common stock were outstanding at February 1, 2003, February 2, 2002 and February 3, 2001, 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 net earnings (loss) from continuing operations:
February 1, February 2, February 3, Year ended 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations: Basic earnings (loss) from continuing operations available to common stockholders $42,992 $34,693 $(50,929) Adjustment for interest on convertible senior notes, net of tax 2,807 - - - ------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) from continuing operations available to common stockholders $45,799 $34,693 $(50,929) - ------------------------------------------------------------------------------------------------------------- Shares: Basic average number of common shares outstanding 51,517 51,348 51,088 Common shares assumed issued upon conversion of convertible senior notes 4,729 - - Common shares assumed issued upon exercise of dilutive stock options 953 687 - - ------------------------------------------------------------------------------------------------------------- Diluted average number of common shares outstanding assuming conversion 57,199 52,035 51,088 - ------------------------------------------------------------------------------------------------------------- Per Share: Basic earnings (loss) from continuing operations per share $ .83 $ .68 $ (1.00) Diluted earnings (loss) from continuing operations per share $ .80 $ .67 $ (1.00) - -------------------------------------------------------------------------------------------------------------
33 NOTE 10 - STOCK OPTION PLANS Options to purchase the Company's common stock have been granted to key employees and members of the Board of Directors. The option prices are at least 100% of the fair market value of the common stock on the grant date. On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan which authorized the issuance of restricted stock and/or options to purchase up to 1,000,000 shares of the Company's common stock. Additional shares in the amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by stockholders on June 4, 1997, May 31, 1995 and June 1, 1993, respectively. 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 1, 2003, there are 200,354 shares remaining 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. Additional shares in the amount of 2,500,000 were authorized by stockholders on May 29, 2002. 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 1, 2003, there are 2,189,750 shares remaining 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 6,898,170 - 6,898,170 Weighted average exercise price of outstanding options $ 16.57 $ - $ 16.57 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in top row) 2,390,104 - 2,390,104 - --------------------------------------------------------------------------------------
34 Stock option transactions for the Company's stock option plans are summarized as follows:
Fiscal 2002 Fiscal 2001 Fiscal 2000 ------------------------ ----------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 6,316,787 $16.48 5,039,772 $19.63 5,413,622 $22.05 Granted 1,213,300 16.27 1,757,000 6.75 1,160,450 6.34 Exercised (108,880) 8.10 (19,400) 8.77 - - Cancelled (523,037) 16.45 (460,585) 14.26 (1,534,300) 18.10 Outstanding - end of year 6,898,170 16.57 6,316,787 16.48 5,039,772 19.63 Options exercisable at year end 4,148,570 20.54 3,422,187 22.29 2,501,678 24.93 Weighted average estimated fair value of options granted 7.20 2.85 2.54 - ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at February 1, 2003:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at Feb. 1, 2003 Life Price at Feb. 1, 2003 Price - --------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $13.00 2,186,100 8 years $ 6.51 595,400 $ 6.62 $13.01 to $21.00 2,428,850 8 years 15.91 1,269,950 15.58 $21.01 to $29.00 1,300,617 4 years 23.36 1,300,617 23.36 $29.01 to $37.38 982,603 3 years 31.63 982,603 31.63 - --------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $37.38 6,898,170 4,148,570 - ---------------------------------------------------------------------------------------------------------------------------
35 NOTE 11 - INCOME TAXES The provision for income taxes includes the following:
February 1, February 2, February 3, Year ended 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Current: Federal $ 24,502 $ 11,985 $ (5,101) State 1,903 236 352 Deferred: Federal (1,189) 6,561 (22,706) State 35 731 (1,792) - ---------------------------------------------------------------------------------------------------------------------------------- $ 25,251 $ 19,513 $ (29,247) - ---------------------------------------------------------------------------------------------------------------------------------- A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows: February 1, February 2, February 3, Year ended 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 1.9 1.2 1.2 Job credits (0.3) (0.3) 0.3 Other, net 0.4 0.1 - - ----------------------------------------------------------------------------------------------------------------------------------- 37.0% 36.0% 36.5% - -----------------------------------------------------------------------------------------------------------------------------------
Items that gave rise to significant portions of the deferred tax accounts are as follows:
