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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 January 29, 2000
OR
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED)
For the transition period from to
------ ------
Commission file number 1-3381
------
The Pep Boys - Manny, Moe & Jack
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0962915
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3111 West Allegheny Avenue, Philadelphia, PA 19132
- --------------------------------------------- ---------
(Address of principal executive office) (Zip code)
215-430-9000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $1.00 par value New York Stock Exchange
Liquid Yield Option Notes
due September 20, 2011 New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
Yes No X
----- -----
As of the close of business on April 7, 2000, the aggregate market value of the
voting stock held by nonaffiliates of the registrant was approximately
$280,104,239.
As of April 7, 2000, there were 53,189,369 shares of the registrant's common
stock outstanding.
2
This Annual Report on Form 10-K contains "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that such forward looking statements involve risks and
uncertainties which could cause actual results to materially differ from those
expressed in any such forward looking statements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Forward Looking
Statements."
3
DOCUMENTS INCORPORATED BY REFERENCE
PART III Portions of the registrant's definitive proxy statement, which will be
filed with the Commission pursuant to Regulation 14A not later than
120 days after the end of the Company's fiscal year, for the Company's
Annual Meeting of Shareholders presently scheduled to be held on
May 31, 2000.
4
This Annual Report on Form 10-K for the year ended January 29, 2000, 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 January 29,
2000, the Company operated 662 stores consisting of 649 SUPERCENTERS and one
SERVICE & TIRE CENTER, having an aggregate of 6,895 service bays, as well as 12
non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates
approximately 13,559,000 gross square feet of retail space, including service
bays. The SUPERCENTERS average approximately 20,700 square feet and the 12 PEP
BOYS EXPRESS stores average approximately 9,600 square feet. The Company
believes that its unique SUPERCENTER format offers the broadest capabilities
in the industry and positions the Company to gain market share and increase
its profitability by serving the "do-it-yourself," automotive service, tire
and "buy-for-resale" customer sectors with the highest quality merchandise
and service.
6
As of January 29, 2000 the Company operated its stores in 37 states
and Puerto Rico. The following table indicates by state the number of stores
of the Company in operation at the end of fiscal 1996, 1997, 1998 and 1999 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 1996 THROUGH 1999
1996 1997 1998 1999
Year Year Year Year
State End Opened Closed End Opened Closed End Opened Closed End
- ------ --- ------ ------ --- ------ ------ --- ------ ------ ---
Alabama 1 - - 1 - - 1 - - 1
Arizona 23 1 - 24 - 1 23 - - 23
Arkansas 1 - - 1 - - 1 - - 1
California 146 10 - 156 6 30 132 4 - 136
Colorado 8 - - 8 - - 8 - - 8
Connecticut 7 2 - 9 1 1 9 - - 9
Delaware 5 1 - 6 - - 6 - - 6
District of Columbia 3 2 - 5 - 5 - - - -
Florida 42 9 - 51 2 5 48 - - 48
Georgia 25 1 - 26 - - 26 - - 26
Illinois 21 11 - 32 1 8 25 - - 25
Indiana 6 6 - 12 4 4 12 1 - 13
Kansas 2 - - 2 - - 2 - - 2
Kentucky 4 - - 4 - - 4 - - 4
Louisiana 12 - - 12 - - 12 - - 12
Maine - - - - 1 - 1 - - 1
Maryland 20 5 2 23 - 4 19 - - 19
Massachusetts 9 2 - 11 3 6 8 2 - 10
Michigan 11 6 - 17 4 6 15 2 - 17
Minnesota - - - - 2 - 2 1 - 3
Missouri 1 - - 1 - - 1 - - 1
Nevada 8 2 - 10 2 - 12 - - 12
New Hampshire 2 2 - 4 - - 4 - - 4
New Jersey 26 8 - 34 - 9 25 3 - 28
New Mexico 8 - - 8 - - 8 - - 8
New York 27 19 - 46 2 18 30 3 - 33
North Carolina 11 - - 11 - - 11 - - 11
Ohio 13 1 - 14 1 - 15 - - 15
Oklahoma 6 - - 6 - - 6 - - 6
Oregon - - - - 1 - 1 2 - 3
Pennsylvania 43 8 1 50 4 8 46 - - 46
Puerto Rico 11 10 - 21 2 - 23 2 - 25
Rhode Island 3 1 - 4 - 1 3 - - 3
South Carolina 6 - - 6 - - 6 - - 6
Tennessee 7 - - 7 - - 7 - - 7
Texas 65 - - 65 - 4 61 - - 61
Utah 6 - - 6 - - 6 - - 6
Virginia 15 3 - 18 - 2 16 1 - 17
Washington - - - - 3 - 3 3 - 6
---- --- -- --- ---- -- ---- ---- -- ----
Total 604 110 3 711 39 112 638 24 - 662
=== == == === == == === == === ===
7
NEW STORES AND EXPANSION STRATEGY
During fiscal 1999, the Company opened 24 SUPERCENTERS, all of which
include service bays.
The Company's typical SUPERCENTER is a free standing, "one-stop"
shopping automotive warehouse that features state-of-the-art service bays. Each
SUPERCENTER carries an average of approximately 25,000 stock-keeping units and
serves the automotive aftermarket needs of the "do-it-yourself," the
"do-it-for-me" (automotive service), tire and "buy-for-resale" customer
sectors. The Company's primary SUPERCENTER prototype is approximately 18,200
square feet and generally features 12 service bays. The Company currently
intends to continue to utilize this prototype in fiscal 2000.
The Company completed the rollout of its commercial automotive parts
delivery program during fiscal 1998. This program was established to increase
the Company's market share with the professional installer. The program has
strengthened the Company's position with the "buy-for-resale" customer by
taking greater advantage of the breadth and quality of its parts inventory as
well as its experience supplying its own service bays and mechanics. As of
January 29, 2000, 581 of the Company's stores provide commercial parts
delivery, which represents approximately 88% of its stores.
8
In fiscal 2000, the Company plans to focus much of its energy on
improving the performance of its existing stores. As a result, the Company
plans to open approximately 5 new stores, all of which will be SUPERCENTERS.
If all 5 stores are opened, the Company anticipates spending approximately
$12,605,877 in addition to the $12,205,535 it has already spent as of January
29, 2000 in connection with certain of these locations. Additionally in fiscal
2000, the Company anticipates spending approximately $3,760,828 on certain
stores it expects to open in fiscal 2001. The Company expects to fund this
expansion from net cash generated by operating activities.
The most important factors considered by the Company when deciding to
open new stores are vehicle and population demographics, market penetration,
competitive positioning and site development costs. The most important factors
considered by the Company when deciding whether to close a store are
profitability and whether the store is outmoded by virtue of store size or
number of service bays, number of other stores within the same market area and
the cost/benefit of establishing a replacement store rather than expanding or
otherwise upgrading an older store.
The Company's ability to meet its expansion goals will depend, in
large measure, upon the availability of suitable sites, prevailing economic
conditions, its success in completing negotiations to purchase or lease
properties, and its ability to obtain governmental approvals and meet
construction deadlines.
MERCHANDISING
Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries the same
basic product line, with variations based on the number and type of cars
registered in the different markets. A full complement of inventory at a
typical SUPERCENTER includes an average of approximately 25,000 items
(approximately 24,000 items are in a PEP BOYS EXPRESS store). The Company's
automotive product line includes: tires (not stocked at PEP BOYS EXPRESS
locations); batteries; new and remanufactured parts for domestic and imported
cars, including suspension parts, ignition parts, exhaust systems, engines and
engine parts, oil and air filters, belts, hoses, air conditioning parts,
lighting, wiper blades and brake parts; chemicals, including oil, antifreeze,
polishes, additives, cleansers and paints; mobile electronics, including sound
systems, alarms, and remote vehicle starters; car accessories, including seat
covers, floor mats, and exterior accessories; hand tools, including sockets,
wrenches, ratchets, paint and body tools, jacks and lift equipment, automotive
specialty tools and test gauges; as well as a selection of truck, van and sport
utility vehicle accessories.
In addition to offering a wide variety of high quality, branded
products, the Company sells an array of high quality products under the Pep
Boys and various other private label names. The Company sells chemicals, oil,
oil treatments, air filters, oil filters, transmission fluids, anti-freeze,
wiper blades and lubricants under the name PROLINE (R). The Company also sells
paints under the name VARSITY (R), starters, batteries, battery booster packs
and alternators under the name PROSTART (R), water pumps and cooling system
parts under the name PROCOOL (R), and temperature gauges under the name
PROTEMP (R). Brakes are sold under the names SHUR GRIP (R), PROSTOP (R) and
ELITE (tm) and tires under the names CORNELL (R) and FUTURA (R).
