UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
(Mark One)
(x) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended February 2, 2002
OR
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 1-3381
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The Pep Boys - Manny, Moe & Jack
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0962915
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3111 West Allegheny Avenue, Philadelphia, PA 19132
- --------------------------------------------- ---------
(Address of principal executive office) (Zip code)
215-430-9000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
Yes No X
----- -----
As of the close of business on April 6, 2002, the aggregate market value of the
voting stock held by nonaffiliates of the registrant was approximately
$764,223,728.
As of April 6, 2002, there were 53,646,131 shares of the registrant's common
stock outstanding.
2
This Annual Report on Form 10-K contains "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that such forward looking statements involve risks and
uncertainties which could cause actual results to materially differ from those
expressed in any such forward looking statements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Forward Looking
Statements."
3
DOCUMENTS INCORPORATED BY REFERENCE
PART III Portions of the registrant's definitive proxy statement, which will be
filed with the Commission pursuant to Regulation 14A not later than
120 days after the end of the Company's fiscal year, for the Company's
Annual Meeting of Shareholders presently scheduled to be held on
May 29, 2002.
4
This Annual Report on Form 10-K for the year ended February 2, 2002 at
the time of filing with the Securities and Exchange Commission, modifies and
supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of
the Securities Exchange Act of 1934 for purposes of any offers or sales of any
securities on or after the date of such filing, pursuant to any Registration
Statement or Prospectus filed pursuant to the Securities Act of 1933 which
incorporates by reference this Annual Report.
5
PART I
ITEM 1 BUSINESS
GENERAL
The Pep Boys - Manny, Moe & Jack and subsidiaries (the "Company") is a
leading automotive retail and service chain. The Company operates in one
industry, the automotive aftermarket. The Company is engaged principally
in the retail sale of automotive parts, tires and accessories,
automotive maintenance and service and the installation of parts. The
Company's primary operating unit is its SUPERCENTER format. As of February 2,
2002, the Company operated 628 stores consisting of 615 SUPERCENTERS and one
SERVICE & TIRE CENTER, having an aggregate of 6,507 service bays, as well as 12
non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates
approximately 12,841,000 gross square feet of retail space, including service
bays. The SUPERCENTERS average approximately 20,700 square feet and the 12 PEP
BOYS EXPRESS stores average approximately 9,600 square feet. The Company
believes that its unique SUPERCENTER format offers the broadest capabilities
in the industry and positions the Company to gain market share and increase
its profitability by serving "do-it-yourself" (retail) and "do-it-for-me"
(service labor, installed merchandise/commercial and tires) customers with the
highest quality merchandise and service offerings.
6
As of February 2, 2002 the Company operated its stores in 36 states and Puerto
Rico. The following table indicates by state the number of stores of the
Company in operation at the end of fiscal 1998, 1999, 2000 and 2001 and the
number of stores opened and closed by the Company during each of the last
three fiscal years:
NUMBER OF STORES AT END OF FISCAL YEARS 1998 THROUGH 2001
1998 1999 2000 2001
Year Year Year Year
State End Opened Closed End Opened Closed End Opened Closed End
- ------ --- ------ ------ --- ------ ------ --- ------ ------ ---
Alabama 1 - - 1 - - 1 - - 1
Arizona 23 - - 23 - - 23 - - 23
Arkansas 1 - - 1 - - 1 - - 1
California 132 4 - 136 - 1 135 - - 135
Colorado 8 - - 8 - - 8 - - 8
Connecticut 9 - - 9 - 1 8 - - 8
Delaware 6 - - 6 - - 6 - - 6
Florida 48 - - 48 - 1 47 - - 47
Georgia 26 - - 26 - - 26 - - 26
Illinois 25 - - 25 - 1 24 - - 24
Indiana 12 1 - 13 - 4 9 - - 9
Kansas 2 - - 2 - - 2 - - 2
Kentucky 4 - - 4 - - 4 - - 4
Louisiana 12 - - 12 - 2 10 - - 10
Maine 1 - - 1 - - 1 - - 1
Maryland 19 - - 19 - - 19 - - 19
Massachusetts 8 2 - 10 - 2 8 - - 8
Michigan 15 2 - 17 - 10 7 - - 7
Minnesota 2 1 - 3 - - 3 - - 3
Missouri 1 - - 1 - - 1 - - 1
Nevada 12 - - 12 - - 12 - - 12
New Hampshire 4 - - 4 - - 4 - - 4
New Jersey 25 3 - 28 - - 28 - - 28
New Mexico 8 - - 8 1 1 8 - - 8
New York 30 3 - 33 1 5 29 1 - 30
North Carolina 11 - - 11 - - 11 - - 11
Ohio 15 - - 15 - 2 13 - - 13
Oklahoma 6 - - 6 - - 6 - - 6
Oregon 1 2 - 3 - 3 - - - -
Pennsylvania 46 - - 46 - - 46 - 1 45
Puerto Rico 23 2 - 25 2 - 27 - - 27
Rhode Island 3 - - 3 - - 3 - - 3
South Carolina 6 - - 6 - - 6 - - 6
Tennessee 7 - - 7 - - 7 - - 7
Texas 61 - - 61 - 1 60 - - 60
Utah 6 - - 6 - - 6 - - 6
Virginia 16 1 - 17 - - 17 - - 17
Washington 3 3 - 6 1 5 2 - - 2
---- --- -- --- ---- -- ---- ---- -- ----
Total 638 24 - 662 5 39 628 1 1 628
=== == == === == == === == === ===
7
DEVELOPMENT
The Company's primary focus in fiscal 2001 was improving the performance of its
existing stores. In addition during fiscal 2001, the Company opened 1
SUPERCENTER and closed 1 SUPERCENTER.
In fiscal 2002, the Company plans to continue to focus much of its energy on
improving the performance of its existing stores. As a result, the Company
plans to open only two new stores, both of which will be SUPERCENTERS.
If the two stores are opened, the Company anticipates spending approximately
$4,023,540 in addition to the $674,211 it has already spent as of February
2, 2002 in connection with certain of these locations. The Company expects to
fund the new stores from net cash generated by operating activities.
PRODUCTS AND SERVICES
Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries a similar product
line, with variations based on the number and type of cars registered in the
markets where the store is located. A full complement of inventory at a typical
store includes an average of approximately 25,000 items. The Company's
automotive product line includes: tires (not stocked at PEP BOYS EXPRESS
locations); batteries; new and remanufactured parts for domestic and imported
cars, including suspension parts, ignition parts, exhaust systems, engines and
engine parts, oil and air filters, belts, hoses, air conditioning parts,
lighting, wiper blades and brake parts; chemicals, including oil, antifreeze,
polishes, additives, cleansers and paints; mobile electronics, including sound
systems, alarms, mobile video, and remote vehicle starters; car accessories,
including seat covers, floor mats, and exterior accessories; hand tools,
including sockets, wrenches, ratchets, paint and body tools, jacks and lift
equipment, automotive specialty tools and test gauges; as well as a selection
of truck, van and sport utility vehicle accessories.
In addition to offering a wide variety of high quality, name brand products,
the Company sells an array of high quality products under various private label
names. The Company sells tires under the names CORNELL (R) and FUTURA (R); and
batteries under the name PROSTART (R). The Company also sells wheel covers
under the name FUTURA (R); water pumps and cooling system parts under the name
PROCOOL (R); air filters, anti-freeze, chemicals, cv axles, lubricants, oil,
oil filters, oil treatments, transmission fluids and wiper blades under the
name PROLINE (R); shock absorbers under the name PRO RYDER (R); alternators,
battery booster packs, and starters under the name PROSTART (R); power steering
hoses and power steering pumps under the name PROSTEER (tm); Brakes under the
name PROSTOP (R); temperature gauges under the name PROTEMP (R); and paints
under the name VARSITY (R). All products sold by the Company under various
private label names accounted for approximately 34% of the Company's
merchandise sales in fiscal 2001. Revenues from the sale of tires accounted
for approximately 17.0% of the Company's total revenues in fiscal years 2001
and 2000, and 16.0% in fiscal year 1999. No other class of products accounted
for as much as 10% of the Company's total revenues.
8
The Company has service bays in 616 of its 628 locations. Each service
department can perform a variety of services which generally include: engine
diagnosis and tune-ups, wheel and front end alignments, state inspection and
emission services, air conditioning service, heating and cooling system
service, fuel injection and throttle body service, and battery and electrical
service; the repair and installation of parts and accessories including brake
parts, suspension parts, exhaust systems, front-end parts, ignition parts,
belts, hoses, clutches, filters, stereos and speakers, alarms, remote starters
and various other merchandise sold in the Company's stores; installation and
balancing of tires; and oil and lubrication services. Revenues from
maintaining or repairing automobiles and installing products, accounted for
approximately 19.2%, 19.1% and 18.4% of the Company's total revenues in fiscal
years 2001, 2000 and 1999, respectively.
The Company's commercial automotive parts delivery program was established to
increase the Company's market share with the professional installer and to
leverage its inventory investment. The program has strengthened the Company's
position with the installed merchandise customer by taking greater advantage of
the breadth and quality of its parts inventory as well as its experience
supplying its own service bays and mechanics. As of February 2, 2002, 485 of
the Company's stores provide commercial parts delivery, which represents
approximately 77% of its stores.
The Company has a point-of-sale system in all of its stores which gathers sales
and gross profit data by stock-keeping unit from each store on a daily basis.
This information is then used by the Company to help formulate its pricing,
marketing and merchandising strategies.
The Company has an electronic parts catalog and an electronic commercial
invoicing system in all of its stores.
The Company has an electronic work order system in all of its service centers.
This system creates a service history for each vehicle, provides customers
with a comprehensive sales document and enables the Company to maintain a
service customer database.
The Company primarily uses an "Everyday Low Price" (EDLP) strategy in
establishing its selling prices. Management believes that EDLP provides better
value to its customers on a day-to-day basis, helps level customer demand and
allows more efficient management of inventories. On occasion, the Company
employs a promotional pricing strategy on select items to drive increased
customer traffic.
The Company uses various forms of advertising to promote its category-dominant
product offering, its state-of-the-art automotive service and repair
capabilities and its commitment to customer service and satisfaction. The
Company's advertising vehicles include, but are not limited to, television and
radio commercials, newspaper advertisements, multi-page catalogs and various
in-store promotions. All or most of the gross cost of the advertising directed
by the Company is customarily borne by the suppliers of the products
advertised.
In fiscal 2001, approximately 52% of the Company's total revenues were cash
transactions (including personal checks), and the remainder were credit
and debit card transactions and commercial credit accounts.
The Company does not experience significant seasonal fluctuation in the
generation of its revenues.
9
STORE OPERATIONS AND MANAGEMENT
All Pep Boys stores are open seven days a week. Each SUPERCENTER generally has
a manager, a service manager and one or more assistant managers. Each PEP BOYS
EXPRESS store has a manager and one or more assistant managers. Stores with
the auto parts delivery program have a commercial sales manager in addition to
the management previously mentioned. A store manager's average length of
service with the Company is approximately seven years.
The Company coordinates the operation and merchandising of each store through a
network of district and regional managers. The regional managers report to the
Divisional Vice Presidents of Operations, who report to the Company's Vice
President of Customer Satisfaction, who reports to the Company's Senior Vice
President - Store Operations, who reports to the Company's President & Chief
Financial Officer, who reports to the Company's Chairman of the Board & Chief
Executive Officer. Supervision and control over the individual stores are
facilitated by means of the Company's computer system, operational handbooks
and regular visits to the individual stores by the district operations managers
and loss prevention personnel.
All of the Company's advertising, accounting, purchasing and most of its
management information systems and administrative functions are conducted at
its corporate headquarters in Philadelphia, Pennsylvania. Certain
administrative functions for the Company's western, southwestern, southeastern,
midwestern and Puerto Rico operations are performed at various regional offices
of the Company. See "Properties."
INVENTORY CONTROL AND DISTRIBUTION
Most of the Company's merchandise is distributed to its stores from its
warehouses primarily by dedicated and contract carriers. Target levels of
inventory for each product have been established for each of the Company's
warehouses and stores and are based upon prior shipment history, sales trends
and seasonal demand. Inventory on hand is compared to the target levels on a
weekly basis at each warehouse. If the inventory on hand at a warehouse is
below the target levels, the Company's buyers order merchandise from its
suppliers.
Each Pep Boys store has an automatic inventory replenishment system that
automatically orders additional inventory when a store's inventory on hand
falls below the target level. In addition, the Company's centralized buying
system, coupled with continued advancement in its warehouse and distribution
systems, has enhanced the Company's ability to control its inventory.
10
SUPPLIERS
During fiscal 2001, the Company's ten largest suppliers accounted for
approximately 45% of the merchandise purchased by the Company. No single
supplier accounted for more than 15% of the Company's purchases. The Company
has no long-term contracts under which the Company is required to purchase
merchandise. Management believes that the relationships the Company has
established with its suppliers are generally good.
In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply and believes that adequate alternative sources
of supply exist, at substantially similar cost, for virtually all types of
merchandise sold in its stores.
COMPETITION
The business of the Company is generally highly competitive. The Company
encounters competition from nationwide and regional chains and from local
independent merchants. The Company's competitors include general, full
range, discount or traditional department stores which carry automotive
parts and accessories and/or have automotive service centers, as well as
specialized automotive retailers similar to the Company. Generally, the
specialized automotive retailers focus on either the "Do-it-yourself" or
"Do-it-for-me" areas of the business. The Company believes that its
operation in both the "Do-it-yourself" and "Do-it-for-me" areas of the business
positively differentiates it from most of its competitors. However, certain of
its competitors are larger in terms of sales volume, store size, and/or number
of stores, have access to greater capital and management resources and have
been operating longer in particular geographic areas than the Company.
Although the Company's competition varies by geographic area, the Company
believes that it generally has a favorable competitive position in terms of
depth and breadth of product line, price, quality of personnel and customer
service.
The Company believes that the warranty policies in connection with the higher
priced items it sells, such as tires, batteries, brake linings and other major
automotive parts and accessories, are comparable or superior to those of its
competitors.
REGULATION
The Company is subject to federal, state and local provisions relating
to the protection of the environment, including provisions with respect to the
disposal of oil at its store locations. Estimated capital expenditures
relating to compliance with such environmental provisions are not deemed
material.
11
EMPLOYEES
At February 2, 2002, the Company employed 22,201 persons as follows:
Full-time Part-time Total
Description Numbers % Numbers % Numbers %
------- ---- ------- ---- ------- ----
Store Sales 7,467 46.5 4,563 74.2 12,030 54.2
Store Service 6,573 41.0 1,472 23.9 8,045 36.2
------- ----- ----- ----- ------- -----
STORE TOTAL 14,040 87.5 6,035 98.1 20,075 90.4
Warehouses 843 5.3 102 1.7 945 4.3
Offices 1,166 7.2 15 .2 1,181 5.3
------- ------ ------- ------- ------- ------
TOTAL EMPLOYEES 16,049 100.0 6,152 100.0 22,201 100.0
====== ===== ===== ===== ====== =====
The Company had no union employees as of February 2, 2002. At the end of
fiscal 2000, the Company employed approximately 17,082 full-time and
6,054 part-time employees and at the end of fiscal 1999, the Company
employed approximately 20,544 full-time and 7,443 part-time employees.