February 1, February 2, 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred Tax Assets: Inventories $ 4,456 $ 3,841 Employee compensation 7,209 4,990 Store closing reserves 750 375 Legal 2,270 2,438 Real estate tax (2,188) (2,188) Insurance 6,128 4,621 Benefit accruals (5,860) (5,693) State tax credit 419 - Valuation allowance (419) - Other 958 919 - ----------------------------------------------------------------------------------------------------------------------------------- $ 13,723 $ 9,303 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred Tax Liabilities: Depreciation $ 72,944 $ 69,093 State taxes (3,046) (2,643) Accrued leases (9,435) (8,955) Other 200 15 - ----------------------------------------------------------------------------------------------------------------------------------- $ 60,663 $ 57,510 - ----------------------------------------------------------------------------------------------------------------------------------- Net Deferred Tax Liability $ 46,940 $ 48,207 - -----------------------------------------------------------------------------------------------------------------------------------
36 NOTE 12 - CONTINGENCIES The Company's California subsidiary is a defendant in a consolidated action entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack" that is currently pending in the California Superior Court in Orange County. The two consolidated actions were originally filed on March 29, 2000 and July 25, 2000. Plaintiffs are former and current store management employees who claim that they were improperly classified as exempt from the overtime provisions of California law and seek to be compensated for all overtime hours worked. Plaintiffs filed a Motion to certify the case as a class action to represent all persons employed in California as salaried store managers, assistant store managers, service managers and assistant service managers since March 29, 1996. Plaintiffs' Motion to certify the case as a class action was previously granted by the trial court. The Company's appeals of that decision through the California Supreme Court were unsuccessful. 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 previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. 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 a Federal Trade Commission 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 continues 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, are not, singularly or in the aggregate, material to the Company's financial position or results of operations. See Note 15 to the consolidated financial statements for information regarding subsequent events related to contingencies. NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
February 1, 2003 February 2, 2002 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 42,770 $ 42,770 $ 15,981 $ 15,981 Accounts receivable 17,916 17,916 18,052 18,052 Liabilities: Accounts payable 200,053 200,053 216,085 216,085 Long-term debt including current maturities 477,459 462,609 669,033 635,080 Senior convertible notes 150,000 133,125 - - - --------------------------------------------------------------------------------------------------------------------------
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 SENIOR CONVERTIBLE SUBORDINATED NOTES 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 1, 2003 and February 2, 2002. 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. 37 NOTE 14 - SUBSEQUENT EVENT - SHARE REPURCHASE PROGRAM On March 26, 2003, the Company announced that its Board of Directors authorized a share repurchase program for the purchase of up to $25,000 of its outstanding common stock. Share repurchases may be made from time to time in the open market or in privately negotiated transactions. NOTE 15 - SUBSEQUENT EVENTS - RESTRUCTURING, DEBT AND FINANCING ARRANGEMENTS, AND CONTINGENCIES Restructuring Building upon the Profit Enhancement Plan launched in October 2000, the Company conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon the Company's profitability. The Company expects these actions, including the disposal and sublease of the properties, to be substantially completed by the end of the second quarter 2004 and estimates the costs, including future costs that were not accrued, to be approximately $70,100. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". These initiatives included: Closure of 33 under-performing stores on July 31, 2003 The charges related to these closures, which were recorded in the second quarter of 2003, included a $33,887 write down of fixed assets, $1,122 in long-term lease and other related obligations, net of subleases, and $980 in workforce reduction costs. Discontinuation of certain merchandise offerings In the second quarter of 2003, the Company recorded a $24,580 write-down of inventory as a result of a decision to discontinue certain merchandising offerings. Corporate realignment The charges related to this realignment, which were recorded in the second quarter of 2003, included $3,070 in workforce reduction costs, $2,543 of expenses incurred in the development of the restructuring plan, a $536 write-down of certain assets and $467 in costs related to two warehouse lease terminations. 38 Discontinued Operations In accordance with SFAS 144, the Company's discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company's corporate restructuring. The results for fiscal years 2002, 2001 and 2000 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results: February 1, February 2, February 3, Year ended 2003 2002 2001 ----------- ------------ ------------ Amount Amount Amount - ------------------------------------------------------------------------------------- Total Revenues $ 74,711 $ 73,865 $ 83,189 Total Gross Profit 17,565 17,151 17,575 Selling, General and Administrative Expenses 16,283 16,148 17,835 Earnings (Loss) from Discontinued Operations Before Income Taxes 1,282 1,003 (260) Net Earnings (Loss) from Discontinued Operations, Net of Tax $ 808 $ 642 $ (165) - -------------------------------------------------------------------------------------