9
The Company also sells shock absorbers under the name PRO RYDER (R), and trunk
and hatchback lift supports under the name PROLIFT (R). All products sold by
the Company under the Pep Boys and various other private label names accounted
for approximately 33% of the Company's merchandise sales in fiscal 1999. The
remaining merchandise is sold under the brand names of others. Revenues from
maintaining or repairing automobiles and installing products, accounted for
approximately 18.4%, 17.0% and 16.3% of the Company's total revenues in
fiscal years 1999, 1998 and 1997, respectively. Revenues from the sale of
tires accounted for approximately 16.0%, 14.2% and 13.2% of the Company's
total revenues in fiscal years 1999, 1998 and 1997, respectively. No other
class of products or services accounted for as much as 10% of the Company's
total revenues.
The Company has a point-of-sale system in all of its stores which
gathers sales and gross profit data by stock-keeping unit from each store on a
daily basis. This information is then used by the Company to help formulate its
pricing, marketing and merchandising strategies.
The Company has an electronic parts catalog in all of its stores and
an electronic commercial invoicing system in all of its stores that offer
commercial parts delivery.
The Company has an electronic work order system in all of its service
centers. This system creates a service history for each vehicle, provides
customers with a comprehensive sales document and enables the Company to
maintain a service customer database.
The Company uses an "Everyday Low Price" (EDLP) strategy in
establishing its selling prices. Management believes that EDLP provides better
value to its customers on a day-to-day basis, helps level customer demand and
allows more efficient management of inventories.
The Company uses various forms of advertising to promote its category-
dominant product offering, its state-of-the-art automotive service and repair
capabilities and its commitment to customer service and satisfaction. The
Company's advertising vehicles include, but are not limited to, multi-page
catalogs, television and radio commercials, newspaper advertisements and
various in-store promotions. All or most of the gross cost of the advertising
directed by the Company is customarily borne by the suppliers of the products
advertised.
In fiscal 1999, approximately 59% of the Company's total revenues were
cash transactions (including personal checks), and the remainder were credit
and debit card transactions and commercial credit accounts.
The Company does not experience significant seasonal fluctuation in
the generation of its revenues.
STORE OPERATIONS AND MANAGEMENT
All Pep Boys stores are open seven days a week. Each SUPERCENTER has a
manager, a service manager, a retail sales manager and two or more assistant
managers. Each PEP BOYS EXPRESS store has a manager, a retail sales manager and
two or more assistant managers. Stores with the auto parts delivery program
have a commercial sales manager in addition to the management previously
mentioned. A store manager's average length of service with the Company is
approximately seven years.
The Company has service bays in 650 of its 662 locations. Each service
department can perform a variety of services which generally include: engine
diagnosis and tune-ups, wheel and front end alignments, state inspection and
emission services, air conditioning service, heating and cooling system
service, fuel injection and throttle body service, and battery and electrical
10
service; the repair and installation of parts and accessories including brake
parts, suspension parts, exhaust systems, front end parts, ignition parts,
belts, hoses, clutches, filters, stereos and speakers, alarms, sunroofs, cruise
controls, remote starters and various other merchandise sold in the Company's
stores; installation and balancing of tires; and oil and lubrication services.
The Company coordinates the operation and merchandising of each store
through a network of district and regional managers. The regional managers
report to the Vice President - Sales, who reports to the Company's Senior Vice
President - Store Operations, who reports to the Company's Chairman of the
Board, President & Chief Executive Officer. Supervision and control over the
individual stores are facilitated by means of the Company's computer system,
operational handbooks and regular visits to the individual stores by the
district operations managers and loss prevention personnel.
All of the Company's advertising, accounting, purchasing and most of
its management information systems and administrative functions are conducted
at its corporate headquarters in Philadelphia, Pennsylvania. Certain of the
Company's management information system functions are conducted at a regional
office located near its corporate headquarters. Certain administrative
functions for the Company's western, southwestern, southeastern, midwestern and
Puerto Rico operations are performed at various regional offices of the
Company. See "Properties."
INVENTORY CONTROL AND DISTRIBUTION
Most of the Company's merchandise is distributed to its stores
from its warehouses primarily by dedicated and contract carriers and also by
Company-owned or leased trucks. Target levels of inventory for each product
have been established for each of the Company's warehouses and stores and are
based upon prior shipment history, sales trends and seasonal demand. Inventory
on hand is compared to the target levels on a weekly basis at each warehouse.
If the inventory on hand at a warehouse is below the target levels, the
Company's buyers order merchandise from its suppliers.
Each Pep Boys store has an automatic inventory replenishment system
that automatically orders additional inventory when a store's inventory on hand
falls below the target level. In addition, the Company's centralized buying
system, coupled with continued advancement in its warehouse and distribution
systems, has enhanced the Company's ability to control its inventory.
SUPPLIERS
During fiscal 1999, the Company's ten largest suppliers accounted for
approximately 46% of the merchandise purchased by the Company. No single
supplier accounted for more than 12% of the Company's purchases. The Company
has no long-term contracts under which the Company is required to purchase
merchandise. Management believes that the relationships the Company has
established with its suppliers are generally good.
In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply and believes that adequate alternative sources
of supply exist, at substantially similar cost, for virtually all types of
merchandise sold in its stores.
11
COMPETITION
The business of the Company is generally highly competitive. The
Company encounters competition from nationwide and regional chains and from
local independent merchants. Some of the Company's competitors are general,
full range, discount or traditional department stores which carry automotive
parts and accessories and/or have automotive service centers, and others,
similar to the Company, are specialized automotive service retailers.
Certain of its competitors are larger in terms of sales volume, store size,
and/or number of stores, have access to greater capital and management
resources and have been operating longer in particular geographic areas
than the Company.
Although the Company's competition varies by geographic area, the
Company believes that it generally has a favorable competitive position in
terms of depth and breadth of product line, price, quality of personnel and
customer service.
In addition, the Company believes that its operation of service bays
in its SUPERCENTERS positively differentiates it from most of its competitors
by providing its customers with the ability to purchase parts and have them
installed at the same location. The Company believes that the warranty policies
in connection with the higher priced items it sells, such as tires, batteries,
brake linings and other major automotive parts and accessories, are comparable
or superior to those of its competitors.
EMPLOYEES
At January 29, 2000, the Company employed 27,987 persons as follows:
Full-time Part-time Total
Description Numbers % Numbers % Numbers %
------- ---- ------- ---- ------- ----
Store Sales 8,878 43.2 5,349 71.9 14,227 50.8
Store Service 9,101 44.3 1,898 25.5 10,999 39.3
------- ----- ----- ----- ------- -----
STORE TOTAL 17,979 87.5 7,247 97.4 25,226 90.1
Warehouses 1,146 5.6 164 2.2 1,310 4.7
Offices 1,419 6.9 32 .4 1,451 5.2
------- ------ ------- ------- ------- ------
TOTAL EMPLOYEES 20,544 100.0 7,443 100.0 27,987 100.0
====== ===== ===== ===== ====== =====
Of the 1,310 full-time and part-time warehouse employees referred to
above, 122 employees at the Company's New Jersey warehouse facilities are
members of a union. The Company believes employee relations are generally good.
At the end of fiscal 1998, the Company employed approximately 19,754 full-time
and 7,706 part-time employees and at the end of fiscal 1997, the Company
employed approximately 18,160 full-time and 6,043 part-time employees.
12
ITEM A 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 54 21 Chairman of the Board since 1994;
Chief Executive Officer
since 1990; President since 1986
George Babich Jr. 48 4 Senior Vice President since 2000;
Chief Financial Officer since
2000; Vice President of Finance
and Treasurer since 1996
Mark L. Page 43 24 Senior Vice President - Store
Operations since 1993
Frederick A. Stampone 44 17 Senior Vice President since 1987;
Chief Administrative Officer
since 1993; Secretary since 1988
Robert E. Brann 48 2 Senior Vice President -
Merchandising since March 1999;
Vice President - Merchandising
since August 1998
Messrs. Leibovitz, Page and Stampone have been executive officers of
the Company for more than the past five years.
Mr. Brann was promoted to Senior Vice President - Merchandising in
March 1999. Prior to that position he was Vice President - Merchandising, since
August 1998. Prior to joining Pep Boys, Mr. Brann served as Executive Vice
President - Merchandising for Trak Auto Corp. from 1989 until August 1998.
Mr. Babich was elected Senior Vice President & Chief Financial
Officer of the Company on March 28, 2000. Mr. Babich joined the Company as Vice
President-Finance & Treasurer in September 1996. Prior to joining Pep Boys,
Mr. Babich was the Chief Financial Officer of Morgan, Lewis & Bockius from
1991 to 1996; Vice President & CFO - North America and then Vice President
Corporate Business & Strategic Planning of The Franklin Mint from 1989 to 1991;
and held numerous management positions of increasing responsibility at PepsiCo
Inc., from 1982 to 1989 and also at Ford Motor Company, from 1978 to 1982.
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 -- a three-story, approximately
60,000 square foot structure in Los Angeles, California of which it occupies
approximately 35,000 square feet and 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.
Of the 662 store locations operated by the Company at
January 29, 2000, 351 are owned and 311 are leased. Of the 311 leased store
locations, 198 are ground leases.