12
EXECUTIVE OFFICERS OF THE COMPANY
The following table indicates the names, ages, years with the Company and
positions (together with the year of election to such positions) of the
executive officers of the Company:
- -----------------------------------------------------------------------------------------------------------------------------------
Years with Position with the Company and
Name Age Company Date of Election to Position
- ----- --- ------- ----------------------------
Mitchell G. Leibovitz 56 23 Chairman of the Board since 1994;
Chief Executive Officer
since 1990
George Babich Jr. 50 6 President since 2002; Chief
Financial Officer since 2000
Mark L. Page 45 26 Senior Vice President - Store
Operations since 1993
Frederick A. Stampone 46 19 Senior Vice President since 1987;
Chief Administrative Officer
since 1993; Secretary since 1988
Don Casey 50 2 Senior Vice President -
Merchandising since 2000
Jeffrey D. Palmer 54 1 Senior Vice President -
Marketing & Advertising since
November 2001
Messrs. Leibovitz, Page and Stampone have been executive officers
of the Company for more than the past five years.
Mr. Babich was elected to his current position effective March 16, 2002.
From March 2001 until March 2002, Mr. Babich served as Executive Vice President
and Chief Financial Officer. From March 2000 until March 2001, Mr. Babich
served as Senior Vice President - Finance and Chief Financial Officer. From
September 1996 through March 2000, Mr. Babich served as Vice President -
Finance.
Mr. Casey rejoined the Company as Senior Vice President-Merchandising in
July 2000. From June 1999 through June 2000, Mr. Casey was Vice President of
Purchasing and Supply Chain for Discount Auto Parts, Inc. From February 1987
through May 1999, Mr. Casey served in various merchandising positions of
increasing seniority with the Company.
Mr. Palmer joined the Company as Senior Vice President-Marketing & Advertising
in November, 2001. Prior to joining Pep Boys, Mr. Palmer was Vice President-
Advertising for Home Depot from 1998 to 2001. From 1995 through 1998, Mr.
Palmer was Vice President of Advertising & Marketing for Circuit City.
Each of the officers serves at the pleasure of the Board of Directors of the
Company.
13
ITEM 2 PROPERTIES
The Company owns its five-story, approximately 300,000 square foot corporate
headquarters in Philadelphia, Pennsylvania. The Company also owns the following
administrative regional offices -- approximately 4,000 square feet of space in
each of Melrose Park, Illinois and Bayamon, Puerto Rico. In addition, the
Company leases approximately 4,000 square feet of space for administrative
regional offices in each of Decatur, Georgia and Richardson, Texas. The
Company owns a three-story, approximately 60,000 square foot structure in Los
Angeles, California in which it occupies 7,200 square feet and either leases
or intends to lease the remainder to tennants.
Of the 628 store locations operated by the Company at February 2, 2002, 344 are
owned and 284 are leased.
The following table sets forth certain information regarding the owned and
leased warehouse space utilized by the Company for its 628 store locations at
February 2, 2002:
Warehouse Products Square Owned or Stores States
Location Warehoused Footage Leased Serviced Serviced
- --------- ---------- ------- ------ -------- -------
Los Angeles, CA All except 216,000 Owned 165 AZ, CA, NM,
tires NV, UT, WA
Los Angeles, CA Tires/parts 73,000 Leased 165 AZ, CA, NM,
NV, UT, WA
Los Angeles, CA All except 137,000 Leased 165 AZ, CA, NM,
tires NV, UT, WA
Atlanta, GA All 392,000 Owned 134 AL, FL, GA,
LA, NC, PR,
SC, TN, VA
Mesquite, TX All 244,000 Owned 96 AR, AZ, CO,
LA, NM, OK,
TX
Plainfield, IN All 403,000 Leased 91 IL, IN, KS,
KY, MI, MN,
MO, NY, OH,
OK, PA, TN,
VA
Chester, NY All 400,400 Leased 142 CT, DE, MA,
---------- MD, ME, NH,
NJ, NY, PA,
RI, VA
Total 1,865,400
==========
The Company anticipates that its existing warehouse space will accommodate
inventory necessary to support store expansion and any increase in
stock-keeping units through the end of fiscal 2002.
14
ITEM 3 LEGAL PROCEEDINGS
The Company is a defendant in an action entitled "Coalition for a Level Playing
Field, L.L.C., et al. v. AutoZone, Inc., et al.," in the United States District
Court for the Eastern District of New York. There are over 100 plaintiffs,
consisting of automotive jobbers, warehouse distributors and a coalition of
several trade associations; the defendants are AutoZone, Inc., Wal-Mart Stores,
Inc., Advance Stores Company, Inc., CSK Auto, Inc., the Company, Discount Auto
Parts, Inc., O'Reilly Automotive, Inc. and Keystone Automotive Operations, Inc.
The plaintiffs allege that the defendants violated various provisions of the
Robinson-Patman Act by, among other things, knowingly inducing and receiving
various forms of discriminatory prices from automotive parts manufacturers.
The plaintiffs are seeking compensatory damages, which would be trebled under
applicable law, as well as injunctive and other equitable relief. The Company
believes the claims are without merit and intends to vigorously defend this
action.
During the first quarter of fiscal 2002, an action entitled "Tomas Diaz
Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack
Corp. Puerto Rico, Inc. d/b/a Pep Boys" was instituted against the Company in
the Court of First Instance of Puerto Rico, Bayamon Superior Division. The
action was subsequently removed to, and is currently pending in, the United
States District Court for the District of Puerto Rico. Plaintiffs are
distributors of a product that claims to improve gas mileage. The plaintiffs
allege that the Company entered into an agreement with them to act as the
exclusive retailer of the product in Puerto Rico that was breached when the
Company determined to stop selling the product. The Company became aware of
an FTC investigation regarding the accuracy of advertising claims concerning
the product's effectiveness. The plaintiffs further allege that they were
negotiating with the manufacturer of the product to obtain the exclusive
distribution rights throughout the United States and that those negotiations
failed. Plaintiffs are seeking damages including payment for the product
that they allege Pep Boys ordered and expenses and loss of sales in Puerto
Rico and the United States resulting from the alleged breach. The Company
believes that the claims are without merit and intends to vigorously defend
this action.
The Company is also party to various other lawsuits and claims, including
purported class actions, arising in the normal course of business. In the
opinion of management, these lawsuits and claims, including the cases above,
are not, singularly or in the aggregate, material to the Company's financial
position or results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended February 2, 2002.
15
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of The Pep Boys - Manny, Moe & Jack is listed on the New York
Stock Exchange under the symbol "PBY". There were 3,214 registered shareholders
as of February 2, 2002. The following table sets forth for the periods listed,
the high and low sale prices and the cash dividends paid on the Company's
common stock.
- ---------------------------------------------------------------------------------------------------------------
MARKET PRICE PER SHARE
Market Price Per Share Cash Dividends
Fiscal year ended February 2, 2002 High Low Per Share
- ----------------------------------- ---- --- ---------
First Quarter $ 7.00 $ 4.40 $.0675
Second Quarter 13.97 5.35 .0675
Third Quarter 13.70 8.80 .0675
Fourth Quarter 18.48 11.88 .0675
Fiscal year ended February 3, 2001
- ----------------------------------
First Quarter $ 7.69 $ 5.50 $.0675
Second Quarter 7.63 5.63 .0675
Third Quarter 6.44 4.19 .0675
Fourth Quarter 5.38 3.31 .0675
It is the present intention of the Company's Board of Directors to continue to
pay regular quarterly cash dividends; however, the declaration and payment of
future dividends will be determined by the Board of Directors in its sole
discretion and will depend upon the earnings, financial condition and capital
needs of the Company and other factors which the Board of Directors deems
relevant.
16
ITEM 6 SELECTED FINANCIAL DATA
The following tables sets forth the selected financial data for the Company and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto included elsewhere herein.
SELECTED FINANCIAL DATA (UNAUDITED)
(dollar amounts in thousands, except per share amounts)
Year ended Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
- --------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Merchandise sales $ 1,765,314 $ 1,957,480 $ 1,954,010 $ 1,991,340 $ 1,720,670
Service revenue 418,401 460,988 440,523 407,368 335,850
Total revenues 2,183,715 2,418,468 2,394,533 2,398,708 2,056,520
Gross profit from merchandise sales 514,906 (1) 452,038 (2) 538,957 492,443 (3) 474,239 (4)
Gross profit from service revenue 102,490 (1) 79,813 (2) 84,078 79,453 66,081
Total gross profit 617,396 (1) 531,851 (2) 623,035 571,896 (3) 540,320 (4)
Selling, general and
administrative expenses 513,946 (1) 559,883 (2) 528,838 517,827 (3) 429,523 (4)
Operating profit (loss) 103,450 (1) (28,032) (2) 94,197 54,069 (3) 110,797 (4)
Non-operating income 4,289 2,245 2,327 2,145 4,315
Interest expense 51,335 57,882 51,557 48,930 39,656
Earnings (loss) before income taxes and
extraordinary items 56,404 (1) (83,669) (2) 44,967 7,284 (3) 75,456 (4)
Net Earnings (loss) before extraordinary items 36,100 (1) (53,148) (2) 29,303 4,974 (3) 49,611 (4)
Extraordinary items (765) 2,054 - - -
Net earnings (loss) 35,335 (1) (51,094) (2) 29,303 4,974 (3) 49,611 (4)
BALANCE SHEET DATA
Working capital $ 97,838 $ 109,207 $ 172,332 $ 241,738 $ 151,340
Current ratio 1.17 to 1 1.18 to 1 1.31 to 1 1.47 to 1 1.24 to 1
Merchandise inventories $ 519,473 $ 547,735 $ 582,898 $ 527,397 $ 655,363
Property and equipment-net 1,117,486 1,194,235 1,335,749 1,330,256 1,377,749
Total assets 1,812,652 1,906,204 2,072,672 2,096,112 2,161,360
Long-term debt (includes
all convertible debt) 544,418 654,194 784,024 691,714 646,641
Stockholders' equity 617,790 594,766 658,284 811,784 822,635
DATA PER COMMON SHARE
Basic earnings (loss) before
extraordinary items $ .70 (1) $ (1.04) (2) $ .58 $ .08 (3) $ .81 (4)
Basic earnings (loss) .69 (1) (1.00) (2) .58 .08 (3) .81 (4)
Diluted earnings (loss) before
extraordinary items .69 (1) (1.04) (2) .58 .08 (3) .80 (4)
Diluted earnings (loss) .68 (1) (1.00) (2) .58 .08 (3) .80 (4)
Cash dividends .27 .27 .27 .26 .24
Stockholders' equity 12.01 11.60 12.91 13.18 13.39
Common share price range:
high 18.48 7.69 21.63 26.69 35.63
low 4.40 3.31 7.13 12.38 21.56
OTHER STATISTICS
Return on average
stockholders' equity 5.8% (8.2)% 4.0% 0.6% 6.2%
Common shares issued and outstanding 51,430,861 51,260,663 50,994,099 61,615,140 61,425,228
Capital expenditures $ 25,464 $ 57,336 $ 104,446 $ 167,876 $ 284,084
Number of retail outlets 628 628 662 638 711
Number of service bays 6,507 6,498 6,895 6,608 6,208
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes pretax charges of $5,197 related to the Profit Enhancement Plan
of which $4,169 reduced gross profit from merchandise sales, $813 reduced
gross profit from service revenue and $215 was included in selling, general
and administrative expenses.
(2) Includes pretax charges of $74,945 related to the Profit Enhancement Plan
of which $67,085 reduced the gross profit from merchandise sales, $5,232
reduced gross profit from service revenue and $2,628 was included in
selling, general and administrative expenses.
(3) Includes pretax charges of $29,451 ($20,109 net of tax or $.33 per
share-basic and diluted), $27,733 of which reduced gross profit from
merchandise sales with the remaining $1,718 included in selling, general
and administrative expenses. These charges were associated with the closure
and sale of 109 Express stores.
(4) Includes pretax charges of $28,012 ($18,418 net of tax or $.30 per
share-basic and diluted), $16,330 of which reduced gross profit from
merchandise sales with the remaining $11,682 included in selling, general
and administrative expenses. These charges were associated with closing
nine stores, reducing the store expansion program, converting all Parts USA
stores to the Pep Boys Express format, certain equipment write-offs, and
severance and other non-recurring expenses.
17
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise principally from the capital expenditures
related to existing stores, offices and warehouses, the need to finance the
acquisition, construction and equipping of new stores and to purchase inventory.
The primary capital expenditures for fiscal 2001 were attributed to capital
maintenance of the Company's existing stores and offices. The Company opened
one new store in fiscal 2001 compared to 5 stores in fiscal 2000 and 24 stores
in fiscal 1999. In fiscal 2001, the Company significantly decreased its levels
of capital expenditures by 55.6% as compared to fiscal 2000. In fiscal 2001,
with a decrease in net inventory levels coupled with decreased levels of
capital expenditures, the Company decreased its debt by $143,913,000 and
increased its cash and cash equivalents by $7,986,000. In fiscal 2000, with an
increase in net inventory levels offset, in part, by decreased levels of
capital expenditures, the Company increased its debt by $28,739,000 and
decreased its cash and cash equivalents by $10,490,000. In fiscal 1999, with
decreased levels of capital expenditures and the use of cash to repurchase
11,276,698 common shares of stock (partially offset by a decrease in net
inventory levels), the Company increased its debt by $20,029,000 and decreased
its cash and cash equivalents by $96,063,000.
The following table indicates the Company's principal cash requirements for the
past three years:
(dollar amounts Fiscal Fiscal Fiscal
in thousands) 2001 2000 1999 Total
- ---------------------------------------------------------------------------------------------------------------
Cash Requirements:
Capital expenditures $ 25,464 $ 57,336 $104,446 $187,246
Net inventory
(decrease) increase(1) (39,592) 80,148 (24,174) 16,382
- ---------------------------------------------------------------------------------------------------------------
Total $(14,128) $137,484 $ 80,272 $203,628
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities
(excluding the change
in net inventory) $128,301 $ 99,739 $155,207 $383,247
- ---------------------------------------------------------------------------------------------------------------
(1) Net inventory (decrease) increase is the change in inventory less the
change in accounts payable.
In fiscal 2001, merchandise inventories decreased as the Company maintained its
net store count and completed the exit of the two distribution centers closed
in fiscal 2000 as part of the Profit Enhancement Plan. Additionally, the
Company decreased the average number of stock-keeping units per store to
approximately 25,000 in fiscal 2001 compared to 26,000 in fiscal 2000. In
fiscal 1999, the average stock-keeping units per store were 25,000. In fiscal
2000, merchandise inventories decreased as the Company decreased its net store
count by 34 and closed two distribution centers. In fiscal 1999, merchandise
inventories increased, as the Company added an additional 24 stores and a new
distribution center in Chester, New York.
18
The Company's working capital was $97,838,000 at February 2, 2002, $109,207,000
at February 3, 2001 and $172,332,000 at January 29, 2000. The Company's
long-term debt, as a percentage of its total capitalization, was 47% at
February 2, 2002, 52% at February 3, 2001 and 54% at January 29, 2000. As of
February 2, 2002, the Company had an available line of credit totaling
$100,690,000.
The Company currently plans to open two new Supercenters in fiscal 2002.