In addition, property, plant and equipment-net associated with the 33 stores of $57,551 and $58,644 as of February 1, 2003 and February 2, 2002, respectively, has been reclassified to Assets from discontinued operations on the consolidated balance sheets. 39 Debt and Financing Arrangements On August 1, 2003, the Company extended its revolving line of credit, which was set to expire September 22, 2004, to August 1, 2008. Thereafter, it automatically renews for annual periods, unless terminated by either party on 60 days notice prior to the applicable termination date. The line of credit provides up to $226,000 of borrowing availability, subject to certain required reserves, and is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to August 1, 2008. The loans bear interest at a rate equal to the LIBOR plus 2.00%, subject to 0.25% incremental increases as excess availability under the line of credit falls below $50,000. The line of credit is subject to financial covenants. On August 1, 2003, the Company refinanced $132,000 operating leases. These leases, which expire on August 1, 2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in accordance with FIN 46 and has determined that it is not required to consolidate the leasing entity. The leases include a residual value guarantee with a maximum value of approximately $105,000. The Company expects the fair market value of the leased real estate to substantially reduce or eliminate the Company's payment under the residual guarantee at the end of the lease term. In accordance with FIN 45, in the second quarter of 2003, the Company has recorded a $4,987 liability for the fair value of the guarantee related to this operating lease. Interest Rate Swap Agreement On June 3, 2003, the Company entered into an interest rate swap for a notional amount of $130,000. The Company has designated the swap as a cash flow hedge of the Company's real estate operating lease payments. The interest rate swap converts the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. 40 Contingencies In the consolidated action entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack" that is currently pending in the California Superior Court in Orange County, the parties reached an agreement in the second quarter of 2003, subject to the court's approval, to submit this matter to binding arbitration. Based on these developments, the Company increased its reserve in fiscal 2003 to an amount sufficient to satisfy the maximum liability that may be imposed on the Company by the arbitrator under the terms of the agreement. 41
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings(Loss) Net Net Earnings Per Share from Earnings (Loss) from Net Continuing (Loss) Cash Market Price Year Ended Total Gross Operating Continuing Earnings Operations Per Share Dividends Per Share Feb. 1, 2003 Revenues Profit Profit Operations (Loss) Basic Diluted Basic Diluted Per Share High Low - ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $539,654 $157,097 $31,406 $ 13,095 $13,565 $ .25 $ .25 $ .26 $ .26 $.0675 $19.38 $13.55 2nd Quarter 565,632 166,574 37,526 16,104 16,554 .31 .29 .32 .30 .0675 19.04 10.75 3rd Quarter 526,299 158,758 35,068 15,419 15,515 .30 .28 .30 .28 .0675 15.23 8.75 4th Quarter 466,192 134,117 8,383 (1,626) (1,834) (.03) (.03) (.04) (.04) .0675 12.64 10.06 - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended Feb. 2, 2002 - ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $532,942 $151,226 $26,652 $ 8,739 $ 9,108 $ .17 $ .17 $ .18 $ .18 $.0675 $ 7.00 $ 4.40 2nd Quarter 553,809 159,724 31,841 12,314 12,519 .24 .24 .24 .24 .0675 13.97 5.35 3rd Quarter 532,728 151,549 27,144 9,721 10,022 .19 .19 .19 .19 .0675 13.70 8.80 4th Quarter 491,216 138,591 17,655 3,919 3,686 .08 .07 .07 .07 .0675 18.48 11.88 - -----------------------------------------------------------------------------------------------------------------------------------
The preceding table has been reclassified to reflect the presentation required for discontinued operations. See Note 15 "Subsequent Events - Discontinued Operations" for details. Under the Company's present accounting system, actual gross profit from merchandise sales can be determined only at the time of physical inventory, which is taken at the end of the fiscal year. Gross profit from merchandise sales for the first, second and third quarters is estimated by the Company based upon recent historical gross profit experience and other appropriate factors. Any variation between estimated and actual gross profit from merchandise sales for the first three quarters is reflected in the fourth quarter's results. 42 -----END PRIVACY-ENHANCED MESSAGE-----