14
The following table sets forth certain information regarding the owned
and leased warehouse space utilized by the Company for its 662 store locations
at January 29, 2000.
Warehouse Products Square Owned or Stores States
Location Warehoused Footage Leased Serviced Serviced
- --------- ---------- ------- ------ -------- -------
Los Angeles, CA All except 216,000 Owned 145 AZ, CA, NV,
tires NM, UT
Los Angeles, CA Tires 73,000 Leased 145 AZ, CA, NV,
NM, UT
Los Angeles, CA All except 137,000 Leased 145 AZ, CA, NV,
tires NM, UT
Bridgeport, NJ All except 195,000 Owned 51 DE, MD, NJ,
tires PA, VA
Bridgeport, NJ Tires and 273,000 Leased 51 DE, MD, NJ,
chemicals PA, VA
Atlanta, GA All 392,000 Owned 134 AL, FL, GA,
NC, PR, SC,
TN, VA
Mesquite, TX All 244,000 Owned 98 AR, CO, KS,
LA, MO, NM,
OK, TX
Plainfield, IN All 403,000 Leased 110 IL, IN, KY,
MI, MN, NY,
OH, PA, TN,
VA
Tracy, CA All 246,250 Leased 42 CA, OR, NV,
WA
Chester, NY All 400,400 Leased 82 CT, DE, MA,
---------- MD, ME, NH,
NJ, NY, PA,
RI
Total 2,579,650
==========
15
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 2000.
The Company is subject to federal, state and local provisions relating
to the protection of the environment, including provisions with respect to the
disposal of oil at its store locations. Estimated capital expenditures relating
to compliance with such environmental provisions are not deemed material.
ITEM 3 LEGAL PROCEEDINGS
The Company is a defendant in a purported class action entitled "Brian
Lee, Anthony Baxton, and Harry Schlein v. The Pep Boys - Manny, Moe & Jack," in
the Circuit Court of Mobile County, Alabama. The Company has moved to dismiss
the case for failure to state a claim. The Company's motion to dismiss is
pending before the Circuit Court of Mobile County, Alabama. In their complaint,
the plaintiffs allege that the Company sold old or used automotive batteries to
consumers as if those batteries were new. The complaint purports to state
causes of action for fraud and deceit, negligent misrepresentation, breach of
contract and violation of state consumer protection statutes. The plaintiffs
are seeking compensatory and punitive damages, 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 a defendant in an action entitled "Coalition for a
Level Playing Field, L.L.C., et al. v. AutoZone, Inc., et al.," in the United
States District Court for the Eastern District of New York. There are over 100
plaintiffs, consisting of automotive jobbers, warehouse distributors and a
coalition of several trade associations; the defendants are AutoZone, Inc.,
Wal-Mart Stores, Inc., Advance Stores Company, Inc., CSK Auto, Inc., the
Company, Discount Auto Parts, Inc., O'Reilly Automotive, Inc. and Keystone
Automotive Operations, Inc. The plaintiffs allege that the defendants violated
various provisions of the Robinson-Patman Act by, among other things, knowingly
inducing and receiving various forms of discriminatory prices from automotive
parts manufacturers. The plaintiffs are seeking compensatory damages, which
would be trebled under applicable law, as well as injunctive and other
equitable relief. The Company believes the claims are without merit and intends
to vigorously defend this action.
The Company is also party to various other lawsuits and claims,
including purported class actions, arising in the normal course of business. In
the opinion of management, these lawsuits and claims, including the cases
above, are not, singularly or in the aggregate, material to the Company's
financial position or results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended January 29, 2000.
16
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 3,657 registered
shareholders as of January 29, 2000. 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 January 29, 2000 High Low Per Share
- ----------------------------------- ---- --- ---------
First Quarter 20 3/16 14 1/4 $.0675
Second Quarter 21 5/8 14 3/16 .0675
Third Quarter 17 7/16 11 5/16 .0675
Fourth Quarter 13 7 1/8 .0675
Fiscal year ended January 30, 1999
- ----------------------------------
First Quarter 26 11/16 21 5/16 $.0650
Second Quarter 23 3/4 16 13/16 .0650
Third Quarter 17 7/8 12 3/8 .0650
Fourth Quarter 17 1/16 12 1/2 .0650
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.
17
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 Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA
Merchandise sales $ 1,954,010 $ 1,991,340 $ 1,720,670 $ 1,554,757 $ 1,355,008
Service revenue 440,523 407,368 335,850 273,782 239,332
Total revenues 2,394,533 2,398,708 2,056,520 1,828,539 1,594,340
Gross profit from merchandise sales 538,957 492,443(2) 474,239(3) 484,494 411,133
Gross profit from service revenue 84,078 79,453 66,081 53,025 44,390
Total gross profit 623,035 571,896(2) 540,320(3) 537,519 455,523
Selling, general and
administrative expenses 528,838 517,827(2) 429,523(3) 349,353 295,098
Operating profit 94,197 54,069(2) 110,797(3) 188,166 160,425
Nonoperating income 2,327 2,145 4,315 1,369 1,099
Interest expense 51,557 48,930 39,656 30,306 32,072
Earnings before income taxes 44,967 7,284(2) 75,456(3) 159,229 129,452
Net earnings 29,303 4,974(2) 49,611(3) 100,824 81,494
BALANCE SHEET DATA
Working capital $ 172,332 $ 241,738 $ 151,340 $ 70,691 $ 39,868
Current ratio 1.31 to 1 1.47 to 1 1.24 to 1 1.13 to 1 1.09 to 1
Merchandise inventories $ 582,898 $ 527,397 $ 655,363 $ 520,082 $ 417,852
Property and equipment-net 1,335,749 1,330,256 1,377,749 1,189,734 1,014,052
Total assets 2,072,672 2,096,112 2,161,360 1,818,365 1,500,008
Long-term debt (includes
all convertible debt) 784,024 691,714 646,641 455,665 367,043
Stockholders' equity 658,284 811,784 822,635 778,091 665,460
DATA PER COMMON SHARE
Basic earnings(1) $ .58 $ .08(2) $ .81(3) $ 1.67 $ 1.37
Diluted earnings(1) .58 .08(2) .80(3) 1.62 1.34
Cash dividends .27 .26 .24 .21 .19
Stockholders' equity 12.91 13.18 13.39 12.78 11.12
Common share price range:
high 21 5/8 26 11/16 35 5/8 38 1/4 34 3/4
low 7 1/8 12 3/8 21 9/16 27 7/8 21 7/8
OTHER STATISTICS
Return on average
stockholders' equity 4.0% 0.6% 6.2% 14.0% 13.0%
Common shares issued and outstanding 50,994,099 61,615,140 61,425,228 60,886,991 59,851,521
Capital expenditures $ 104,446 $ 167,876 $ 284,084 $ 245,246 $ 205,913
Number of retail outlets 662 638 711 604 506
Number of service bays 6,895 6,608 6,208 5,398 4,727
- ----------------------------------------------------------------------------------------------------------------------------------
(1) All data per common share for the years ended February 1, 1997 and prior
have been restated to reflect the adoption of Statement of Financial
Accounting Standards No. 128 "Earnings per Share."
(2) 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.
(3) 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.
18
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in the
consolidated statements of earnings 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
- -----------------------------------------------------------------------------------------------------------------------------------
Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998 Fiscal 1999 vs. Fiscal 1998 vs.
Year ended (Fiscal 1999) (Fiscal 1998) (Fiscal 1997) Fiscal 1998 Fiscal 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Merchandise Sales 81.6% 83.0% 83.7% (1.9)% 15.7%
Service Revenue(1) 18.4 17.0 16.3 8.1 21.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 100.0 (0.2) 16.6
- -----------------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales(2) 72.4(3) 75.3(3) 72.4(3) (5.6) 20.3
Costs of Service Revenue(2) 80.9(3) 80.5(3) 80.3(3) 8.7 21.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 74.0 76.2 73.7 (3.0) 20.5
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 27.6(3) 24.7(3) 27.6(3) 9.4 3.8
Gross Profit from Service Revenue 19.1(3) 19.5(3) 19.7(3) 5.8 20.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 26.0 23.8 26.3 8.9 5.8
- -----------------------------------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses 22.1 21.6 20.9 2.1 20.6
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Profit 3.9 2.2 5.4 74.2 (51.2)
Nonoperating Income 0.1 0.1 0.2 8.5 (50.3)
Interest Expense 2.1 2.0 1.9 5.4 23.4
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 1.9 0.3 3.7 517.3 (90.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Income Taxes 34.8(4) 31.7(4) 34.3(4) 578.1 (91.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Earnings 1.2 0.2 2.4 489.1 (90.0)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed
parts or materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include
service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
(3) As a percentage of related sales or revenue, as applicable.
(4) As a percentage of earnings before income taxes.