Management estimates the costs of opening the two Supercenters, coupled with
capital expenditures relating to existing stores, warehouses and offices
during fiscal 2002, will be approximately $43,000,000. The Company anticipates
that its net cash provided by operating activities and its existing line of
credit will exceed its principal cash requirements for capital expenditures and
net inventory in fiscal 2002.
The following chart represents the Company's total contractual
obligations as of February 2, 2002:
(dollar amounts
in thousands) Due in less Due in Due in Due after
Obligation Total than 1 year 1-3 years 3-5 years 5 years
- ---------------------------------------------------------------------------------------------
Long-term debt $ 669,033 $124,615 $286,583 $257,564 $ 271
Operating leases 539,403 51,887 86,805 71,925 328,786
Unconditional purchase
obligation 34,705 7,361 19,887 7,457 -
- ---------------------------------------------------------------------------------------------
Total cash obligations $1,243,141 $183,863 $393,275 $336,946 $329,057
- ---------------------------------------------------------------------------------------------
In addition to the amounts shown above, the Company has $37,887,000 of
outstanding standby letters of credit used primarily to secure the Company's
insurance claims. The letters of credit are renewable on an annual basis. The
operating leases shown above are exclusive of any lease obligations for stores
for which reserves were created in conjunction with the Profit Enhancement
Plan. The Company anticipates that its net cash provided by operating
activities, its existing line of credit and its access to capital markets will
exceed its cash obligations presented in the table above.
In November 2001, the Company repurchased the remaining $1,202,000 face value
of its Liquid Yield Option Notes (LYONs) which were redeemed for a
price of $677 per LYON. The book value of the repurchased LYONs was $814,000.
In the third quarter of 2001, the Company reclassed the $50,000,000 Medium-Term
Note and the remaining $43,005,000 of the $49,000,000 Medium-Term Note to
current liabilities on the consolidated balance sheet. These Medium-Term
Notes are redeemable at the option of the holder on July 16, 2002 and
September 19, 2002, respectively. The Company anticipates being able to
repurchase these notes with cash from operations and its existing line of
credit.
In September 2001, the Company repurchased $159,702,000 face value of its
LYONs which were redeemed at the option of the holder at a price of $673
per LYON. The book value of the repurchased LYONs was $107,475,000 and the
after-tax extraordinary loss was $993,000.
In July 2001, the Company repurchased $3,000,000 face value of its LYONs at
a price of $656 per LYON. The book value of the repurchased LYONs was
$2,006,000.
In June 2001, the Company obtained $90,000,000 in a Senior Secured Credit
Facility. The facility, which is secured by certain equipment and real
estate with a total book value as of February 2, 2002 of $108,663,000, was
issued in two tranches. Tranche A is a term loan for $45,000,000 with an
interest rate based on London Interbank Offered Rate (LIBOR) plus 3.65%.
Tranche A is structured as a two-year term loan payable in equal installments
with the final payment due in 2003. Tranche B is a term loan for $45,000,000
with an interest rate of LIBOR plus 3.95%. Tranche B is structured as a
five-year term loan payable in equal installments with the final payment due
in 2006. The Senior Secured Credit Facility is subject to certain financial
covenants. The Company used the proceeds from the facility to repurchase the
outstanding LYONs that were put back to the Company on the September 20, 2001
put date.
19
In May 2001, the Company sold certain operating assets for $14,000,000.
The assets were leased back from the purchaser in a lease structured as a
one-year term with three one-year renewal options. The resulting lease is
being accounted for as an operating lease and the gain of $3,817,000 from the
sale of the certain operating assets is deferred until the lease term is
completed and the residual guarantee is satisfied, at which time the gain will
be recorded in costs of merchandise sales and costs of service revenue. The
Company used the proceeds from the sale to retire debt.
In May 2001, the Company repurchased $77,600,000 face value of its LYONs at a
price of $649 per LYON. The book value of the repurchased LYONs was
$51,517,000 and the after-tax extraordinary gain was $228,000.
In September 2000, the Company entered into a new revolving credit agreement.
The new revolving credit agreement provides up to $225,000,000 of borrowing
availability, which is collateralized by inventory and accounts receivable.
Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days
prior to each anniversary date, the Company may request and, upon agreement
with the bank, extend the maturity of this facility an additional year. The
interest rate on any loan is equal to the LIBOR plus 1.75%, and increases in
0.25% increments as the excess availability falls below $50,000,000. The
revolver is subject to financial covenants. The Company recorded an after-tax
extraordinary charge related to the restructuring of its revolving line of
credit of $931,000 in the third quarter of fiscal 2000.
In September 2000, the Company entered into a new real estate operating lease
facility with leased property trusts, established as an unconsolidated
special-purpose entity. The $143,000,000 real estate operating lease
facility, which has an interest rate of LIBOR plus 1.85%, replaces $143,000,000
of leases, which had an interest rate of LIBOR plus 2.27%. The Company, as a
result of replacing the existing operating leases, recorded a pretax charge to
fiscal 2000 earnings of $1,630,000 of unamortized lease costs, which was
recorded in the costs of merchandise sales section of the consolidated
statement of operations. The $143,000,000 real estate operating lease facility
has a four-year term with a guaranteed residual value. At February 2, 2002,
the maximum amount of the residual guarantee relative to the real estate under
the lease is approximately $92,372,000. The Company expects the fair market
value of the leased real estate, subject to the purchase option or sale to a
third party, to substantially reduce or eliminate the Company's payment under
the residual guarantee at the end of the lease term.
In September 2000, the Company retired $70,000,000 of Senior Notes, at par,
using the proceeds from its new $225,000,000 revolving line of credit. The
retired notes were issued in a private placement in February 1999 in two
tranches. The first tranche was for $45,000,000 and had a coupon of 8.45% with
a maturity of 2011. The second tranche was for $25,000,000 and had a coupon of
8.30% with a maturity of 2009.
In June 2000, the Company repurchased $5,995,000 face value of the $49,000,000
Medium-Term Note, which was redeemable at the option of the holder on
September 19, 2002. The after-tax extraordinary gain was $960,000.
In April 2000, the Company repurchased $30,200,000 face value of its LYONs at a
price of $520 per LYON. The book value of the LYONs was $19,226,000 and the
after-tax extraordinary gain was $2,025,000.
On February 1, 1999, the Company repurchased 11,276,698 of its common shares
outstanding. The Company financed the share repurchase with $110,427,000 in
cash and with the $70,000,000 proceeds received in connection with the private
placement of Senior Notes issued on February 1, 1999 and retired in September
2000 as stated above.
20
EFFECTS OF INFLATION
The Company uses the LIFO method of inventory valuation. Thus, the cost of
merchandise sold approximates current cost. Although the Company cannot
accurately determine the precise effect of inflation on its operations, it does
not believe inflation has had a material effect on revenues or results of
operations during fiscal 2001, fiscal 2000 or fiscal 1999.
IMPAIRMENT CHARGES
During fiscal year 2000, the Company, as a result of its ongoing review of the
performance of its stores, identified certain stores whose cash flow trend
indicated that the carrying value may not be fully recoverable. An impairment
charge of $5,735,000 was recorded for these stores in costs of merchandise
sales on the consolidated statement of operations. The charge reflects the
difference between carrying value and fair value. Fair value was based on
sales of similar assets or other estimates of fair value developed by Company
management. Management judgment is necessary to estimate fair value.
Accordingly, actual results could vary from such estimates.
PROFIT ENHANCEMENT PLAN
In the third quarter 2000, the Company performed a comprehensive review of its
field, distribution and Store Support Center infrastructure as well as the
performance of each store. As a result of this review, the Company implemented
a number of changes that it believed would improve its performance and recorded
a charge of $71,234,000. The charges included expenses related to the closure
of the 38 under-performing stores and two distribution centers, certain
equipment write-offs, the abandonment of two development parcels and severance
costs. The charges were recorded in costs of merchandise sales, costs of
service revenue and selling, general and administrative expenses on the
consolidated statement of operations as $62,665,000, $5,661,000 and
$2,908,000, respectively.
PLAN UPDATE
The Profit Enhancement Plan has been progressing closely to the schedule
originally estimated by the Company. Each of the 38 stores and one of
the distribution centers identified for closure were closed on or before
October 28, 2000. The second distribution center was closed on November 30,
2000. All employees were notified of their separation on or before October 28,
2000. The assets held for disposal were reclassed and depreciation was stopped
on October 28, 2000 which was concurrent with the announcement of the Profit
Enhancement Plan and the closure of the stores.
The Company is progressing towards the disposal of the 38 stores, 11 of which
were owned and 27 were leased by the Company, two distribution centers and two
development parcels which were closed or abandoned in connection with the
Profit Enhancement Plan. As of the end of fiscal 2001, the Company had
successfully disposed of ten of the closed stores, the two distribution centers
and one of the development parcels. The Company estimates the remaining closed
or abandoned properties will be disposed of by the end of fiscal 2002.
ASSETS HELD FOR DISPOSAL
The assets held for disposal as of the end of fiscal 2001 and 2000 included the
building and land of the remaining closed stores owned by the Company,
additional development parcels, and equipment from the remaining closed stores.
The carrying values of the building, land and equipment were $16,007,000 and
$22,629,000 for fiscal years 2001 and 2000, respectively.
21
In fiscal 2001, the Company was able to sell three of the 13 owned properties
for net proceeds of $4,103,000. The sales resulted in a loss of $691,000
which was recorded in costs of merchandise sales and selling, general and
administrative expenses on the consolidated statement of operations.
Additionally, the Company recorded a downward revision in the estimated values
for certain properties of $1,496,000 in fiscal 2001. This expense was recorded
in costs of merchandise sales on the consolidated statement of operations. In
fiscal 2001, the Company recorded a loss for equipment held for disposal of
$162,000, which was due primarily to a reduction in the Company's estimated
proceeds.
The Company is actively marketing the remaining ten owned properties and has
made adjustments to property values in accordance with the change in market
values. As a result, the Company has extended the original estimated time
needed for selling the owned properties. It is expected that seven of these
properties with a carrying value of $10,663,000 will be disposed of by the
second quarter 2002, with the remaining three properties with a carrying value
of $4,746,000 expected to be disposed of by the end of the third quarter 2002.
The Company will continue to monitor the status for disposing of its owned
properties and make any necessary adjustments. An adjustment was reflected in
on-going expenses for the increased time required to maintain these properties.
LEASE RESERVE
As of the end of fiscal 2001, the Company was able to sublease three
and exit the lease of an additional five leased properties. The Company
expects the remaining 19 leased properties to be subleased or otherwise
disposed of by the end of fiscal 2002.
The Company increased the reserve for leases $1,644,000 during fiscal 2001.
These changes in the reserve were a result of a $3,834,000 increase due
primarily to an increase in the estimated amount of time it will take the
Company to sublease certain properties and a decrease in estimated sublease
rates. The reserve increase was offset, in part, by a $2,190,000 decrease due
primarily to lower than estimated commissions and lease exit costs on subleases
for certain properties. The effects of these adjustments were recorded in
costs of merchandise sales and costs of service revenue.
In fiscal 2000, the Company increased the lease reserve by $113,000. These
changes in the reserve were a result of a $1,176,000 increase due to an
increase in the estimated lease payments related to the closed stores. The
increase was offset, in part, by a $1,063,000 decrease due primarily to an
increase in the estimated sublease rates coupled with lower lease related
expenses.
ON-GOING EXPENSES
The on-going expense reserve represents exit activity costs which are not
associated with or do not benefit activities that will be continued. These
costs are necessary to maintain the remaining closed stores until sold, sublet
or otherwise disposed of. The on-going costs reserve includes general
maintenance costs such as utilities, security, telephone, real estate taxes and
personal property taxes which will be incurred until the properties are
disposed. The reserve for on-going costs will diminish as sites are sold,
sublet or otherwise disposed of and such activities are estimated to be
completed by the end of fiscal 2002.
In fiscal 2001, the Company increased the on-going expense reserve $595,000.
This change was a result of a $1,214,000 increase in the reserve due to an
increase in the estimated time it is expected to take to sublease, sell or
otherwise dispose of the remaining properties offset, in part, by a $619,000
decrease due to lower than anticipated cost for utilities and security costs.
In fiscal 2000, the Company increased the on-going expense reserve $361,000.
This change was due to an increase in the estimated time it is expected to
take to sublease, sell or otherwise dispose of the remaining properties.
22
SEVERANCE RESERVE
The total number of employees separated due to the Profit Enhancement Plan was
approximately 1,000. The 1,000 employees were composed of 76% store employees,
13% distribution employees, and 11% Store Support Center and field
administrative employees. The total severance paid in connection with the
Profit Enhancement Plan was $1,353,000.
In fiscal 2001, the Company reversed $69,000 of severance due primarily to
certain employees originally expected to be receiving severance failing to
qualify to receive payments and lower than estimated final payments. Each
reversal was recorded through the line it was originally charged in the
consolidated statements of operations.
In fiscal 2000, the Company reversed $272,000 of severance due to employees
being accepted into positions in other locations of the Company and employees
failing to qualify to receive payments. Each reversal was recorded through the
line it was originally charged in the consolidated statements of operations.
NON-RESERVABLE EXPENSES
Non-reservable expenses are those costs which could not be reserved, but were
incurred as a result of the Profit Enhancement Plan. These expenses related to
costs incurred which had a future economic benefit to the Company such as the
transferring of inventory and equipment out of properties closed by the Profit
Enhancement Plan.
The expenses of this nature incurred were $678,000 and $3,611,000 for fiscal
2001 and fiscal 2000, respectively. The fiscal 2001 expenses incurred related
to the completion of the removal of inventory and equipment from the closed
distribution centers. The fiscal 2000 expenses incurred were for inventory and
equipment handling related to the closure of the 38 stores and two distribution
centers. The fiscal 2000 expenses were offset by a recovery of certain benefit
expenses related to the reduction in workforce.
23
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Following are tables summarizing expenses related to the Profit Enhancement
Plan for fiscal 2001 and fiscal 2000. The details and reasons for the
original charge and changes to the charge are as described above in the
respective reserve categories.
FISCAL 2001
(dollar amounts
in thousands) Non-Reservable
Income Statement Reserve Expense Total
Classification Adjustments Incurred Expense
- -----------------------------------------------------------------
Costs of
merchandise sales $3,528 $ 641 $4,169
Costs of
service revenue 804 9 813
Selling, general and
administrative 187 28 215
- -----------------------------------------------------------------
Total expenses $4,519 $ 678 $5,197
- -----------------------------------------------------------------
FISCAL 2000
(dollar amounts
in thousands) Non-Reservable
Income Statement Original Reserve Expense Total
Classification Charge Adjustments Incurred Expense
- -----------------------------------------------------------------------------
Costs of
merchandise sales $62,665 $ 939 $3,481 $67,085
Costs of
service revenue 5,661 (177) (252) 5,232
Selling, general and
administrative 2,908 (662) 382 2,628
- -----------------------------------------------------------------------------
Total expenses $71,234 $ 100 $3,611 $74,945
- -----------------------------------------------------------------------------
24
At the end of the third quarter 2000, the Company set up a reserve liability
account which is included in accrued liabilities on the consolidated balance
sheet. This liability account tracks all accruals including remaining rent on
leases net of sublease income, severance, and on-going expenses for the closed
properties. The following chart reconciles the change in reserve from the
origination of the charge through the fiscal year ended February 2, 2002. All
additions and adjustments were charged or credited through the appropriate line
items on the statement of operations.