19
FISCAL 1999 VS. FISCAL 1998
Total revenues for fiscal 1999 decreased 0.2% from fiscal 1998 due
primarily to the sale and closure of 115 stores in fiscal 1998. This decrease
was offset, in part, by an increase in comparable store revenues (revenues
generated by stores in operation during the same months of each period) of 1.5%
in fiscal 1999. Comparable store merchandise sales increased 0.9% while
comparable service revenue increased 4.4%.
During fiscal 1998, the Company recorded pretax charges to earnings of
$29,451,000 ($20,109,000 net of tax) related to the sale and closure of 115
stores. The total pretax charges were comprised of $27,733,000 recorded as
costs of merchandise sales and $1,718,000 of selling, general and
administrative expenses. There were no such charges in fiscal 1999.
Gross profit from merchandise sales increased, as a percentage of
merchandise sales, due primarily to higher merchandise margins coupled with the
absence of $27,733,000 in pretax charges recorded in fiscal 1998 offset, in
part, by an increase in store occupancy costs.
Selling, general and administrative expenses increased, as a
percentage of total revenues, due primarily to increases in general office
costs and store expenses offset, in part, by a decrease in media costs and the
absence of $1,718,000 in pretax charges recorded in fiscal 1998.
The increase in net earnings, as a percentage of total revenues, was
due primarily to an increase in gross profit from merchandise sales, as a
percentage of merchandise sales, and the absence of after tax charges of
$20,109,000 recorded in fiscal 1998 offset, in part, by an increase in selling,
general and administrative expenses, as a percentage of total revenues.
FISCAL 1998 VS. FISCAL 1997
Total revenues for fiscal 1998 increased 16.6% over fiscal 1997 due
primarily to a 9.0% increase in comparable store sales as well as more stores
in operation during fiscal 1998 versus fiscal 1997. Comparable store
merchandise sales, which were positively impacted by the Company's commercial
delivery program, increased 8.6% while comparable service revenue
increased 11.5%.
Sales for fiscal 1998 were negatively impacted by the sale and closure
of 115 stores, 109 of which were closed on or about October 10, 1998.
On October 21, 1998, the Company consummated the sale of real estate assets
relating to 100 of these stores. As a result of these events, the Company
recorded pretax charges of $29,451,000 ($20,109,000 net of tax), $27,733,000 of
which was included in costs of merchandise sales. These costs include various
building, leasehold improvement, fixture and equipment write-offs, as well as
lease commitment charges and the costs associated with handling the related
merchandise inventories. The remaining $1,718,000 of related costs, which
consist primarily of store and general office payroll and travel expenses, were
included in selling, general and administrative expenses.
20
The substantial decrease in gross profit from merchandise sales, as a
percentage of merchandise sales, was due primarily to significantly lower
merchandise margins as well as the pretax charges of $27,733,000 recorded in
fiscal 1998 versus the pretax charges of $16,330,000 recorded in fiscal 1997
offset, in part, by decreases in warehousing and store occupancy costs. The
fiscal 1997 pretax charges included the costs associated with closing nine
stores, converting all Parts USA stores to the Pep Boys Express format, certain
equipment write-offs and other non-recurring charges.
The increase in selling, general and administrative expenses, as a
percentage of total revenues, was due primarily to a substantial increase in
store expenses and an increase in media costs offset, in part, by a decrease in
general office costs and the pretax charges of $1,718,000 recorded in
fiscal 1998 versus $11,682,000 recorded in fiscal 1997. The fiscal 1997
pretax charges included costs associated with reducing the store expansion
program, certain equipment write-offs and other non-recurring charges.
The significant decrease in net earnings in fiscal 1998, as compared
with fiscal 1997, was due primarily to a substantial decrease in gross profit
from merchandise sales, as a percentage of merchandise sales and an increase in
selling, general and administrative expenses, as a percentage of total
revenues. After tax charges of $20,109,000 were recorded in fiscal 1998,
compared with after tax charges of $18,418,000 recorded in fiscal 1997.
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 1999, fiscal 1998 or fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise principally from the need to
finance the acquisition, construction and equipping of new stores and to
purchase inventory. The Company opened 24 stores in fiscal 1999, 39 stores in
fiscal 1998, and 110 stores in fiscal 1997. In fiscal 1999, the Company
decreased its level of capital expenditures by 37.8% as compared to fiscal
1998. In fiscal 1999, with decreased levels of capital expenditures, the use of
cash to repurchase 11,276,698 common shares of stock (partially offset by a
decrease in net inventory levels), the Company increased its debt by
$20,029,000 and decreased its cash and cash equivalents by $96,063,000. In
fiscal 1998, with significantly decreased levels of capital expenditures and
the cash generated from its sale of real estate assets (partially offset by an
increase in net inventory levels), the Company increased its debt by
$70,380,000 and increased its cash and cash equivalents by $103,737,000. In
fiscal 1997, with increased levels of capital expenditures and net inventory,
the Company increased its debt by $174,999,000.
21
The following table indicates the Company's principal cash requirements for the past three years.
(dollar amounts Fiscal Fiscal Fiscal
in thousands) 1999 1998 1997 Total
- ---------------------------------------------------------------------------------------------------------------
Cash Requirements:
Capital expenditures $104,446 $167,876 $284,084 $556,406
Net inventory
(decrease) increase(1) (24,174) 40,696 63,764 80,286
- ---------------------------------------------------------------------------------------------------------------
Total $ 80,272 $208,572 $347,848 $636,692
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities
(excluding the change
in net inventory) $155,207 $160,713 $180,721 $496,641
- ---------------------------------------------------------------------------------------------------------------
(1) Net inventory (decrease) increase is the change in inventory less the
change in accounts payable.
In fiscal 1999, merchandise inventories increased as the Company added
an additional 24 stores and a new distribution center in Chester, New York. The
average number of stock-keeping units per store was approximately 25,000 in
fiscal years 1999 and 1998, compared to approximately 28,000 in fiscal 1997.
In fiscal 1998, merchandise inventories decreased, as the Company reduced its
warehouse inventories, closed one distribution center, better tailored its
store inventories and decreased its net store count by 73 stores. In fiscal
1997, merchandise inventories increased as the Company added 110 new stores
and two new distribution centers.
The Company's working capital was $172,332,000 at January 29, 2000,
$241,738,000 at January 30, 1999 and $151,340,000 at January 31, 1998. The
Company's long-term debt, as a percentage of its total capitalization, was
54% at January 29, 2000, 46% at January 30, 1999 and 44% at January 31, 1998.
As of January 29, 2000, the Company had available lines of credit totaling
$205,000,000.
The Company currently plans to open five new Supercenters in fiscal
2000. Management estimates the costs of opening all five Supercenters, coupled
with capital expenditures relating to existing stores, warehouses and offices
during fiscal 2000, will be approximately $75,000,000. The Company anticipates
that its net cash provided by operating activities will exceed its remaining
principal cash requirements (capital expenditures and net inventory) in fiscal
2000.
On February 1, 1999, the Company repurchased 11,276,698 of its common
shares outstanding. The Company financed the share repurchase with $110,427,000
in cash and with the $70,000,000 proceeds received in connection with the
private placement of Senior Notes issued on February 1, 1999. The Senior Notes
were issued in two series at par and pay interest semiannually on January 31
and July 31, commencing July 31, 1999. Series A Senior Notes, with an aggregate
principal balance of $25,000,000, will mature in 2009 and bear interest at
7.80% per annum. Series B Senior Notes, with an aggregate principal balance of
$45,000,000, will mature in 2011 and bear interest at 7.95% per annum. In
addition, the interest rates on the Senior Notes are subject to a .50% increase
for such time as the credit rating of the Company's long-term unsecured debt
securities decreases below investment grade as rated by both Moody's and
Standard & Poor's.
22
In February 1998, the Company established a Medium-Term Note program
which permitted the Company to issue up to $200,000,000 of Medium-Term Notes.
Under this program the Company sold $100,000,000 principal amount of senior
notes, ranging in annual interest rates from 6.7% to 6.9% and due March 2004
and March 2006. The net proceeds of $99,429,000 were used for working capital,
the repayment of debt and for general corporate purposes. Additionally, in July
1998, under this note program, the Company sold $100,000,000 of Term Enhanced
ReMarketable Securities with a stated maturity date of July 2017. The Company
also sold a call option with the securities, which allows the securities to be
remarketed to the public in July 2006 under certain circumstances. If the
securities are not remarketed, the Company will be obligated to repay the
principal amount in full in July 2017. The level yield to maturity on the
securities is approximately 6.85% and the coupon rate is 6.92%. The net
proceeds of $101,923,500 from the sale of the securities and the call option
were used for working capital, the repayment of debt and for general corporate
purposes.