(dollar amounts Lease Fixed On-going
in thousands) Expenses Assets Severance Expenses Total
- -----------------------------------------------------------------------------------------
Original charges $ 7,916 $57,680 $ 1,694 $ 3,944 $71,234
Addition 1,176 1,074 - 361 2,611
Utilization (975) (58,754) (1,213) (1,345) (62,287)
Adjustment (1,063) - (272) - (1,335)
- -----------------------------------------------------------------------------------------
Reserve balance
at Feb. 3, 2001 7,054 - 209 2,960 10,223
- -----------------------------------------------------------------------------------------
Addition 3,834 2,440 - 1,214 7,488
Utilization (5,548) (2,349) (140) (2,235) (10,272)
Adjustment (2,190) (91) (69) (619) (2,969)
- -----------------------------------------------------------------------------------------
Reserve balance
at Feb. 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470
- -----------------------------------------------------------------------------------------
25
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in the
consolidated statements of operations as a percentage of total revenues (except
as otherwise provided) and the percentage change in dollar amounts of such
items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change
- -----------------------------------------------------------------------------------------------------------------------------------
Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Fiscal 2001 vs. Fiscal 2000 vs.
Year ended (Fiscal 2001) (Fiscal 2000) (Fiscal 1999) Fiscal 2000 Fiscal 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Merchandise Sales 80.8% 80.9% 81.6% (9.8)% 0.2%
Service Revenue(1) 19.2 19.1 18.4 (9.2) 4.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 100.0 (9.7) 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales(2) 70.8 (3) 76.9 (3) 72.4 (3) (16.9) 6.4
Costs of Service Revenue(2) 75.5 (3) 82.7 (3) 80.9 (3) (17.1) 6.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 71.7 78.0 74.0 (17.0) 6.5
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 29.2 (3) 23.1 (3) 27.6 (3) 13.9 (16.1)
Gross Profit from Service Revenue 24.5 (3) 17.3 (3) 19.1 (3) 28.4 (5.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 28.3 22.0 26.0 16.1 (14.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses 23.6 23.2 22.1 (8.2) 5.9
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 4.7 (1.2) 3.9 469.0 (129.8)
Non-operating Income 0.2 0.1 0.1 91.0 (3.5)
Interest Expense 2.3 2.4 2.1 (11.3) 12.3
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 2.6 (3.5) 1.9 167.4 (286.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Income Taxes 36.0 (4) 36.5 (4) 34.8 (4) 166.5 (294.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Before Extraordinary Items 1.7 (2.2) 1.2 167.9 (281.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Extraordinary Items - 0.1 - (137.2) N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) 1.7 (2.1) 1.2 169.2 (274.4)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed
parts or materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include
service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
(3) As a percentage of related sales or revenue, as applicable.
(4) As a percentage of earnings (loss) before income taxes.
26
FISCAL 2001 VS. FISCAL 2000
Total revenues for fiscal 2001, which included 52 weeks, decreased 10% compared
to fiscal 2000, which included 53 weeks, due primarily to less stores in
operation during 2001 vs. 2000 coupled with a decrease in comparable store
revenues (revenues generated by stores in operation during the same months of
each period) of 6%. Total revenues for fiscal 2001 compared to fiscal 2000,
excluding the extra week, decreased by 8% on an overall basis and remained at a
decrease of 6% on a comparable store basis. Comparable store merchandise sales
decreased 6% while comparable store service revenue decreased 5% compared to
2000 on a 52 week basis. This decline in total and comparable revenue
reflected the impact of the closure of the 38 stores and other steps taken in
October 2000 in conjunction with implementing the Company's Profit Enhancement
Plan.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 29.2% in 2001 from 23.1% in 2000. This increase, as a percentage of
merchandise sales, was due primarily to Profit Enhancement Plan charges
recorded in 2001 of $4,169,000 compared to charges recorded in 2000 of
$67,085,000 and $5,735,000 associated with the Profit Enhancement Plan and
asset impairments, respectively. Higher merchandise margins and a decrease in
warehousing costs, as a percentage of merchandise sales, offset, in part, by an
increase in store occupancy costs, as a percentage of merchandise sales, also
contributed to the increase in gross profit from merchandise sales. The
improved merchandise margins, as a percentage of merchandise sales, were a
result of a combination of improvement in the mix of sales, selectively higher
retail pricing and lower product acquisition costs. The decrease in
warehousing costs, as a percentage of merchandise sales, were a result of the
effects of a supply chain initiative implemented in late fiscal 2000 to improve
efficiencies. The increase in store occupancy costs, as a percentage of
merchandise sales, was a result of higher utilities costs, particularly in
California.
Gross profit from service revenue increased, as a percentage of service
revenue, to 24.5% in 2001 from 17.3% in 2000. This increase, as a percentage
of service revenue, was due primarily to a decrease in service personnel costs,
as a percentage of service revenue, coupled with Profit Enhancement Plan
charges recorded in 2001 of $813,000 compared to $5,232,000 recorded in 2000.
The decrease in service center personnel costs, as a percentage of service
revenue, was a result of the steps taken in the Profit Enhancement Plan.
Selling, general and administrative expenses increased, as a percentage of
total revenues, to 23.6% in 2001 from 23.2% in 2000. This increase, as a
percentage of total revenues, was due primarily to an increase in media
expenses from 2000 to 2001 of $6,828,000 or 0.3% of total revenues, offset,
in part, by a decrease in general office expense, as a percentage of total
revenues, and Profit Enhancement Plan charges recorded in 2001 of $215,000
compared to $2,628,000 recorded in 2000. The increase in media expense, as a
percentage of total revenues, was a result of lower vendor reimbursements. The
decrease in general office expense, as a percentage of total revenues, was a
result of lower legal expense, as a percentage of total revenues.
Interest expense was $6,547,000 or 11.3% lower than last year due primarily to
lower debt levels coupled with lower average interest rates.
27
Net earnings increased, as a percentage of total revenues, due primarily to a
net Profit Enhancement Plan charge recorded in 2001 of $3,326,000 compared to
net charges recorded in 2000 of $47,609,000 and $3,643,000 associated with
Profit Enhancement Plan and asset impairments, respectively. Also contributing
to the net earnings increase, as a percentage of total revenues, were increases
in both gross profit from merchandise sales and service revenue, as a
percentage of merchandise sales and service revenue, respectively, and a
decrease in interest expense, as a percentage of total revenues. These gross
profit increases were offset, in part, by an increase in selling, general and
administrative expenses, as a percentage of total revenues, coupled with a net
extraordinary loss of $765,000 in 2001 compared to a $2,054,000 net
extraordinary gain in 2000.
FISCAL 2000 VS. FISCAL 1999
Total revenues for fiscal 2000, which included 53 weeks, increased 1% over
fiscal 1999, due primarily to the extra week of operation during fiscal 2000
vs. 1999. Comparable store revenues (revenues generated by stores in operation
during the same months of each period) decreased 1%. Total revenues for fiscal
2000, excluding the extra week, decreased 1% on an overall basis and remained a
decrease of 1% on a comparable store basis. Comparable store merchandise sales
decreased 2% while comparable store service revenue increased 2% over fiscal
1999 on a 52 week basis.
Gross profit from merchandise sales decreased, as a percentage of merchandise
sales, to 23.1% in 2000 from 27.6% in 1999. This decrease, as a percentage of
merchandise sales, was due primarily to the pretax charge from the Profit
Enhancement Plan of $67,085,000 coupled with a $5,735,000 impairment charge,
increases in warehousing and store occupancy costs offset, in part, by higher
merchandise margins, as a percentage of merchandise sales.
Gross profit from service revenue decreased, as a percentage of service
revenue, to 17.3% in 2000 from 19.1% in 1999. The decrease was due to a
$5,232,000 pretax charge from the Profit Enhancement Plan and an increase in
service center personnel costs, as a percentage of service revenue.
Selling, general and administrative expenses increased, as a percentage of
total revenues, to 23.2% in 2000 from 22.1% in 1999. This increase was due
primarily to increases in store and general office expenses, as a percentage
of total revenues, coupled with the pretax charges from the Profit Enhancement
Plan of $2,628,000.
Interest expense was $6,325,000 or 12.3% higher than last year, due primarily
to higher interest rates coupled with slightly higher average debt levels
incurred during the year to fund the Company's capital expenditures.
The Company's net loss in fiscal 2000, as compared with net earnings in fiscal
1999, was due primarily to decreases in gross profit from merchandise sales, as
a percentage of merchandise sales, and gross profit from service revenue, as a
percentage of service revenue, and an increase in selling, general and
administrative expenses, as a percentage of total revenues, all of which
included the effects of the Profit Enhancement Plan, coupled with an increase
in interest expense, as a percentage of total revenues.
NEW ACCOUNTING STANDARDS
In 2001, the Emerging Issues Task Force (EITF) issued EITF 01-09, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)." This pronouncement deals with accounting for certain types
of sales incentives and other consideration offered by companies to their
customers. This pronouncement is effective in fiscal years beginning after
December 15, 2001. The Company has analyzed the impact of adoption of this
statement and it will have no material effect on the Company's consolidated
financial statements upon its adoption on February 3, 2002.
28
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This SFAS supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company has analyzed the impact
of adoption of this statement and it will have no material effect on the
Company's consolidated financial statements upon its adoption on
February 3, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after
June 15, 2002. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business
combinations should be accounted for using the purchase method of accounting;
use of the pooling-of-interests method is prohibited. The provisions of the
statement apply to all business combinations initiated after June 30, 2001.
SFAS 142 applies to all acquired intangible assets whether acquired singly, as
part of a group, or in a business combination. Adoption of SFAS 142 will
result in ceasing amortization of goodwill. All of the provisions of the
statement are effective in fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were initially
recognized. The Company has analyzed the impact of adoption of this statement
and it will have no material effect on the Company's consolidated financial
statements upon its adoption on February 3, 2002.
In September 2000, the EITF issued EITF 00-23, "Issues Related to the
Accounting for Stock Compensation under APB Opinion No. 25 and FASB
Interpretation No. (FIN) 44." This pronouncement addressed practice issues and
questions related to accounting for stock compensation primarily under APB No.
25 and FIN 44. The Company has incorporated the guidance provided by the
interpretation with no material effect on its consolidated financial
statements.
In June 2000, the FASB issued FIN 44, "Accounting for Certain Transactions
involving Stock Compensation." This interpretation provides additional
guidance for application of APB No. 25, "Accounting for Stock Issued to
Employees." The Company has incorporated the guidance provided by the
interpretation with no material effect on its consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No.
138. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company has adopted this statement in the first
quarter of fiscal 2001 with no material effect on its consolidated financial
statements.
29
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's primary market risk exposure with
regard to financial instruments is to changes in interest rates. Pursuant to
the terms of its revolving credit agreement and senior secured credit facility,
changes in the lenders' prime rate or LIBOR could affect the rates at which
the Company could borrow funds thereunder. At February 2, 2002, the Company
had outstanding borrowings of $142,467,000 against these credit facilities.
The table below summarizes the fair value and contract terms of fixed rate debt
instruments held by the Company at February 2, 2002:
(dollar amounts Average
in thousands) Amount Interest Rate
- ----------------------------------------------------------------
Fair value at
February 2, 2002 $491,120
Expected maturities:
2002 93,103 6.5%
2003 81,000 6.6
2004 108,000 6.7
2005 100,000 7.0
2006 143,000 6.9
- -----------------------------------------------------------------
At February 3, 2001, the Company held fixed rate debt instruments with an
aggregate fair value of $472,770.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to customer incentives, product returns and warranty obligations,
bad debts, inventories, income taxes, financing operations, restructuring
costs, retirement benefits, risk participation agreements and contingencies and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
30
The Company believes that the following represent its more critical estimates
and assumptions used in the preparation of the consolidated financial
statements, although not inclusive:
*The Company evaluates whether inventory is stated at the lower of cost
or market based on historical experience with the carrying value and
life of inventory. The assumptions used in this evaluation are based
on current market conditions and the Company believes inventory is
stated at the lower of cost or market in the consolidated financial
statements. In addition, historically the Company has been able to
return excess items to vendors for credit. Future changes by vendors
in their policies or willingness to accept returns of excess inventory
could require a revision in the estimates.
*The Company has risk participation arrangements with respect to
casualty and health care insurance. The amounts included in the
Company's costs related to these arrangements are estimated and can
vary based on changes in assumptions, claims experience or the
providers included in the associated insurance programs.
*The Company records reserves for future product returns and warranty
claims. The reserves are based on current sales of products and
historical claim experience. If claims experience differs from
historical levels, revisions in the Company's estimates may be
required.
FORWARD-LOOKING STATEMENTS
Certain statements made herein, including those discussing management's
expectations for future periods, are forward-looking and involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements due to factors beyond the
control of the Company, including the strength of the national and regional
economies and retail and commercial consumers' ability to spend, the health of
the various sectors of the market that the Company serves, the weather in
geographical regions with a high concentration of the Company's stores,
competitive pricing, location and number of competitors' stores and product and
labor costs. Further factors that might cause such a difference include, but
are not limited to, the factors described in the Company's filings with the
Securities and Exchange Commission.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The material in Item 7 of this filing titled "Quantitative and Qualitative
Disclosures about Market Risk" are hereby incorporated herein by reference.