In July 1997, the Company established a Medium-Term Note program which
permitted the Company to issue up to $150,000,000 of Medium-Term Notes. Under
this program the Company sold $150,000,000 principal amount of senior notes,
ranging in annual interest rates from 6.4% to 6.7% and due November 2004
through September 2007. $50,000,000 of this debt is redeemable at the option of
the holder on July 16, 2002 and $49,000,000 is redeemable at the option of the
holder on September 19, 2002. The net proceeds of $149,225,000 were used for
working capital, the repayment of debt and for general corporate purposes.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
As amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities- Deferral of the Effective Date of FASB Statement No. 133," this
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000, although early adoption is encouraged. The Company is in the
process of analyzing the impact of the adoption of this statement on its
consolidated financial statements.
23
INFORMATION SYSTEMS AND THE YEAR 2000
During 1997, the Company initiated a project to assess the impact of
Year 2000 issues on a corporate-wide basis. A Year 2000 Project Director,
reporting directly to the Chief Information Officer, was assigned to lead the
project and, in conjunction with senior management of the Company, formulated
a project plan to address Year 2000 compliance issues. The Project Director
monitored and coordinated the project plan through regular meetings with
operational managers who executed the specifics of the project plan. The
Project Director regularly updated senior management, including the Company's
Chief Financial Officer. In addition, the Board of Directors was periodically
updated by the Company's senior management.
The project plan was comprehensive and focused on both information
technology (IT) systems and non-IT systems. Execution of the project plan was
divided into five key phases: inventory, assessment, remediation, testing, and
implementation. The Company utilized both internal and external resources to
complete its Year 2000 project plan initiatives.
IT systems include the Company's application software, both proprietary
and third party, as well as the hardware infrastructure. Specifically, this
includes all software and related hardware for the Company's systems, namely:
mainframe, store, personal computer, local area network, and data communication.
The non-IT systems include equipment and systems that contain embedded
computer chips, such as energy management, HVAC, telephone and the Company's
service center equipment, which specifically includes its engine diagnostic,
wheel alignment and emission testing equipment.
Substantially all of the Company's IT and non-IT systems were Year 2000
compliant by October 30, 1999, enabling the Company to successfully respond to
the Year 2000 date change. The Company has not experienced any material Year
2000 problems with its IT or non-IT systems, nor has the Company experienced
any material problems with any of its third party vendor relationships.
The Company developed contingency plans for Year 2000 related business
interruptions which identified what actions would need to be taken if a
critical system or third party service provider were not Year 2000 compliant.
These plans included, but were not limited to, the replacement of electronic
applications with manual processes, back-up power supplies, additional staffing
of support personnel to react to unforeseen events, and a formal disaster
recovery procedure. None of the contingency plans developed by the Company had
to be used due to Year 2000 related problems.
In conjunction with the development of contingency plans, the Company's
critical third party vendor relationships (other than those relating to IT and
non-IT systems), such as relationships with critical merchandise,
transportation, utility, financial institutions and other general service
providers, were reviewed for Year 2000 compliance. Although there have been no
Year 2000 related problems with any of its third party relationships, the
Company believes that should a vendor or service provider become unable to
deliver merchandise or services, substitutes for many of the goods the Company
sells and services it receives can be obtained from alternate sources.
The Company's total costs associated with the Year 2000 effort were
approximately $9,428,000 through January 29, 2000. These costs have been funded
out of cash flows from operating activities. The Company does not expect to
incur any additional costs related to the Year 2000 issue.
24
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 certain revolving credit agreements, changes in the federal funds rate, the
lenders' prime rate or LIBOR could affect the rates at which the Company could
borrow funds thereunder. At January 29, 2000, the Company had outstanding
borrowings of $10,000,000 against these credit facilities. The table below
summarizes the fair value and contract terms of fixed rate debt instruments
held by the Company at January 29, 2000:
(dollar amounts Average
in thousands) Amount Interest Rate
- ----------------------------------------------------------------
Fair value at
January 29, 2000 $489,824
Expected maturities:
2000 183 7.5%
2001 197 7.5
2002 13,682 7.0
2003 84,586 6.6
2004 111,587 6.7
- -----------------------------------------------------------------
At January 30, 1999, the Company held fixed rate debt instruments with an
aggregate fair value of $573,062.
FORWARD-LOOKING STATEMENTS
Certain statements made herein are forward-looking which 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 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, product costs, and the ability to grow and
improve the commercial delivery program. 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.
25
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 January 29, 2000 and January 30, 1999,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the three years in the period ended January 29, 2000.
Our audits also included the financial statement schedules listed in the Index
at Item 14. These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Pep Boys - Manny, Moe & Jack
and subsidiaries at January 29, 2000 and January 30, 1999, and the results of
their operations and their cash flows for each of the three years in the
period ended January 29, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 16, 2000
26
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
January 29, January 30,
2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 18,485 $ 114,548
Accounts receivable, less allowance for
uncollectible accounts of $826 and $996 17,281 17,393
Merchandise inventories 582,898 527,397
Prepaid expenses 39,184 36,634
Deferred income taxes 16,606 17,073
Other 46,278 41,099
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 720,732 754,144
- ----------------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 287,039 281,804
Building and improvements 954,638 907,309
Furniture, fixtures and equipment 647,557 596,840
Construction in progress 25,763 30,951
- ----------------------------------------------------------------------------------------------------------------------------------
1,914,997 1,816,904
Less accumulated depreciation and amortization 579,248 486,648
- ----------------------------------------------------------------------------------------------------------------------------------
Total Property and Equipment 1,335,749 1,330,256
- ----------------------------------------------------------------------------------------------------------------------------------
Other 16,191 11,712
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,072,672 $ 2,096,112
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 320,066 $ 240,391
Accrued expenses 228,151 199,551
Current maturities of convertible debt - 72,294
Current maturities of long-term debt 183 170
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 548,400 512,406
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt, less current maturities 612,668 526,851
Convertible Debt, less current maturities 171,356 164,863
Deferred Income Taxes 81,964 80,208
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $1 per share: Authorized 500,000,000 shares;
Issued 63,910,577 and 63,847,640 63,911 63,848
Additional paid-in capital 177,247 175,940
Retained earnings 649,487 636,475
Accumulated other comprehensive income - (4,210)
- ----------------------------------------------------------------------------------------------------------------------------------
890,645 872,053
Less shares in treasury - 10,721,208 shares, at cost 173,097 -
Less shares in benefits trust - 2,195,270 and 2,232,500 shares, at cost 59,264 60,269
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 658,284 811,784
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,072,672 $ 2,096,112
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF EARNINGS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
January 29, January 30, January 31,
Year ended 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $1,954,010 $1,991,340 $ 1,720,670
Service Revenue 440,523 407,368 335,850
- ----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 2,394,533 2,398,708 2,056,520
- ----------------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 1,415,053 1,498,897 1,246,431
Costs of Service Revenue 356,445 327,915 269,769
- ----------------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 1,771,498 1,826,812 1,516,200
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 538,957 492,443 474,239
Gross Profit from Service Revenue 84,078 79,453 66,081
- ----------------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 623,035 571,896 540,320
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 528,838 517,827 429,523
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Profit 94,197 54,069 110,797
Nonoperating Income 2,327 2,145 4,315
Interest Expense 51,557 48,930 39,656
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 44,967 7,284 75,456
Income Taxes 15,664 2,310 25,845
- ----------------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 29,303 $ 4,974 $ 49,611
- ----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share $ .58 $ .08 $ .81
Diluted Earnings per Share $ .58 $ .08 $ .80
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
28
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, February 1, 1997 63,119,491 $63,119 $162,660 $612,581 $(60,269) $778,091
Comprehensive Income
Net earnings 49,611
Minimum pension liability
adjustment, net of tax $(1,366)
Total Comprehensive Income 48,245
Cash dividends ($.24 per share) (14,687) (14,687)
Exercise of stock options
and related tax benefits 491,039 492 9,582 10,074
Dividend reinvestment plan 47,198 47 1,221 1,268
Acquisitions and transfers of
190,000 shares to employees'
savings plan (356) (356)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 63,657,728 63,658 173,107 647,505 (1,366) (60,269) 822,635
Comprehensive Income
Net earnings 4,974
Minimum pension liability
adjustment, net of tax (2,844)
Total Comprehensive Income 2,130
Cash dividends ($.26 per share) (16,004) (16,004)
Exercise of stock options
and related tax benefits 107,825 108 1,369 1,477
Dividend reinvestment plan 82,087 82 1,369 1,451
Acquisitions and transfers of
75,000 shares to employees'
savings plan 95 95
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 30, 1999 63,847,640 63,848 175,940 636,475 (4,210) (60,269) 811,784
Comprehensive Income
Net earnings 29,303
Minimum pension liability
adjustment, net of tax 4,210
Total Comprehensive Income 33,513
Cash dividends ($.27 per share) (13,693) (13,693)
Repurchase of Treasury Stock (410) (11,276,698) $(182,065) 1,005 (181,470)
Exercise of stock options
and related tax benefits 27,630 28 774 (1,795) 495,000 7,991 6,998
Dividend reinvestment plan 35,307 35 533 (393) 60,490 977 1,152
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 2000 63,910,577 $63,911 $177,247 $649,487 (10,721,208) $(173,097) $ - $(59,264) $658,284
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
January 29, January 30, January 31,
Year ended 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $ 29,303 $ 4,974 $ 49,611
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:
Depreciation and amortization 97,012 96,856 82,862
Accretion of bond discount 6,493 6,493 6,133
Increase in deferred income taxes 2,223 13,142 16,593
(Gain) Loss from sales of assets (538) 19,968 12,278
Changes in operating assets and liabilities:
(Increase) in accounts receivable, prepaid expenses
and other (12,096) (14,857) (16,875)
(Increase) Decrease in merchandise inventories (55,501) 127,966 (135,281)
Increase (Decrease) in accounts payable 79,675 (168,662) 71,517
Increase in accrued expenses 32,810 34,137 30,119
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 179,381 120,017 116,957
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (104,446) (167,876) (284,084)
Net Proceeds from sales of assets 2,479 98,545 929
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (101,967) (69,331) (283,155)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net borrowings (payments) under line of credit
agreements 10,000 (122,000) 19,000
Net proceeds from issuance of notes 76,000 202,241 149,225
Borrowings from life insurance policies - - 12,406
Reduction of long-term debt (170) (158) (134)
Reduction of convertible debt (72,294) (13,956) -
Dividends paid (13,693) (16,004) (14,687)
Purchase of treasury shares (181,470) - -
Proceeds from exercise of stock options 6,998 1,477 7,342
Proceeds from dividend reinvestment plan 1,152 1,451 1,268
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided by Financing Activities (173,477) 53,051 174,420
- -----------------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (96,063) 103,737 8,222
Cash and Cash Equivalents at Beginning of Period 114,548 10,811 2,589
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 18,485 $ 114,548 $ 10,811
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ - $ - $ 29,009
Interest paid, net of amounts capitalized 43,449 39,966 32,489
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
30
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended January 29, 2000, January 30, 1999 and January 31, 1998 (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 662 stores at January 29, 2000. The Company currently operates stores
in 37 states and Puerto Rico.
FISCAL YEAR END The Company's fiscal year ends on the Saturday nearest to
January 31. Fiscal years 1999, 1998 and 1997 were comprised of 52 weeks.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost
(last-in, first-out method) or market. If the first-in, first-out method of
valuing inventories had been used, inventories would have been approximately
the same as using the last-in, first-out method for both fiscal years 1999 and
1998.
CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly
liquid investments that are readily convertible to known amounts of cash and so
near maturity that they present an insignificant risk to changes in value
because of changes in interest rates.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method over
the following estimated useful lives: building and improvements, 5 to 40 years;
furniture, fixtures and equipment, 3 to 10 years.
SOFTWARE CAPITALIZATION In 1998, the Company adopted Statement of Position(SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." In accordance with this standard, certain direct development
costs associated with internal-use software are capitalized, including external
direct costs of material and services, and payroll costs for employees devoting
time to the software projects. These costs are amortized over a period not to
exceed five years beginning when the asset is substantially ready for use.
Costs incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred.
CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection
with the construction of certain long-term assets. Capitalized interest
amounted to $1,098, $1,020 and $1,861 in fiscal years 1999, 1998 and 1997,
respectively.
SERVICE REVENUE Service revenue consists of the labor charge for installing
merchandise or maintaining or repairing vehicles, excluding the sale of any
installed parts or materials.
COSTS OF REVENUES Costs of merchandise sales include the cost of products sold,
buying, warehousing and store occupancy costs. Costs of service revenue include
service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
PENSION EXPENSE The Company reports all information on its pension and savings
plan benefits in accordance with Statement of Financial Accounting Standards
(SFAS) No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits."
INCOME TAXES The Company uses the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred income taxes are determined based upon enacted tax
laws and rates applied to the differences between the financial statement and
tax bases of assets and liabilities.
ADVERTISING The Company expenses the production costs of advertising the first
time the advertising takes place. The Company nets cooperative advertising
reimbursements against costs incurred. Net advertising expense for fiscal years
1999, 1998 and 1997 was $346, $6,378 and $0, respectively. No advertising costs
were recorded as an asset as of January 29, 2000 or January 30, 1999.
STORE OPENING COSTS The costs of opening new stores are expensed as incurred.
31
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 reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not be
recoverable.
EARNINGS PER SHARE Earnings per share for all periods have been computed in
accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share is
computed by dividing earnings by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed by dividing
earnings by the weighted average number of common shares outstanding during the
year plus the assumed conversion of dilutive convertible debt and incremental
shares that would have been outstanding upon the assumed exercise of dilutive
stock options.
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As
permitted by SFAS No. 123, the Company is accounting for employee stock-based
compensation plans in accordance with Accounting Principles Board (APB) opinion
No. 25, "Accounting for Stock Issued to Employees," and has provided
disclosures required by SFAS No. 123.
COMPREHENSIVE INCOME Comprehensive income is reported in accordance with SFAS
No. 130, "Reporting Comprehensive Income." Other comprehensive income includes
minimum pension liability adjustments.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the
Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
As amended by SFAS No. 137,"Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," this
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000, although early adoption is encouraged. The Company is still in
the process of analyzing the impact of the adoption of this statement 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 Jan. 29, 2000 Jan. 30, 1999 Jan. 31, 1998
- ----------------------------------------------------------------------------------------
Parts and Accessories $1,571,445 $1,649,599 $1,448,355
Tires 382,565 341,741 272,315
- ----------------------------------------------------------------------------------------
Total Merchandise Sales 1,954,010 1,991,340 1,720,670
Service 440,523 407,368 335,850
- ----------------------------------------------------------------------------------------
Total Revenues $2,394,533 $2,398,708 $2,056,520
========================================================================================
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.
RECLASSIFICATIONS Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the current year's presentation.
NOTE 2 - DEBT
SHORT-TERM BORROWINGS The Company had no short-term borrowings outstanding at
January 29, 2000 or at January 30, 1999. The Company had available a short-term
line of credit of $15,000 at January 29, 2000 and short-term lines of credit
with several banks totaling $120,000 at January 30, 1999. The interest rates on
these lines were negotiated based upon market conditions. The average and
maximum month end balances on these borrowings were $2,556 and $16,366,
respectively, during fiscal 1999 and $43,171 and $137,050, respectively, during
fiscal 1998.
32
LONG-TERM DEBT
- ------------------------------------------------------------------------------------------------------------
January 29, 2000 January 30, 1999
- ------------------------------------------------------------------------------------------------------------
Medium-term notes, 6.4% to 6.7%, due
November 2004 through September 2007 $150,000 $150,000
Medium-term notes, 6.7% to 6.9%, due 100,000 100,000
March 2004 through March 2006
7% notes due June 2005 100,000 100,000
6.92% Term Enhanced ReMarketable Securities, 100,000 100,000
Due July 2017
Revolving credit agreement 10,000 -
6 5/8% notes due May 2003 75,000 75,000
Senior Notes, 7.8% and 7.95%, due
January 2009 and January 2011 70,000 -
Other notes payable, 5.8% to 8% 7,851 2,021
- ------------------------------------------------------------------------------------------------------------
612,851 527,021
Less current maturities 183 170
- ------------------------------------------------------------------------------------------------------------
Total long-term debt $612,668 $526,851
- ------------------------------------------------------------------------------------------------------------
The Company has a revolving credit agreement with nine major banks
providing for borrowings of up to $200,000. Funds may be drawn and repaid
anytime prior to March 30, 2002. Sixty days prior to each anniversary date, the
Company may request and, upon agreement of each bank, extend the maturity of
this facility an additional year. If one of the banks fails to agree to this
extension, the Company has the right to replace that bank. At the Company's
option, the interest rate on any loan may be based on (i) the higher of the
federal funds rate plus 0.25% or the prime rate, (ii) LIBOR plus up to 1.1%
or (iii) a negotiated rate based upon market conditions. In addition, the
interest rates on the revolving credit agreement are subject to a 0.50%
increase for such time as the credit rating of the Company's long-term
unsecured debt securities decreases below investment grade as rated by both
Moody's (Ba2) and Standard & Poor's (BB). The weighted average interest rate on
borrowings under the revolving credit agreement was 6.6% at January 29, 2000.
The other notes payable have a weighted average interest rate of 6.2%
at January 29, 2000 and 6.4% at January 30, 1999, 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 $7,446 at
January 29, 2000.
In February 1999, the Company completed a private placement of Senior
Notes totaling $70,000. The Senior Notes were issued in two series at par, and
pay interest semiannually on January 31 and July 31. The Series A 7.8% Senior
Notes, with an aggregate principal balance of $25,000, begin repaying principal
in equal installments from January 2003 until maturity in January 2009. The
Series B 7.95% Senior Notes, with an aggregate principal balance of $45,000,
begin repaying principal in equal installments from January 2007 until maturity
in January 2011. In addition, the interest rates on the Senior Notes are
subject to a 0.50% increase for such time as the credit rating of the Company's
long-term unsecured debt securities decreases below investment grade as rated
by both Moody's (Ba1) and Standard & Poor's (BB+). The proceeds from the
issuance of the notes were used to finance the Company's share repurchase (see
Note 4).