31
ITEM 8 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
The Pep Boys - Manny, Moe & Jack
We have audited the accompanying consolidated balance sheets of The
Pep Boys - Manny, Moe & Jack and subsidiaries as of February 2, 2002 and
February 3, 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended February 2, 2002. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Pep Boys - Manny, Moe & Jack
and subsidiaries as of February 2, 2002 and February 3, 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended February 2, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 21, 2002
32
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
February 2, February 3,
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,981 $ 7,995
Accounts receivable, less allowance for
uncollectible accounts of $725 and $639 18,052 16,792
Merchandise inventories 519,473 547,735
Prepaid expenses 42,170 28,705
Deferred income taxes 15,820 25,409
Other 52,308 50,401
Assets held for disposal 16,007 22,629
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 679,811 699,666
- ----------------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 277,726 278,017
Buildings and improvements 922,065 918,031
Furniture, fixtures and equipment 583,918 618,959
Construction in progress 10,741 15,032
- ----------------------------------------------------------------------------------------------------------------------------------
1,794,450 1,830,039
Less accumulated depreciation and amortization 676,964 635,804
- ----------------------------------------------------------------------------------------------------------------------------------
Total Property and Equipment 1,117,486 1,194,235
- ----------------------------------------------------------------------------------------------------------------------------------
Other 15,355 12,303
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,812,652 $ 1,906,204
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 216,085 $ 204,755
Accrued expenses 241,273 226,952
Current maturities of convertible debt - 158,555
Current maturities of long-term debt 124,615 197
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 581,973 590,459
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 544,418 654,194
Deferred income taxes 64,027 66,192
Deferred gain on sale leaseback 4,444 593
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $1 per share: Authorized 500,000,000 shares;
Issued 63,910,577 63,911 63,911
Additional paid-in capital 177,244 177,244
Retained earnings 601,944 581,668
----------------------------------------------------------------------------------------------------------------------------------
843,099 822,823
Less cost of shares in treasury - 10,284,446 and 10,454,644 shares 166,045 168,793
Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 617,790 594,766
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,812,652 $ 1,906,204
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
33
CONSOLIDATED STATEMENTS OF OPERATIONS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
February 2, February 3, January 29,
Year ended 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $1,765,314 $1,957,480 $1,954,010
Service Revenue 418,401 460,988 440,523
- ----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 2,183,715 2,418,468 2,394,533
- ----------------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 1,250,408 1,505,442 1,415,053
Costs of Service Revenue 315,911 381,175 356,445
- ----------------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 1,566,319 1,886,617 1,771,498
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 514,906 452,038 538,957
Gross Profit from Service Revenue 102,490 79,813 84,078
- ----------------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 617,396 531,851 623,035
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 513,946 559,883 528,838
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 103,450 (28,032) 94,197
Non-operating Income 4,289 2,245 2,327
Interest Expense 51,335 57,882 51,557
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 56,404 (83,669) 44,967
Income Tax Expense (Benefit) 20,304 (30,521) 15,664
- ----------------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Before Extraordinary Items 36,100 (53,148) 29,303
Extraordinary Items, Net of Tax of $(430) and $1,180 (765) 2,054 -
Net Earnings (Loss) $ 35,335 $ (51,094) $ 29,303
- ----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share:
Before Extraordinary Items $ .70 $ (1.04) $ .58
Extraordinary Items, Net of Tax (.01) .04 -
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share $ .69 $ (1.00) $ .58
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share:
Before Extraordinary Items $ .69 $ (1.04) $ .58
Extraordinary Items, Net of Tax (.01) .04 -
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share $ .68 $ (1.00) $ .58
- ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
Accumulated
Additional Other Total
Common Stock Paid-in Retained Treasury Stock Comprehensive Benefits Stockholders'
Shares Amount Capital Earnings Shares Amount Income Trust Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 30, 1999 63,847,640 $63,848 $175,940 $636,475 $(4,210) $(60,269) $811,784
Comprehensive income -
Net earnings 29,303
Minimum pension liability
adjustment, net of tax 4,210
Total comprehensive income 33,513
Cash dividends ($.27 per share) (13,693) (13,693)
Repurchase of treasury stock (410) (11,276,698) $(182,065) 1,005 (181,470)
Exercise of stock options
and related tax benefits 27,630 28 774 (1,795) 495,000 7,991 6,998
Dividend reinvestment plan 35,307 35 533 (393) 60,490 977 1,152
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 2000 63,910,577 63,911 177,247 649,487 (10,721,208) (173,097) - (59,264) 658,284
Comprehensive income -
Net loss (51,094) (51,094)
Cash dividends ($.27 per share) (13,793) (13,793)
Dividend reinvestment plan (3) (2,932) 266,564 4,304 1,369
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, February 3, 2001 63,910,577 63,911 177,244 581,668 (10,454,644) (168,793) - (59,264) 594,766
Comprehensive income -
Net earnings 35,335 35,335
Cash dividends ($.27 per share) (13,864) (13,864)
Exercise of stock options
and related tax benefits (94) 17,000 275 181
Dividend reinvestment plan (1,101) 153,198 2,473 1,372
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, February 2, 2002 63,910,577 $63,911 $177,244 $601,944 (10,284,446) $(166,045) $ - $(59,264) $617,790
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
February 2, February 3, January 29,
Year ended 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Earnings (Loss) $ 35,335 $ (51,094) $ 29,303
Adjustments to Reconcile Net Earnings (Loss) to Net Cash
Provided by Operating Activities:
Extraordinary item, net of tax 765 (2,054) -
Depreciation and amortization 84,693 99,308 97,012
Deferred income taxes 7,424 (24,575) 2,223
Accretion of bond discount 3,256 6,425 6,493
Loss on assets held for disposal 2,349 53,740 -
Loss on asset impairment - 5,735 -
(Gain) loss from sale of assets (1,116) 3,651 (538)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, prepaid expenses
and other (18,726) 9,802 (12,096)
Decrease (increase) in merchandise inventories 28,262 35,163 (55,501)
Increase (decrease) in accounts payable 11,330 (115,311) 79,675
Increase (decrease) in accrued expenses 14,321 (1,199) 32,810
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 167,893 19,591 179,381
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (25,464) (57,336) (104,446)
Proceeds from sales of assets 26,760 14,380 2,479
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 1,296 (42,956) (101,967)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net (payments) borrowings under line of credit
agreements (56,876) 117,535 10,000
Reduction of long-term debt (18,482) (75,028) (170)
Reduction of convertible debt (161,056) (17,208) (72,294)
Net proceeds from issuance of notes 87,522 - 76,000
Dividends paid (13,864) (13,793) (13,693)
Purchase of treasury shares - - (181,470)
Proceeds from exercise of stock options 181 - 6,998
Proceeds from dividend reinvestment plan 1,372 1,369 1,152
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (161,203) 12,875 (173,477)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 7,986 (10,490) (96,063)
Cash and Cash Equivalents at Beginning of Year 7,995 18,485 114,548
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 15,981 $ 7,995 $ 18,485
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 6,570 $ - $ -
Interest paid, net of amounts capitalized 47,081 53,415 43,449
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
36
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 2, 2002, February 3, 2001 and January 29, 2000 (dollar
amounts in thousands, except per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Pep Boys-Manny, Moe & Jack and subsidiaries (the "Company") is
engaged principally in the retail sale of automotive parts and accessories,
automotive maintenance and service and the installation of parts through a
chain of stores at February 2, 2002. The Company currently operates stores in
36 states and Puerto Rico.
FISCAL YEAR END The Company's fiscal year ends on the Saturday nearest to
January 31. Fiscal years 2001 and 1999 were comprised of 52 weeks, while
fiscal year 2000 was comprised of 53 weeks.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States necessarily requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost
(last-in, first-out) or market. If the first-in, first-out method of valuing
inventories had been used by the Company, the inventory valuation difference
would have been immaterial on both February 2, 2002 and February 3, 2001.
CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly
liquid investments with a maturity of three months or less when purchased.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method over
the following estimated useful lives: building and improvements, 5 to 40 years;
furniture, fixtures and equipment, 3 to 10 years.
SOFTWARE CAPITALIZATION In 1998, the Company adopted Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." In accordance with this standard, certain direct
development costs associated with internal-use software are capitalized,
including external direct costs of material and services, and payroll costs for
employees devoting time to the software projects. These costs are amortized
over a period not to exceed five years beginning when the asset is
substantially ready for use. Costs incurred during the preliminary project
stage, as well as maintenance and training costs, are expensed as incurred.
CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection
with the construction of certain long-term assets. Capitalized interest
amounted to $1, $489 and $1,098 in fiscal years 2001, 2000 and 1999,
respectively.
REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise
at the time the merchandise is sold. Service revenues are recognized upon
completion of the service. The Company records revenue net of an allowance for
estimated future returns. Return activity is immaterial to revenue and results
of operations in all periods presented.
SERVICE REVENUE Service revenue consists of the labor charge for installing
merchandise or maintaining or repairing vehicles, excluding the sale of any
installed parts or materials.
37
COSTS OF REVENUES Costs of merchandise sales include the cost of products sold,
buying, warehousing and store occupancy costs. Costs of service revenue
include service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
PENSION EXPENSE The Company reports all information on its pension and savings
plan benefits in accordance with Statement of Financial Accounting Standards
(SFAS) No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits."
INCOME TAXES The Company uses the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under
the liability method, deferred income taxes are determined based upon enacted
tax laws and rates applied to the differences between the financial statement
and tax bases of assets and liabilities.
ADVERTISING The Company expenses the production costs of advertising the first
time the advertising takes place. The Company nets cooperative advertising
reimbursements against costs incurred. Net advertising expense for fiscal
years 2001, 2000 and 1999 was $6,828, $0 and $346, respectively. No
advertising costs were recorded as assets as of February 2, 2002 or
February 3, 2001.
STORE OPENING COSTS The costs of opening new stores are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived
assets in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This standard
prescribes the method for asset impairment evaluation for long-lived assets and
certain identifiable intangibles that are either held and used or to be
disposed of. The Company evaluates the ability to recover long-lived assets
whenever events or circumstances indicate that the carrying value of the asset
may not be recoverable. In the event assets are impaired, losses are
recognized to the extent the carrying value exceeds the fair value. In
addition, the Company reports assets to be disposed of at the lower of the
carrying amount or the fair market value less selling costs.
During fiscal year 2000, the Company, as a result of its ongoing review of the
performance of its stores, identified certain stores whose cash flow trend
indicated that the carrying value may not be fully recoverable. An impairment
charge of $5,735 was recorded for these stores in costs of merchandise sales on
the consolidated statement of operations. The charge reflects the difference
between carrying value and fair value. Fair value was based on sales of
similar assets or other estimates of fair value developed by Company
management.
EARNINGS PER SHARE Earnings per share for all periods have been computed in
accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share
is computed by dividing earnings by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is computed by
dividing earnings by the weighted average number of common shares outstanding
during the year plus the assumed conversion of dilutive convertible debt and
incremental shares that would have been outstanding upon the assumed exercise
of dilutive stock options.
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As
permitted by SFAS No. 123, the Company is accounting for employee stock-based
compensation plans in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," incorporating the
guidance of Financial Accounting Standards Board (FASB) Interpretation No.
(FIN) 44 "Accounting for Certain Transactions involving Stock Compensation" and
Emerging Issues Task Force (EITF) 00-23 "Issues Related to the Accounting for
Stock Compensation under APB Opinion No. 25 and FIN 44" and has provided
disclosures required by SFAS No. 123.
38
COMPREHENSIVE INCOME Comprehensive income is reported in accordance with SFAS
No. 130, "Reporting Comprehensive Income." Other comprehensive income includes
minimum pension liability adjustments.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company has adopted this statement in the
first quarter of fiscal 2001 with no material effect on its consolidated
financial statements.
SEGMENT INFORMATION The Company reports segment information in accordance with
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." The Company operates in one industry, the automotive
aftermarket. In accordance with SFAS No. 131, the Company aggregates all of
its stores and reports one operating segment. Sales by major product
categories are as follows:
Year ended Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000
- ----------------------------------------------------------------------------------------
Parts and Accessories $1,403,775 $1,547,020 $1,571,445
Tires 361,539 410,460 382,565
- ----------------------------------------------------------------------------------------
Total Merchandise Sales 1,765,314 1,957,480 1,954,010
Service 418,401 460,988 440,523
- ----------------------------------------------------------------------------------------
Total Revenues $2,183,715 $2,418,468 $2,394,533
========================================================================================
Parts and accessories includes batteries, new and rebuilt parts, chemicals,
mobile electronics, tools, and various car, truck, van and sport utility
vehicle accessories as well as other automotive related items. Service consists
of the labor charge for installing merchandise or maintaining or repairing
vehicles.
RECENT ACCOUNTING PRONOUNCEMENTS In 2001, the EITF issued EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." This pronouncement deals with accounting
for certain types of sales incentives and other consideration offered by
companies to their customers. This guidance is effective in fiscal years
beginning after December 15, 2001. The Company has analyzed the impact of the
adoption of this statement and it will not have a material effect on the
Company's consolidated financial statements upon its adoption on
February 3, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and the reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company has
analyzed the impact of the adoption of this statement and it will not have a
material effect on the Company's consolidated financial statements upon its
adoption on February 3, 2002.
39
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after
June 15, 2002. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business
combinations should be accounted for using the purchase method of accounting;
use of the pooling-of-interests method is prohibited. The provisions of the
statement apply to all business combinations initiated after June 30, 2001.
SFAS 142 applies to all acquired intangible assets whether acquired singly, as
part of a group, or in a business combination. Adoption of SFAS 142 will
result in ceasing amortization of goodwill. All of the provisions of the
statement are effective in fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets recognized in an entity's statement
of financial position at that date, regardless of when those assets were
initially recognized. The Company has analyzed the impact of the adoption of
this statement and it will not have a material effect on the Company's
consolidated financial statements upon its adoption on February 3, 2002.
In September 2000, the EITF issued EITF 00-23, "Issues Related to the
Accounting for Stock Compensation under APB Opinion No. 25 and FIN 44." This
pronouncement addressed practice issues and questions related to accounting
for stock compensation primarily under APB No. 25 and FIN 44. The Company has
incorporated the guidance provided by the interpretation with no material
effect on its consolidated financial statements.
In June 2000, the FASB issued FIN 44, "Accounting for Certain Transactions
involving Stock Compensation." This interpretation provides additional
guidance for APB No. 25, "Accounting for Stock Issued to Employees." The
Company has incorporated the guidance provided by the interpretation with no
material effect on its consolidated financial statements.
RECLASSIFICATIONS Certain reclassifications have been made to the prior years'
consolidated financial statements to provide comparability with the current
year's presentation.
NOTE 2 - DEBT
SHORT-TERM BORROWINGS In fiscal 2001, the Company had no short-term borrowing
lines. In the third quarter of fiscal 2000, the Company, in conjunction with
the acquiring of a new long-term revolving credit agreement, terminated its
short-term borrowing line. The Company did have short-term borrowings during
fiscal 2000 and the average and maximum month end balances were $4,232 and
$13,000, respectively.
40
LONG-TERM DEBT
- ------------------------------------------------------------------------------------------------------------
February 2, 2002 February 3, 2001
- ------------------------------------------------------------------------------------------------------------
Medium-term notes, 6.4% to 6.7%, due
November 2004 through September 2007 $144,005 $144,005
Medium-term notes, 6.7% to 6.9%, due
March 2004 through March 2006 100,000 100,000
7% notes due June 2005 100,000 100,000
6.92% Term Enhanced ReMarketable Securities,
due July 2017 100,000 100,000
6.625% notes due May 2003 75,000 75,000
Senior Secured Credit Facility,
due July 2003 and July 2006 71,625 -
Revolving credit agreement 70,842 127,718
Other notes payable, 3.8% to 8% 7,561 7,668
- ------------------------------------------------------------------------------------------------------------
669,033 654,391
Less current maturities 124,615 197
- ------------------------------------------------------------------------------------------------------------
Total long-term debt $544,418 $654,194
- ------------------------------------------------------------------------------------------------------------
In June 2001, the Company obtained $90,000 in a Senior Secured Credit Facility.
The Facility, which is secured by certain equipment and real estate with a
total book value as of February 2, 2002 of $108,633, was issued in two
tranches. Tranche A is a term loan for $45,000 with an interest rate based on
London Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is structured as
a two-year term loan payable in equal installments with the final payment due
in 2003. The weighted average interest rate on Tranche A was 6.7% at
February 2, 2002. Tranche B is a term loan for $45,000 with an interest rate
of LIBOR plus 3.95%. Tranche B is structured as a five-year term loan payable
in equal installments with the final payment due in 2006. The weighted average
interest rate on Tranche B was 6.9% at February 2, 2002. The Senior Secured
Credit Facility is subject to certain financial covenants.
In September 2000, the Company entered into a new revolving credit agreement.
The new revolving credit agreement provides up to $225,000 of borrowing
availability, which is collateralized by inventory and accounts receivable.
Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days
prior to each anniversary date, the Company may request and, upon agreement
with the bank, extend the maturity of this facility an additional year. The
interest rate on any loan is equal to the LIBOR plus 1.75%, and increases in
0.25% increments as the excess availability falls below $50,000. The revolver
is subject to certain financial covenants. This revolver replaces the previous
revolver the Company had with nine major banks, which provided up to $200,000
in borrowings. The Company recorded an after-tax extraordinary charge related
to the extinguishment of its previous revolving credit agreement of $931. The
weighted average interest rate on borrowings under the revolving credit
agreement was 6.2% and 8.5% at February 2, 2002 and February 3, 2001,
respectively.
41
In February 1998, the Company established a Medium-Term Note program which
permitted the Company to issue up to $200,000 of Medium-Term Notes. Under this
program the Company sold $100,000 principal amount of Senior Notes, ranging in
annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006.
Additionally, in July 1998, under this note program, the Company sold $100,000
of Term Enhanced ReMarketable Securities with a stated maturity date of July
2017. The Company also sold a call option with the securities, which allows
the securities to be remarketed to the public in July 2006 under certain
circumstances. If the securities are not remarketed, the Company will be
obligated to repay the principal amount in full in July 2017. The level yield
to maturity on the securities is approximately 6.85% and the coupon rate is
6.92%.
Between July and October 1997, the Company issued $150,000 in Medium-Term Notes
with interest rates of 6.4% to 6.7% and maturity dates from November 2004
through September 2007. $50,000 of this debt is redeemable at the option of
the holder on July 16, 2002 and $49,000 is redeemable at the option of the
holder on September 19, 2002.
In June 2000, the Company repurchased $5,995 face value of the $49,000
Medium-Term Note, which was redeemable at the option of the holder on
September 19, 2002. The after-tax extraordinary gain was $960.
In the third quarter of 2001, the Company reclassed the $50,000 Medium-Term
Note and the remaining $43,005 of the $49,000 Medium-Term Note to current
liabilities on the consolidated balance sheet. These Medium-Term Notes are
redeemable at the option of the holder on July 16, 2002 and September 19, 2002,
respectively.
The other notes payable have a weighted average interest rate of 4.9% at
February 2, 2002 and 5.4% at February 3, 2001, and mature at various times
through August 2016. Certain of these notes are collateralized by land and
buildings with an aggregate carrying value of approximately $7,260 and $7,398
at February 2, 2002 and February 3, 2001, respectively.
CONVERTIBLE DEBT
- ------------------------------------------------------------------------------------------------------------
February 2, 2002 February 3, 2001
- ------------------------------------------------------------------------------------------------------------
Zero Coupon Convertible Subordinated Notes $ - $158,555
- ------------------------------------------------------------------------------------------------------------
- 158,555
Less current maturities - 158,555
- ------------------------------------------------------------------------------------------------------------
Total long-term convertible debt $ - $ -
- ------------------------------------------------------------------------------------------------------------
On September 20, 1996, the Company issued $271,704 principal amount
(at maturity) of Liquid Yield Option Notes (LYONs) with a price to the public
of $150,000. The net proceeds to the Company were $146,250. The issue price
of each such LYON was $552.07 and required no periodic payments of interest.
The LYONs had a maturity date of September 20, 2011, at $1,000 per LYON,
representing a yield to maturity of 4.0% per annum (computed on a semiannual
bond equivalent basis).
42
In April 2000, the Company repurchased $30,200 face value of its LYONs at a
price of $520 per LYON. The book value of the repurchased LYONs was $19,226
and the after-tax extraordinary gain was $2,025.
In May 2001, the Company repurchased $77,600 face value of its LYONs at a price
of $649 per LYON. The book value of the repurchased LYONs was $51,517 and the
after-tax extraordinary gain was $228.
In July 2001, the Company repurchased $3,000 face value of its LYONs at a price
of $656 per LYON. The book value of the repurchased LYONs was $2,006.
In September 2001, the Company repurchased $159,702 face value of its LYONs
which were redeemed at the option of the holder at a price of $673 per LYON.
The book value of the repurchased LYONs was $107,475 and the after-tax
extraordinary loss was $993.
In November 2001, the Company repurchased the remaining $1,202 face value of
its LYONs which were redeemed for a price of $677 per LYON. The book value of
the repurchased LYONs was $814.
Several of the Company's debt agreements require the maintenance of certain
financial ratios and compliance with covenants. Approximately $36,133 of the
Company's net worth was not restricted by these covenants as of
February 2, 2002. The Company was in compliance with all such ratios and
covenants at February 2, 2002.
The annual maturities, of all long-term debt for the next five years are
$124,615 in 2002, $98,714 in 2003, $187,869 in 2004, $109,016 in 2005 and
$148,548 in 2006. These maturities include amounts for early redemption, which
is at the option of the holders. Any compensating balance requirements related
to all revolving credit agreements and debt were satisfied by balances
available from normal business operations.
The Company was contingently liable for outstanding letters of credit in the
amount of approximately $37,887 at February 2, 2002.
NOTE 3 - LEASE AND OTHER COMMITMENTS
In May 2001, the Company sold certain operating assets for $14,000. The assets
were leased back from the purchaser in a lease structured as a one-year term
with three one-year renewal options. The resulting lease is being accounted
for as an operating lease and the gain of $3,817 from the sale of the certain
operating assets is deferred until the lease term is completed and the residual
guarantee is satisfied, at which time the gain will be recorded in costs of
merchandise sales and costs of service revenue.
In January 2001, the Company sold certain assets for $10,464. The assets were
leased back from the purchaser on a month to month renewable term basis with a
residual guarantee given by the Company at the end of the lease term. The
resulting lease is being accounted for as an operating lease and the gain of
$593 from the sale of the certain assets is deferred until the lease term is
completed and the residual guarantee is satisfied, at which time the gain will
be recorded in costs of merchandise sales.
43
In September 2000, the Company entered into a $143,000 real estate operating
lease facility with leased property trusts, established as an unconsolidated
special-purpose entity. The real estate operating lease facility, which has
an interest rate of LIBOR plus 1.85%, replaces $143,000 of leases, which had
an interest rate of LIBOR plus 2.27%. The Company, as a result of replacing
the existing operating leases, recorded a pretax charge to fiscal 2000 earnings
of $1,630 of unamortized lease costs, which was recorded in the costs of
merchandise sales section of the consolidated statement of operations. The
$143,000 real estate operating lease facility has a four-year term with a
guaranteed residual value. At February 2, 2002, the maximum amount of the
residual guarantee relative to the real estate under the lease is
approximately $92,372. The Company expects the fair market value of the leased
real estate, subject to the purchase option or sale to a third party, to
substantially reduce or eliminate the Company's payment under the residual
guarantee at the end of the lease term.
The Company leases certain property and equipment under operating leases which
contain renewal and escalation clauses. Future minimum rental commitments for
noncancelable operating leases in effect as of February 2, 2002 are shown
below. All amounts are exclusive of lease obligations and sublease rentals
applicable to stores for which reserves in conjunction with the Profit
Enhancement Plan have previously been established. The aggregate minimum
rental commitments for such leases having terms of more than one year are
approximately: 2002-$51,887; 2003-$44,925; 2004-$41,880; 2005-$35,888;
2006-$36,037; thereafter-$328,786. Rental expenses incurred for operating
leases in 2001, 2000 and 1999 were $64,434, $63,206 and $59,890.
In October 2001, the Company entered into a contractual commitment to purchase
media advertising services with equal annual purchase requirements totaling
$39,773 over the next four years. As of February 2, 2002, the remaining
balance for this commitment was $34,705.
NOTE 4 - STOCKHOLDERS' EQUITY
SHARE REPURCHASE - TREASURY STOCK On February 1, 1999, the Company repurchased
11,276,698 of its common shares outstanding pursuant to a Dutch Auction
self-tender offer at a price of $16.00 per share. The repurchased shares
included 1,276,698 common shares which were repurchased as a result of the
Company exercising its option to purchase an additional 2% of its outstanding
shares. Expenses related to the share repurchase were approximately $1,638 and
were included as part of the cost of the shares acquired. A portion of the
treasury shares will be used by the Company to provide benefits to employees
under its compensation plans and in conjunction with the Company's dividend
reinvestment program. As of February 2, 2002, the Company has reflected
10,284,446 shares of its common stock at a cost of $166,045 as "cost of shares
in treasury" on the Company's consolidated balance sheet.
RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend
one common share purchase right on each of its common shares. The rights will
not be exercisable or transferable apart from the Company's common stock until
a person or group, as defined in the rights agreement (dated December 5, 1997),
without the proper consent of the Company's Board of Directors, acquires 15% or
more, or makes an offer to acquire 15% or more of the Company's outstanding
stock. When exercisable, the rights entitle the holder to purchase one share
of the Company's common stock for $125. Under certain circumstances, including
the acquisition of 15% of the Company's stock by a person or group, the rights
entitle the holder to purchase common stock of the Company or common stock of
an acquiring company having a market value of twice the exercise price of the
right. The rights do not have voting power and are subject to redemption by
the Company's Board of Directors for $.01 per right anytime before a 15%
position has been acquired and for 10 days thereafter, at which time the rights
become nonredeemable. The rights expire on December 31, 2007.
44
BENEFITS TRUST On April 29, 1994, the Company established a flexible employee
benefits trust with the intention of purchasing up to $75,000 worth of the
Company's common shares. The repurchased shares will be held in the trust and
will be used to fund the Company's existing benefit plan obligations including
healthcare programs, savings and retirement plans and other benefit
obligations. The trust will allocate or sell the repurchased shares through
2023 to fund these benefit programs. As shares are released from the trust,
the Company will charge or credit additional paid-in capital for the difference
between the fair value of shares released and the original cost of the shares
to the trust. For financial reporting purposes, the trust is consolidated with
the accounts of the Company. All dividend and interest transactions between
the trust and the Company are eliminated. In connection with the Dutch Auction
self-tender offer, 37,230 shares were tendered at a price of $16.00 per share
in fiscal 1999. At February 2, 2002, the Company has reflected 2,195,270
shares of its common stock at a cost of $59,264 as "cost of shares in benefits
trust" on the Company's consolidated balance sheet.
NOTE 5 - PROFIT ENHANCEMENT PLAN
In the third quarter 2000, the Company performed a comprehensive review of its
field, distribution and Store Support Center infrastructure as well as the
performance of each store. As a result of this review, the Company implemented
a number of changes that it believed would improve its performance and recorded
a charge of $71,234. The charges included expenses related to the closure of
the 38 under-performing stores and two distribution centers, certain equipment
write-offs, the abandonment of two development parcels and severance costs.
The charges were recorded in costs of merchandise sales, costs of service
revenue and selling, general and administrative expenses on the consolidated
statement of operations as $62,665, $5,661 and $2,908, respectively.
PLAN UPDATE
The Profit Enhancement Plan has been progressing closely to the schedule
originally estimated by the Company. Each of the 38 stores and one of the
distribution centers identified for closure were closed on or before
October 28, 2000. The second distribution center was closed on November 30,
2000. All employees were notified of their separation on or before October 28,
2000. The assets held for disposal were reclassed and depreciation was stopped
on October 28, 2000 which was concurrent with the announcement of the Profit
Enhancement Plan and the closure of the stores.
The Company is progressing towards the disposal of the 38 stores, 11 of which
were owned and 27 were leased by the Company, two distribution centers and two
development parcels which were closed or abandoned in connection with the
Profit Enhancement Plan. As of the end of fiscal 2001, the Company had
successfully disposed of ten of the closed stores, the two distribution centers
and one of the development parcels. The Company estimates the remaining closed
or abandoned properties will be disposed of by the end of fiscal 2002.
ASSETS HELD FOR DISPOSAL
The assets held for disposal as of the end of fiscal 2001 and 2000 included the
building and land of the remaining closed stores owned by the Company,
additional development parcels, and equipment from the remaining closed
stores. The carrying values of the building, land and equipment were $16,007
and $22,629 for fiscal years 2001 and 2000, respectively.
In fiscal 2001, the Company was able to sell three of the 13 owned properties
for net proceeds of $4,103. The sales resulted in a loss of $691 which was
recorded in costs of merchandise sales and selling, general and administrative
expenses on the consolidated statement of operations. Additionally, the
Company recorded a downward revision in the estimated values for certain
properties of $1,496 in fiscal 2001. This expense was recorded in costs of
merchandise sales on the consolidated statement of operations. In fiscal 2001,
the Company recorded a loss for equipment held for disposal of $162, which was
due primarily to a reduction in the Company's estimated proceeds.
45
The Company is actively marketing the remaining ten owned properties and has
made adjustments to property values in accordance with the change in market
values. As a result, the Company has extended the original estimated time
needed for selling the owned properties. It is expected that seven of these
properties with a carrying value of $10,663 will be disposed of by the second
quarter 2002, with the remaining three properties with a carrying value of
$4,746 expected to be disposed of by the end of the third quarter 2002. The
Company will continue to monitor the status for disposing of its owned
properties and make any necessary adjustments. An adjustment was reflected in
on-going expenses for the increased time required to maintain these properties.
LEASE RESERVE
As of the end of fiscal 2001, the Company was able to sublease three and exit
the lease of an additional five leased properties. The Company expects the
remaining 19 leased properties to be subleased or otherwise disposed of by the
end of fiscal 2002.
The Company increased the reserve for leases $1,644 during fiscal 2001. These
changes in the reserve were a result of a $3,834 increase due primarily to an
increase in the estimated amount of time it will take the Company to sublease
certain properties and a decrease in estimated sublease rates. The reserve
increase was offset, in part, by a $2,190 decrease due primarily to lower than
estimated commissions and lease exit costs on subleases for certain properties.
The effects of these adjustments were recorded in costs of merchandise sales
and costs of service revenue.
In fiscal 2000, the Company increased the lease reserve by $113. These changes
in the reserve were a result of a $1,176 increase due to an increase in the
estimated lease payments related to the closed stores. The increase was
offset, in part, by a $1,063 decrease due primarily to an increase in the
estimated sublease rates coupled with lower lease related expenses.
ON-GOING EXPENSES
The on-going expense reserve represents exit activity costs which are not
associated with or do not benefit activities that will be continued. These
costs are necessary to maintain the remaining closed stores until sold, sublet
or otherwise disposed of. The on-going costs reserve includes general
maintenance costs such as utilities, security, telephone, real estate taxes and
personal property taxes which will be incurred until the properties are
disposed. The reserve for on-going costs will diminish as sites are sold,
sublet or otherwise disposed of and such activities are estimated to be
completed by the end of fiscal 2002.
In fiscal 2001, the Company increased the on-going expense reserve $595.
This change was a result of a $1,214 increase in the reserve due to an increase
in the estimated time it is expected to take to sublease, sell or otherwise
dispose of the remaining properties offset, in part, by a $619 decrease due to
lower than anticipated cost for utilities and security costs.
In fiscal 2000, the Company increased the on-going expense reserve $361. This
change was due to an increase in the estimated time it is expected to take to
sublease, sell or otherwise dispose of the remaining properties.
SEVERANCE RESERVE
The total number of employees separated due to the Profit Enhancement Plan was
approximately 1,000. The 1,000 employees were composed of 76% store employees,
13% distribution employees, and 11% Store Support Center and field
administrative employees. The total severance paid in connection with the
Profit Enhancement Plan was $1,353.