In February 1998, the Company established a Medium-Term Note program
which permitted the Company to issue up to $200,000 of Medium-Term Notes. Under
this program the Company sold $100,000 principal amount of Senior Notes,
ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and
March 2006. Additionally, in July 1998, under this note program, the Company
sold $100,000 of Term Enhanced ReMarketable Securities with a stated maturity
date of July 2017. The Company also sold a call option with the securities,
which allows the securities to be remarketed to the public in July 2006 under
certain circumstances. If the securities are not remarketed, the Company will
be obligated to repay the principal amount in full in July 2017. The level
yield to maturity on the securities is approximately 6.85% and the coupon rate
is 6.92%.
Between July and October 1997, the Company issued $150,000 in Medium
Term Notes with interest rates of 6.4% to 6.7% and maturity dates from November
2004 through September 2007. $50,000 of this debt is redeemable at the option of
the holder on July 16, 2002 and $49,000 is redeemable at the option of the
holder on September 19, 2002.
33
CONVERTIBLE DEBT
- ------------------------------------------------------------------------------------------------------------
January 29, 2000 January 30, 1999
- ------------------------------------------------------------------------------------------------------------
Convertible Subordinated Notes $ - $72,294
Zero Coupon Convertible Subordinated Notes 171,356 164,863
- ------------------------------------------------------------------------------------------------------------
171,356 237,157
Less current maturities - 72,294
- ------------------------------------------------------------------------------------------------------------
Total long-term convertible debt $171,356 $164,863
- ------------------------------------------------------------------------------------------------------------
On August 24, 1994, the Company sold $86,250 of 4% convertible
subordinated notes. These notes were convertible by the holders into the common
stock of the Company at any time on or before September 1, 1999 (the maturity
date) at a conversion price of $41 per share subject to adjustment in certain
events. The notes were redeemable, in whole or in part, at the option of the
Company at any time on or after September 15, 1997, at a redemption price of
101% of the principal amount and at par on or after September 1, 1998. During
the fourth quarter of fiscal 1998, the Company redeemed $13,956 of the
convertible subordinated notes. During the second quarter of fiscal 1999, the
Company redeemed an additional $16,500 of the convertible subordinated notes.
On the maturity date, the Company repaid the remaining principal balance of
$55,794. The repayment of the Company's debt was financed with cash provided by
operating activities.
On September 20, 1996, the Company issued $271,704 principal amount (at
maturity) of Liquid Yield Option Notes (LYONs) with a price to the public of
$150,000. The net proceeds to the Company were $146,250. The issue price of
each such LYON was $552.07 and there will be no periodic payments of interest.
The LYONs will mature on September 20, 2011, at $1,000 per LYON, representing a
yield to maturity of 4.0% per annum (computed on a semiannual bond equivalent
basis).
Each LYON is convertible at the option of the holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased, into
common stock of the Company at a conversion rate of 12.929 shares per LYON. The
LYONs are redeemable at the option of the holder on September 20, 2001 and
September 20, 2006 at the issue price plus accrued original issue discount. The
Company, at its option, may elect to pay the purchase price on any such
purchase date in cash or common stock, or any combination thereof. As of
January 29, 2000, no LYONs have been converted. On or prior to September 20,
2001, the Company will purchase for cash any LYON, at the option of the holder,
in the event of a change in control of the Company. The LYONs are subordinated
to all existing and future senior indebtedness of the Company.
Several of the Company's debt agreements require the maintenance of
certain financial ratios and covenants, including interest, leverage and
minimum net worth ratios. The Company was in compliance with all debt covenants
at January 29, 2000.
The annual maturities of all long-term and convertible debt for the
next five years are $183 in 2000, $197 in 2001, $13,682 in 2002, $84,586 in
2003 and $111,587 in 2004. These maturities do not include any 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 $19,915 at January 29, 2000.
34
NOTE 3 - LEASE COMMITMENTS
The Company leases certain property and equipment under operating
leases which contain renewal and escalation clauses. Aggregate minimum rental
commitments for leases having noncancelable lease terms of more than one year
are approximately: 2000 - $47,068; 2001 - $46,524; 2002 - $46,452; 2003 -
$39,319; 2004 - $37,966; thereafter - $427,650. Rental expenses incurred for
operating leases in 1999, 1998 and 1997 were $59,890, $57,157 and $49,105,
respectively.
NOTE 4 - STOCKHOLDERS' EQUITY
SHARE REPURCHASE - TREASURY STOCK On February 1, 1999, the Company repurchased
11,276,698 of its common shares outstanding pursuant to a Dutch Auction self-
tender offer at a price of $16.00 per share. The repurchased shares included
1,276,698 common shares which were repurchased as a result of the Company
exercising its option to purchase an additional 2% of its outstanding shares.
Expenses related to the share repurchase were approximately $1,638 and were
included as part of the cost of the shares acquired. A portion of the treasury
shares will be used by the Company to provide benefits to employees under its
compensation plans and in conjunction with the Company's dividend reinvestment
program. At January 29, 2000, the Company has reflected 10,721,208 shares of
its common stock at a cost of $173,097 as "Shares in treasury" on the Company's
Consolidated Balance Sheet.
RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend
one common share purchase right on each of its common shares. The rights will
not be exercisable or transferable apart from the Company's common stock until
a person or group, as defined in the rights agreement (dated December 5,1997),
without the proper consent of the Company's Board of Directors, acquires 15%
or more, or makes an offer to acquire 15% or more of the Company's outstanding
stock. When exercisable, the rights entitle the holder to purchase one share
of the Company's common stock for $125. Under certain circumstances, including
the acquisition of 15% of the Company's stock by a person or group, the rights
entitle the holder to purchase common stock of the Company or common stock of
an acquiring company having a market value of twice the exercise price of the
right. The rights do not have voting power and are subject to redemption by the
Company's Board of Directors for $.01 per right anytime before a 15% position
has been acquired and for 10 days thereafter, at which time the rights become
nonredeemable. The rights expire on December 31, 2007.
BENEFITS TRUST On April 29, 1994, the Company established a flexible employee
benefits trust with the intention of purchasing up to $75,000 worth of the
Company's common shares. The repurchased shares will be held in the trust and
will be used to fund the Company's existing benefit plan obligations including
healthcare programs, savings and retirement plans and other benefit
obligations. The trust will allocate or sell the repurchased shares through
2023 to fund these benefit programs. As shares are released from the trust, the
Company will charge or credit additional paid-in capital for the difference
between the fair value of shares released and the original cost of the shares
to the trust. For financial reporting purposes, the trust is consolidated with
the accounts of the Company. All dividend and interest transactions between the
trust and the Company are eliminated. In connection with the Dutch Auction
self-tender offer, 37,230 shares were tendered at a price of $16.00 per share
in fiscal 1999. At January 29, 2000, the Company has reflected 2,195,270 shares
of its common stock at a cost of $59,264 as "Shares in benefits trust" on the
Company's Consolidated Balance Sheet.
NOTE 5 - SIGNIFICANT CHARGES
During fiscal 1998, the Company recorded pretax charges of $29,451
($20,109 net of tax), $27,733 of which was recorded as Costs of Merchandise
Sales on the Company's Consolidated Statements of Earnings and includes the
costs associated with closure and sale of 109 Pep Boys Express stores.
The remaining $1,718 of these expenses have been included in Selling,
General and Administrative Expenses on the Company's Consolidated
Statements of Earnings.
During the fourth quarter of fiscal 1997, the Company recorded pretax
charges of $28,012 ($18,418 net of tax), $16,330 of which was recorded as Costs
of Merchandise Sales on the Company's Consolidated Statements of Earnings and
includes the costs associated with closing nine stores, converting all Parts
USA stores to the Pep Boys Express format, certain equipment write-offs and
other non-recurring expenses. The remaining $11,682 of these expenses, which
include costs associated with reducing the store expansion program, certain
equipment write-offs and other non-recurring expenses, have been included in
Selling, General and Administrative Expenses on the Company's Consolidated
Statements of Earnings.
35
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.
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:
Jan. 29, Jan. 30, Jan. 31,
Year ended 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost $ - $ - $ -
Interest cost 1,826 1,711 1,667
Expected return on plan assets (1,915) (1,703) (1,729)
Amortization of transition asset (214) (214) (214)
Prior service cost - - -
Recognized actuarial loss 597 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total pension expense (income) $ 294 $ (206) $ (276)
- -----------------------------------------------------------------------------------------------------------------------------------
Pension plan assets are stated at fair market value and are composed
primarily of money market funds, stock index funds, fixed income investments
with maturities of less than five years and the Company's common stock.
36
The following table sets forth the reconciliation of the benefit
obligation, fair value of plan assets and funded status of the Company's
defined benefit plan.