In fiscal 2001, the Company reversed $69 of severance due primarily to certain
employees originally expected to be receiving severance failing to qualify to
receive payments and lower than estimated final payments. Each reversal was
recorded through the line it was originally charged in the consolidated
statements of operations.
46
In fiscal 2000, the Company reversed $272 of severance due to employees being
accepted into positions in other locations of the Company and employees failing
to qualify to receive payments. Each reversal was recorded through the line it
was originally charged in the consolidated statements of operations.
NON-RESERVABLE EXPENSES
Non-reservable expenses are those costs which could not be reserved, but were
incurred as a result of the Profit Enhancement Plan. These expenses related
to costs incurred which had a future economic benefit to the Company such as
the transferring of inventory and equipment out of properties closed by the
Profit Enhancement Plan.
The expenses of this nature incurred were $678 and $3,611 for fiscal 2001 and
fiscal 2000, respectively. The fiscal 2001 expenses incurred related to the
completion of the removal of inventory and equipment from the closed
distribution centers. The fiscal 2000 expenses were incurred for inventory and
equipment handling related to the closure of the 38 stores and two distribution
centers. The fiscal 2000 expenses were offset by a recovery of certain benefit
expenses related to the reduction in workforce.
47
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Below are tables summarizing expenses related to the Profit Enhancement Plan
for fiscal 2001 and fiscal 2000. The details and reasons for the original
charge and changes to the charge are as described above in the respective
reserve categories.
FISCAL 2001
Non-Reservable
Income Statement Reserve Expense Total
Classification Adjustments Incurred Expense
- -----------------------------------------------------------------
Costs of
merchandise sales $3,528 $ 641 $4,169
Costs of
service revenue 804 9 813
Selling, general and
administrative 187 28 215
- -----------------------------------------------------------------
Total expenses $4,519 $ 678 $5,197
- -----------------------------------------------------------------
FISCAL 2000
Non-Reservable
Income Statement Original Reserve Expense Total
Classification Charge Adjustments Incurred Expense
- -----------------------------------------------------------------------------
Costs of
merchandise sales $62,665 $ 939 $3,481 $67,085
Costs of
service revenue 5,661 (177) (252) 5,232
Selling, general and
administrative 2,908 (662) 382 2,628
- -----------------------------------------------------------------------------
Total expenses $71,234 $ 100 $3,611 $74,945
- -----------------------------------------------------------------------------
48
At the end of the third quarter 2000, the Company set up a reserve liability
account which is included in accrued liabilities on the consolidated balance
sheet. This liability account tracks all accruals including remaining
rent on leases net of sublease income, severance, and on-going expenses for
the closed properties. The following chart reconciles the change in reserve
from the origination of the charge through the fiscal year ended February 2,
2002. All additions and adjustments were charged or credited through the
appropriate line items on the statement of operations.
Lease Fixed On-going
Expenses Assets Severance Expenses Total
- -----------------------------------------------------------------------------------------
Original charges $ 7,916 $57,680 $ 1,694 $ 3,944 $71,234
Addition 1,176 1,074 - 361 2,611
Utilization (975) (58,754) (1,213) (1,345) (62,287)
Adjustment (1,063) - (272) - (1,335)
- -----------------------------------------------------------------------------------------
Reserve balance
at Feb. 3, 2001 7,054 - 209 2,960 10,223
- -----------------------------------------------------------------------------------------
Addition 3,834 2,440 - 1,214 7,488
Utilization (5,548) (2,349) (140) (2,235) (10,272)
Adjustment (2,190) (91) (69) (619) (2,969)
- -----------------------------------------------------------------------------------------
Reserve balance
at Feb. 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470
- -----------------------------------------------------------------------------------------
NOTE 6 - PENSION AND SAVINGS PLANS
The Company has a defined benefit pension plan covering substantially all of
its full-time employees hired on or before February 1, 1992. Normal retirement
age is 65. Pension benefits are based on salary and years of service.
The Company's policy is to fund amounts as are necessary on an actuarial basis
to provide assets sufficient to meet the benefits to be paid to plan members in
accordance with the requirements of ERISA.
The actuarial computations are made using the "projected unit credit method."
Variances between actual experience and assumptions for costs and returns on
assets are amortized over the remaining service lives of employees under the
plan.
49
As of December 31, 1996, the Company froze the accrued benefits under the plan
and active participants became fully vested. The plan's trustee will continue
to maintain and invest plan assets and will administer benefit payments.
Pension expense (income) includes the following:
Feb. 2, Feb. 3, Jan. 29,
Year ended 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Interest cost $ 1,895 $ 1,848 $ 1,826
Expected return on plan assets (2,162) (2,261) (1,915)
Amortization of transition asset (214) (214) (214)
Recognized actuarial loss 992 890 597
- -----------------------------------------------------------------------------------------------------------------------------
Total pension expense $ 511 $ 263 $ 294
- -----------------------------------------------------------------------------------------------------------------------------
Pension plan assets are stated at fair market value and are composed primarily
of money market funds, stock index funds, fixed income investments with
maturities of less than five years, and the Company's common stock.
50
The following table sets forth the reconciliation of the benefit obligation,
fair value of plan assets and funded status of the Company's defined benefit
plan:
Feb. 2, Feb. 3,
Year ended 2002 2001
- --------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $25,726 $26,955
Interest cost 1,895 1,848
Actuarial loss (gain) 944 (2,041)
Benefits paid (1,056) (1,036)
- ---------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $27,509 $25,726
- ---------------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year $25,854 $26,974
Actual return on plan assets (net of expenses) 1,816 (84)
Employer contributions 895 -
Benefits paid (1,056) (1,036)
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $27,509 $25,854
- ---------------------------------------------------------------------------------------------------------------
Reconciliation of the Funded Status:
Funded status $ - $ 128
Unrecognized transition asset - (214)
Unrecognized actuarial loss 3,960 3,663
- ---------------------------------------------------------------------------------------------------------------
Net amount recognized at year-end
as prepaid benefit cost $ 3,960 $ 3,577
- ---------------------------------------------------------------------------------------------------------------
Weighted-Average Assumptions:
Discount rate 7.25% 7.40%
Expected return on plan assets 8.50% 8.50%
- ---------------------------------------------------------------------------------------------------------------
The Company had no comprehensive income attributable to the change in the
minimum pension liability in fiscal years 2001 and 2000. The Company recorded
other comprehensive income, net of tax, attributable to the change in the
minimum pension liability of $4,210 in fiscal year 1999.
The Company has 401(k) savings plans which cover all full-time employees who
are at least 21 years of age with one or more years of service. The Company
contributes the lesser of 50% of the first 6% of a participant's contributions
or 3% of the participant's compensation. The Company's savings plans'
contribution expense was $4,516, $4,947 and $5,644 in fiscal years 2001, 2000
and 1999, respectively.
51
NOTE 7 - NET EARNINGS PER SHARE
For fiscal years 2001, 2000 and 1999, basic earnings per share are based on
net earnings divided by the weighted average number of shares outstanding
during the period. Diluted earnings per share assumes conversion of
convertible subordinated notes, zero coupon convertible subordinated notes and
the dilutive effects of stock options. Adjustments for convertible securities
were antidilutive in 2001, 2000 and 1999, and therefore excluded from the
computation of diluted EPS; all of these securities were retired as of the end
of fiscal 2001 and will not effect future calculations. Options to purchase
3,940,587, 5,032,772 and 4,755,657 shares of common stock were outstanding at
February 2, 2002, February 3, 2001 and January 29, 2000, respectively, but were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market prices of the common shares on such
dates.
The following schedule presents the calculation of basic and diluted earnings
per share for income before extraordinary items:
(In thousands, except per share amounts)
Fiscal 2001 Fiscal 2000 Fiscal 1999
---------------------------------- ---------------------------------- ---------------------------------
Earnings Shares Per share Earnings Shares Per share Earnings Shares Per share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator)(Denominator) Amount
----------- ------------ ------ ----------- ------------- ------ ---------- ------------ ------
Basic EPS Before
Extraordinary Items
Earnings available to
common shareholders $36,100 51,348 $ .70 $(53,148) 51,088 $(1.04) $ 29,303 50,665 $.58
====== ====== ====
Effect of Dilutive
Securities
Common shares assumed
issued upon exercise of
dilutive stock options - 687 - - - 175
------- ------ ------- ------ ------- ------
Diluted EPS Before
Extraordinary Items
Earnings available to
common shareholders
assuming conversion $36,100 52,035 $ .69 $(53,148) 51,088 $(1.04) $ 29,303 50,840 $.58
======= ====== ====== ======== ====== ====== ======== ====== ====
52
NOTE 8 - STOCK OPTION PLANS
Options to purchase the Company's common stock have been granted to key
employees and members of the Board of Directors. The option prices are at least
100% of the fair market value of the common stock on the grant date.
On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan which
authorized the issuance of restricted stock and/or options to purchase up to
1,000,000 shares of the Company's common stock. Additional shares in the
amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by stockholders
on June 4, 1997, May 31, 1995 and June 1, 1993, respectively. In April 2001,
the Board of Directors amended the 1990 Stock Incentive Plan to extend the
expiration date for the grant of non-qualified stock options and restricted
stock thereunder to directors, officers and employees until March 31, 2005.
Under this plan, both incentive and nonqualified stock options may be granted
to eligible participants. Incentive stock options are fully exercisable on the
second or third anniversary of the grant date or become exercisable over a
four-year period with one-fifth exercisable on the grant date and one-fifth on
each anniversary date for the four years following the grant date. Nonqualified
options are fully exercisable on the third anniversary of their grant date or
become exercisable over a four-year period with one-fifth exercisable on the
grant date and one-fifth on each anniversary date for the four years following
the grant date. Options cannot be exercised more than ten years after the
grant date. As of February 2, 2002, 478,367 remain available for grant.
On June 2, 1999 the stockholders approved the 1999 Stock Incentive Plan which
authorized the issuance of restricted stock and/or options to purchase up to
2,000,000 shares of the Company's common stock. Under this plan, both
incentive and nonqualified stock options may be granted to eligible
participants. The incentive stock options and nonqualified stock options are
fully exercisable on the third anniversary of the grant date or become
exercisable over a four-year period with one-fifth exercisable on the grant
date and one-fifth on each anniversary date for the four years following the
grant date. Options cannot be exercised more than ten years after the grant
date. As of February 2, 2002, 102,000 shares remain available for grant.
Equity Equity
compensation compensation
plans approved plans not approved
by shareholders by shareholders Total
- --------------------------------------------------------------------------------------
Number of securities to
be issued upon exercise
of outstanding options 6,316,787 - 6,316,787
Weighted average exercise
price of outstanding
options $ 16.48 $ - $ 16.48
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in top row) 580,367 - 580,367
- --------------------------------------------------------------------------------------
53
Stock option transactions for the Company's stock option plans are summarized
as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999
------------------------ ----------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding - beginning of year 5,039,772 $19.63 5,413,622 $22.05 4,982,761 $23.02
Granted 1,757,000 6.75 1,160,450 6.34 1,558,450 16.08
Exercised (19,400) 8.77 - - (519,850) 12.50
Cancelled (460,585) 14.26 (1,534,300) 18.10 (607,739) 22.75
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year 6,316,787 16.48 5,039,772 19.63 5,413,622 22.05
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 3,422,187 22.29 2,501,678 24.93 2,489,162 24.66
Weighted average estimated fair value
of options granted 2.85 2.54 6.60
- ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at February 2, 2002:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at Feb. 2, 2002 Life Price at Feb.2, 2002 Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 5.31 to $13.00 2,447,200 9 years $ 6.56 379,200 $ 6.56
$13.01 to $21.00 1,397,230 7 years 15.58 747,630 15.53
$21.01 to $29.00 1,436,792 5 years 23.30 1,259,792 23.34
$29.01 to $37.38 1,035,565 4 years 31.65 1,035,565 31.65
- ---------------------------------------------------------------------------------------------------------------------------
$ 5.31 to $37.38 6,316,787 3,422,187
- ---------------------------------------------------------------------------------------------------------------------------
54
The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and
the guidance of FIN 44 "Accounting for Certain Transactions involving Stock
Compensation" and EITF 00-23 "Issues Related to Accounting for Stock
Compensation under APB Opinion No. 25 and FIN 44" in accounting for its stock
option plans. Accordingly, no compensation expense has been recognized for its
stock option plans. Had compensation cost for the Company's stock option
plans been determined based on the fair value at the grant dates and recognized
as compensation expense on a straight-line basis over the vesting period of the
grant consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net earnings (loss) and net earnings (loss) per
share would have been reduced to the pro forma amounts indicated as follows:
- -----------------------------------------------------------------------------------------------------------
Fiscal 2001 Fiscal 2000 Fiscal 1999
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss):
Income (loss) before extraordinary items $32,208 $(57,365) $24,450
Extraordinary items (765) 2,054 -
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $31,443 $(55,311) $24,450
- -----------------------------------------------------------------------------------------------------------
Earnings (loss) per share - basic:
Income (loss) before extraordinary items $ .63 $ (1.12) $ .48
Extraordinary items (.01) .04 -
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ .62 $ (1.08) $ .48
- -----------------------------------------------------------------------------------------------------------
Earnings (loss) per share - diluted:
Income (loss) before extraordinary items $ .62 $ (1.12) $ .48
Extraordinary items (.01) .04 -
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ .61 $ (1.08) $ .48
- -----------------------------------------------------------------------------------------------------------
The pro forma effects on net earnings for fiscal years 2001, 2000 and 1999 are
not representative of the pro forma effect on net earnings in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
The fair value of each option granted during fiscal years 2001, 2000 and 1999
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: (i) dividend yield of 1.29%,
0.90% and 0.78%, respectively; (ii) expected volatility of 39%, 40% and 34%,
respectively; (iii) risk-free interest rate ranges of 2.8% to 5.5%, 5.8% to
6.7% and 5.0% to 6.5%, respectively; and (iv) ranges of expected lives of 4
years to 8 years for fiscal years 2001, 2000 and 1999.
55
NOTE 9 - INCOME TAXES
The provision for income taxes includes the following:
Feb. 2, Feb. 3, Jan. 29,
Year ended 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 12,640 $ (6,300) $ 12,653
State 240 353 788
Deferred:
Federal 6,680 (22,776) 2,074
State 744 (1,798) 149
- ----------------------------------------------------------------------------------------------------------------------------------
$ 20,304 $(30,521) $ 15,664
- ----------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the effective
rate of the provision for income taxes follows:
Feb. 2, Feb. 3, Jan. 29,
Year ended 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal
tax benefits 1.2 1.2 1.4
Job credits (0.3) 0.3 (1.1)
Other, net 0.1 - (0.5)
- -----------------------------------------------------------------------------------------------------------------------------------
36.0% 36.5% 34.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Items that gave rise to significant portions of the deferred tax accounts are
as follows:
Feb. 2, Feb. 3,
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Inventories $ 3,841 $ 8,431
Vacation accrual 4,990 5,014
Store closing reserves 1,968 5,661
Accrued leases 7,737 7,966
Real estate tax (2,188) (2,091)
Insurance 4,621 4,009
Benefit accruals (5,693) (2,347)
Carry forward credits - (2,401)
Other 544 1,167
- -----------------------------------------------------------------------------------------------------------------------------------
$ 15,820 $ 25,409
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 69,093 $ 68,709
State taxes (2,643) (2,040)
Legal (2,438) -
Other 15 (477)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 64,027 $ 66,192
- -----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 48,207 $ 40,783
- -----------------------------------------------------------------------------------------------------------------------------------
56
NOTE 10 - CONTINGENCIES
The Company is a defendant in an action entitled "Coalition for a Level Playing
Field, L.L.C., et al. v. AutoZone, Inc., et al.," in the United States District
Court for the Eastern District of New York. There are over 100 plaintiffs,
consisting of automotive jobbers, warehouse distributors and a coalition of
several trade associations; the defendants are AutoZone, Inc., Wal-Mart Stores,
Inc., Advance Stores Company, Inc., CSK Auto, Inc., the Company, Discount Auto
Parts, Inc., O'Reilly Automotive, Inc. and Keystone Automotive Operations, Inc.
The plaintiffs allege that the defendants violated various provisions of the
Robinson-Patman Act by, among other things, knowingly inducing and receiving
various forms of discriminatory prices from automotive parts manufacturers. The
plaintiffs are seeking compensatory damages, which would be trebled under
applicable law, as well as injunctive and other equitable relief. The Company
believes the claims are without merit and intends to vigorously defend this
action.
The Company is also party to various other lawsuits and claims, including
purported class actions, arising in the normal course of business. In the
opinion of management, these lawsuits and claims, including the cases above,
are not, singularly or in the aggregate, material to the Company's financial
position or results of operations.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
February 2, 2002 February 3, 2001
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 15,981 $ 15,981 $ 7,995 $ 7,995
Accounts receivable 18,052 18,052 16,792 16,792
Liabilities:
Accounts payable 216,085 216,085 204,755 204,755
Long-term debt including
current maturities 669,033 635,080 654,391 472,770
Zero coupon
convertible
subordinated notes - - 158,555 148,525
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts approximate fair value because of the short maturity of
these items.
LONG-TERM DEBT INCLUDING CURRENT MATURITIES AND ZERO COUPON CONVERTIBLE
SUBORDINATED NOTES INCLUDING CURRENT MATURITIES
Interest rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities are used to estimate fair value for
debt issues that are not quoted on an exchange.
The fair value estimates presented herein are based on pertinent information
available to management as of February 2, 2002 and February 3, 2001. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
current estimates of fair value may differ significantly from amounts
presented herein.
57
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Earnings(Loss) Net
Net Earnings Per Share Before Earnings
Operating (Loss) Before Net Extraordinary (Loss) Cash Market Price
Year Ended Total Gross Profit Extraordinary Earnings Items Per Share Dividends Per Share
Feb. 2, 2002 Revenues Profit (Loss) Items (Loss) Basic Diluted Basic Diluted Per Share High Low
- -----------------------------------------------------------------------------------------------------------------------------------
1st Quarter $551,383 $155,537 $27,039 $ 9,108 $ 9,108 $ .18 $ .18 $ .18 $ .18 $.0675 $ 7.00 $ 4.40
2nd Quarter 572,874 164,104 31,964 12,285 12,519 .24 .24 .24 .24 .0675 13.97 5.35
3rd Quarter 551,255 155,706 27,362 11,016 10,022 .21 .21 .19 .19 .0675 13.70 8.80
4th Quarter 508,203 142,049 17,085 3,691 3,686 .07 .07 .07 .07 .0675 18.48 11.88
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
Feb. 3, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
1st Quarter $614,809 $159,816 $19,501 $ 4,407 $6,447 $ .09 $ .09 $ .13 $ .13 $.0675 $ 7.69 $ 5.50
2nd Quarter 633,887 157,622 18,593 3,409 4,376 .07 .07 .09 .09 .0675 7.63 5.63
3rd Quarter 622,382 66,358 (82,571) (62,271) (63,209) (1.22) (1.22) (1.24) (1.24) .0675 6.44 4.19
4th Quarter(1) 547,390 148,055 16,445 1,292 1,292 .03 .03 .03 .03 .0675 5.38 3.31
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Included 14 weeks due to the 53 week fiscal year
Under the Company's present accounting system, actual gross profit from
merchandise sales can be determined only at the time of physical inventory,
which is taken at the end of the fiscal year. Gross profit from merchandise
sales for the first, second and third quarters is estimated by the Company
based upon recent historical gross profit experience and other appropriate
factors. Any variation between estimated and actual gross profit from
merchandise sales for the first three quarters is reflected in the fourth
quarter's results.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material contained in the registrant's definitive proxy statement, which
will be filed pursuant to Regulation 14A not later than 120 days after the
end of the Company's fiscal year (the "Proxy Statement"), under the captions
"(ITEM 1) ELECTION OF DIRECTORS," other than "-Report of the Audit Committee of
the Board of Directors," and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE" is hereby incorporated herein by reference. The information
regarding executive officers called for by Item 401 of Regulation S-K is
included in Part I, in accordance with General Instruction G(3) to Form
10-K.
ITEM 11 EXECUTIVE COMPENSATION
The material in the Proxy Statement under the caption "EXECUTIVE COMPENSATION,"
other than the material under "-Report of the Compensation Committee of the
Board of Directors on Executive Compensation" and "-Performance Graph," is
hereby incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The material in the Proxy Statement under the caption "SHARE OWNERSHIP" is
hereby incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The material in the Proxy Statement under the caption "EXECUTIVE
COMPENSATION-Certain Relationships and Related Transactions" is hereby
incorporated herein by reference.
58
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a). Page
----
1. The following consolidated financial statements
of The Pep Boys - Manny, Moe & Jack are included in Item 8.
Independent Auditors' Report 32
Consolidated Balance Sheets - February 2, 2002
and February 3, 2001 33
Consolidated Statements of Operations - Years ended February 2, 2002,
February 3, 2001 and January 29, 2000 34
Consolidated Statements of Stockholders' Equity Years ended February
2, 2002, February 3, 2001 and January 29, 2000 35
Consolidated Statements of Cash Flows - Years ended February 2, 2002,
February 3, 2001, and January 29, 2000 36
Notes to Consolidated Financial Statements 37
2. The following consolidated financial statement schedule of The Pep
Boys - Manny, Moe & Jack is included.
Schedule II Valuation and Qualifying Accounts and Reserves 65
All other schedules have been omitted because they are not applicable
or not required or the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits
(3.1) Articles of Incorporation, Incorporated by reference from
as amended the Company's Form 10-K for the
fiscal year ended January 30,
1988.
(3.2) By-Laws, as amended Incorporated by reference from
the Registration Statement on
Form S-3 (File No. 33-39225).
(3.3) Amendment to By-Laws Incorporated by reference from
(Declassification of Board of Directors) the Company's Form 10-K for the
fiscal year ended January 29,
2000.
(4.1) Indenture, dated as of March 22, Incorporated by reference from
1991 between the Company and the Registration Statement on
Bank America Trust Company of Form S-3 (File No. 33-39225).
New York as Trustee, including
Form of Debt Security
(4.2) Indenture, dated as of June Incorporated by reference from
12, 1995, between the Company the Registration Statement on
and First Fidelity Bank, Form S-3 (File No. 33-59859).
National Association as Trustee,
including Form of Debenture
59
(4.3) Indenture, dated as of July 15, 1997, Incorporated by reference from
between the Company and PNC the Registration Statement on
Bank, National Association, as Form S-3 (File No. 333-30295).
Trustee, providing for the issuance
of Senior Debt Securities, and form
of security
(4.4) Indenture, dated as of February 18, 1998 Incorporated by reference from
between the Company and PNC the Registration Statement on
Bank, National Association, as Form S-3/A (File No. 333-45793).
Trustee, providing for the issuance
of Senior Debt Securities, and form
of security
(10.1)* Medical Reimbursement Plan of Incorporated by reference from
the Company the Company's Form 10-K for the
fiscal year ended January 31,
1982.
(10.2) Rights Agreement dated as of Incorporated by reference from
December 5, 1997 between the the Company's Form 8-K dated
Company and First Union December 8, 1997.
National Bank
(10.3)* Directors' Deferred Compensation Incorporated by reference from
Plan, as amended the Company's Form 10-K for the
fiscal year ended January 30,
1988.
(10.4) Dividend Reinvestment and Stock Purchase Incorporated by reference from
Plan dated January 4, 1990 the Registration Statement on
Form S-3 (File No. 33-32857).
(10.5)* The Pep Boys - Manny, Moe & Incorporated by reference from
Jack Trust Agreement for the the Company's Form 10-K for the
Executive Supplemental Pension fiscal year ended February 1,
Plan and Certain Contingent 1992.
Compensation Arrangements,
dated as of February 13, 1992
(10.6)* Amendment to the Executive Incorporated by reference from
Supplemental Pension Plan the Company's Form 10-K for the
(amended and restated effective fiscal year ended February 1,
January 1, 1988), dated as of 1992.
February 13, 1992
(10.7)* Consulting and Retirement Incorporated by reference from
Agreement by and between the the Company's Form 10-K for the
Company and Benjamin Strauss, fiscal year ended February 1,
dated as of February 2, 1992 1992.
(10.8) Flexible Employee Benefits Trust Incorporated by reference from
the Company's Form 8-K dated May
6, 1994.
(10.9)* The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from
the Company's Form 10-K for the
year ended January 31, 1998.
60
(10.10)* Form of Employment Agreement dated as of Incorporated by reference from
June 1998 between the Company and certain the Company's Form 10-Q for the
officers of the Company. quarter ended October 31, 1998.
(10.11)* Employment Agreement between Mitchell G. Leibovitz Incorporated by reference from
and the Company dated as of June 3, 1998. the Company's Form 10-Q for the
quarter ended October 31, 1998.
(10.12) The Pep Boys - Manny, Moe & Jack Incorporated by reference from
Annual Incentive Bonus Plan, as amended and restated. the Company's Form 10-K for the
year ended January 30, 1999.
(10.13) Amendments to The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from
the Company's Form 10-Q for the
quarter ended May 1, 1999.
(10.14)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from
1999 Stock Incentive Plan - Amended the Company's Form 10-Q for the
and Restated as of August 31, 1999. quarter ended October 30, 1999.
(10.15) Loan and Security Agreement between the Company and Incorporated by reference from
Congress Financial Corporation dated September 22, 2000. the Company's Form 8-K filed
October 18, 2000.
(10.16) Participation Agreement between the Company and Incorporated by reference from
The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed
September 22, 2000. October 18, 2000.
(10.17) Master Lease Agreement between the Company and Incorporated by reference from
The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed
September 22, 2000. October 18, 2000.
(10.18) Sale-leaseback agreement between the Company Incorporated by reference from
and ARI Fleet LT dated January 31, 2001. the Company's Form 10-K for the
year ended February 3, 2001.
(10.19)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from
1990 Stock Incentive Plan - Amended the Company's Form 10-K for the
and Restated as of March 26, 2001. year ended February 3, 2001.
(10.20) Credit Agreement between the Company Incorporated by reference from
and GMAC Business Credit, LLC dated the Company's Form 8-K filed
June 29, 2001. July 13, 2001.
(10.21)* The Pep Boys Savings Plan - Amended
and Restated as of April 25, 2001.
(10.22) Amendment No. 1 dated as of June 29, 2001
to the Loan and Security Agreement dated
September 22, 2000 between the Company and
Congress Financial Corporation.
(10.23)* The Pep Boys - Manny, Moe & Jack
Pension Plan - Amended and Restated
as of September 10, 2001.
(10.24) Advertising Purchase Agreement between
the Company and ICON International, Inc.
dated October 3, 2001.
(10.25) Amendment No. 2 dated as of December 13, 2001
to the Loan and Security Agreement dated
September 22, 2000 between the Company and
Congress Financial Corporation
(11) Computation of Earnings per Share
(12) Computation of Ratio of Earnings
to Fixed Charges
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
* Management contract or compensatory plan or arrangement.
(b) None
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PEP BOYS - MANNY, MOE & JACK
(Registrant)
Dated: May 3, 2002 by: /s/ George Babich Jr.
-------------- ---------------------
George Babich Jr.,
President and
Chief Financial Officer
62
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ---------- -------- ----
/s/ Mitchell G. Leibovitz Chairman of the Board May 3, 2002
Mitchell G. Leibovitz and Chief Executive Officer
(Principal Executive Officer)
/s/ George Babich Jr. President and May 3, 2002
George Babich Jr. Chief Financial Officer
(Principal Financial
Officer)
/s/ Bernard K. McElroy Chief Accounting Officer May 3, 2002
Bernard K. McElroy and Treasurer (Principal
Accounting Officer)
/s/ Peter A. Bassi Director May 3, 2002
Peter A. Bassi
/s/ Lennox K. Black Director May 3, 2002
Lennox K. Black
/s/ Bernard J. Korman Director May 3, 2002
Bernard J. Korman
/s/ J. Richard Leaman, Jr. Director May 3, 2002
J. Richard Leaman, Jr.
/s/ William Leonard Director May 3, 2002
William Leonard
/s/ Malcolmn D. Pryor Director May 3, 2002
Malcolmn D. Pryor
/s/ Lester Rosenfeld Director May 3, 2002
Lester Rosenfeld
/s/ Jane Scaccetti Director May 3, 2002
Jane Scaccetti
/s/ Benjamin Strauss Director May 3, 2002
Benjamin Strauss
/s/ John T. Sweetwood Director May 3, 2002
John T. Sweetwood
63
FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT
TO THE REQUIREMENTS OF FORM 10-K
64
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------------
Additions Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Descriptions Period Expenses Accounts Deductions* Period
- ----------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended February 2, 2002 $639 $1,674 $ - $1,588 $725
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended February 3, 2001 $826 $1,859 $ - $2,046 $639
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended January 29, 2000 $996 $3,254 $ - $3,424 $826
- ----------------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off.
65
INDEX TO EXHIBITS
Index of Financial Statements, Financial Statement Schedule and Exhibits
Page
----
1. The following consolidated financial statements
of The Pep Boys - Manny, Moe & Jack are included in Item 8.
Independent Auditors' Report 32
Consolidated Balance Sheets - February 2, 2002
and February 3, 2001 33
Consolidated Statements of Operations- Years ended February 2,
2002, February 3, 2001 and January 29, 2000 34
Consolidated Statements of Stockholders' Equity Years ended
February 2, 2002, February 3, 2001 and January 29, 2000 35
Consolidated Statements of Cash Flows - Years ended February 2,
2002, February 3, 2001 and January 29, 2000 36
Notes to Consolidated Financial Statements 37
2. The following consolidated financial statement schedule of The Pep
Boys - Manny, Moe & Jack
is included.
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not
applicable or not required or the required information is included
in the consolidated financial statements or notes thereto.
3. Exhibits
(10.21) The Pep Boys Savings Plan - Amended
and Restated as of April 25, 2001.
(10.22) Amendment No. 1 dated as of June 29, 2001
to the Loan and Security Agreement dated
September 22, 2000 between the Company and
Congress Financial Corporation.
(10.23) The Pep Boys - Manny, Moe & Jack
Pension Plan - Amended and Restated
as of September 10, 2001.
(10.24) Advertising Purchase Agreement between
the Company and ICON International, Inc.
dated October 3, 2001.
(10.25) Amendment No. 2 dated as of December 13, 2001
to the Loan and Security Agreement dated
September 22, 2000 between the Company and
Congress Financial Corporation
(11) Computation of Earnings per Share
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
66