Jan. 29, Jan 30,
2000 1999
- --------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $28,615 $24,567
Interest cost 1,826 1,711
Actuarial (gain)loss (2,213) 3,129
Benefits paid (1,273) (792)
- ---------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $26,955 $28,615
- ---------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year $20,236 $20,324
Actual return on plan assets (net of expenses) 2,077 654
Employer contributions 5,934 50
Benefits paid (1,273) (792)
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $26,974 $20,236
- ---------------------------------------------------------------------------------------------------------------
Reconciliation of the Funded Status
Funded status $ 19 $(8,378)
Unrecognized transition asset (428) (643)
Unrecognized actuarial loss 4,249 7,221
Amount contributed after measurement date - 2,000
- ---------------------------------------------------------------------------------------------------------------
Net amount recognized at year-end $ 3,840 $ 200
- ---------------------------------------------------------------------------------------------------------------
Amounts recognized on consolidated
balance sheets consist of:
Prepaid benefit cost $ 3,840 $ -
Accrued benefit liability - (6,378)
Accumulated other comprehensive income - 6,578
- ---------------------------------------------------------------------------------------------------------------
Net amount recognized at year-end $ 3,840 $ 200
- ---------------------------------------------------------------------------------------------------------------
Weighted-Average Assumptions
Discount rate: 6.90% 6.50%
Expected return on plan assets: 8.50% 8.50%
- ---------------------------------------------------------------------------------------------------------------
The Company recorded other comprehensive income attributable to the change
in the minimum pension liability of $(6,578)($(4,210) net of tax), $4,392
($2,844 net of tax) and $ 2,186($1,366 net of tax) in fiscal years 1999, 1998
and 1997, respectively.
The Company has 401(k) savings plans which covers all full-time employees who
are at least 21 years of age with one or more years of service. The Company
contributes the lesser of 50% of the first 6% of a participant's contributions
or 3% of the participant's compensation. The Company's savings plan
contribution expense was $5,644, $5,274 and $4,543 in fiscal years 1999, 1998
and 1997, respectively.
37
NOTE 7 - INCOME TAXES
The provision for income taxes includes the following:
Jan. 29, Jan. 30, Jan. 31,
Year ended 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 12,653 $(10,295) $ 8,651
State 788 (537) 601
Deferred:
Federal 2,074 12,266 15,487
State 149 876 1,106
- ----------------------------------------------------------------------------------------------------------------------------------
$ 15,664 $ 2,310 $25,845
- ----------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the
effective rate of the provision for income taxes follows:
Jan. 29, Jan. 30, Jan. 31,
Year ended 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal
tax benefits 1.4 3.0 1.5
Job credits (1.1) (5.8) (0.3)
Other, net (0.5) (0.5) (1.9)
- -----------------------------------------------------------------------------------------------------------------------------------
34.8% 31.7% 34.3%
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes relate to the following temporary differences:
Jan. 29, Jan. 30, Jan. 31,
Year ended 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation $ 720 $ 11,508 $ 22,173
Inventories (117) 1,767 575
Vacation accrual (831) (387) (725)
Pension accrual 633 3,386 (2,118)
Store closing reserves 288 1,340 (3,866)
Insurance (2,344) 1,939 (288)
Loss on real estate disposal 1,054 (4,727) -
Other, net 2,820 (1,684) 842
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2,223 $13,142 $ 16,593
- -----------------------------------------------------------------------------------------------------------------------------------
38
The following are components of the net deferred tax accounts as of
January 29, 2000:
Federal State Total
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Current $34,875 $2,491 $37,366
Long-term 34,044 2,432 36,476
Deferred tax liabilities:
Current 19,376 1,384 20,760
Long-term 110,544 7,896 118,440
- ------------------------------------------------------------------------------------------------------------------------------------
The following are components of the net deferred tax accounts as of
January 30, 1999:
Federal State Total
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Current $33,709 $2,408 $36,117
Long-term 24,408 1,743 26,151
Deferred tax liabilities:
Current 17,774 1,270 19,044
Long-term 99,269 7,090 106,359
- ------------------------------------------------------------------------------------------------------------------------------------
Items that gave rise to significant portions of the deferred tax
accounts are as follows:
Jan. 29, Jan. 30,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Inventories $ 7,851 $ 7,734
Vacation accrual 5,542 4,711
Minimum pension liability adjustment (1,548) 820
Store closing reserves 2,238 2,526
Other, net 2,523 1,282
- ------------------------------------------------------------------------------------------------------------------------------------
$16,606 $17,073
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $82,908 $82,188
Other, net (944) (1,980)
- ------------------------------------------------------------------------------------------------------------------------------------
$81,964 $80,208
- ------------------------------------------------------------------------------------------------------------------------------------
39
NOTE 8 - NET EARNINGS PER SHARE
For fiscal years 1999, 1998 and 1997, 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 1999, 1998 and 1997, and therefore excluded from the
computation of diluted EPS; however, these securities could potentially be
dilutive in the future. Options to purchase 4,755,657, 3,572,946 and 2,281,572
shares of common stock were outstanding at January 29, 2000, January 30, 1999
and January 31, 1998, 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.
- -------------------------------------------------------------------------------
(In thousands, except per share amounts)
Fiscal 1999 Fiscal 1998 Fiscal 1997
---------------------------------- ---------------------------------- ---------------------------------
Earnings Shares Per share Earnings Shares Per share Earnings Shares Per share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator)(Denominator) Amount
----------- ------------ ------ ----------- ------------ ------ ---------- ------------ ------
Basic EPS
Earnings available to
common stockholders $29,303 50,665 $.58 $ 4,974 61,543 $.08 $49,611 61,133 $.81
==== ==== ====
Effective of Dilutive
Securities
Common shares assumed
issued upon exercise of
dilutive stock options - 175 - 197 - 524
------- ------ ------- ------ ------- ------
Diluted EPS
Earnings available to
common stockholders
assuming conversion $29,303 50,840 $.58 $ 4,974 61,740 $.08 $49,611 61,657 $.80
======= ====== ==== ======= ====== ==== ======= ====== ====
40
NOTE 9 - 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.
Under the terms of the Company's Incentive Stock Option Plan adopted in
1982, options to purchase up to 3,600,000 shares of the Company's common stock
were authorized. Options granted prior to 1988 are exercisable from the date of
grant. Options granted in 1988 and thereafter are exercisable on the second
anniversary of the grant date. All options under this plan cannot be exercised
more than ten years from the grant date. No additional options will be granted
under this plan.
Under the terms of the Company's Nonqualified Stock Option Plans,
adopted in 1984 and 1985, options to purchase up to 3,300,000 shares of the
Company's common stock were authorized. The options became 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
granted cannot be exercised more than ten and one-half years after the grant
date. No additional options will be granted under these plans.
On May 21, 1990, the stockholders approved the 1990 Stock Incentive
Plan which authorized the issuance of restricted stock and/or options to
purchase up to 1,000,000 shares of the Company's common stock. Additional
shares in the amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by
stockholders on June 4, 1997, May 31, 1995 and June 1, 1993, respectively.
Under this plan, both incentive and nonqualified stock options may be granted
to eligible participants. Incentive stock options are either fully exercisable
on the second or third anniversary of the grant date or become exercisable over
a four-year period with one-fifth exercisable on the grant date and one-fifth
on each anniversary date for the four years following the grant date.
Nonqualified options become exercisable over a four-year period with one-fifth
exercisable on the grant date and one-fifth on each anniversary date for the
four years following the grant date. Options cannot be exercised more than ten
years after the grant date. As of January 29, 2000, 476,982 shares remain
available for grant.
On June 2, 1999 the stockholders approved the 1999 Stock Incentive Plan
which authorized the issuance of restricted stock and/or options to purchase up
to 2,000,000 shares of the Company's common stock. Under this plan, both
incentive and nonqualified stock options may be granted to eligible
participants. The incentive stock options and nonqualified stock options are
fully exercisable on the third anniversary of the grant date or become
exercisable over a four-year period with one-fifth exercisable on the grant
date and one-fifth on each anniversary date for the four years following the
grant date. Options cannot be exercised more than ten years after the grant
date. As of January 29, 2000, 1,217,450 shares remain available for grant.
Stock option transactions for the Company's stock option plans are
summarized as follows:
Fiscal 1999 Fiscal 1998 Fiscal 1997
------------------------ ----------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding - beginning of year 4,982,761 $23.02 3,465,194 $25.40 3,500,036 $23.34
Granted 1,558,450 16.08 2,515,150 21.06 837,000 30.15
Exercised (519,850) 12.50 (107,825) 17.09 (487,914) 15.00
Canceled (607,739) 22.75 (889,758) 27.23 (383,928) 30.24
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year 5,413,622 22.05 4,982,761 23.02 3,465,194 25.40
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable - at year end 2,489,162 24.66 2,359,724 21.94 1,988,209 21.08
Weighted average estimated fair value
of options granted 6.60 8.44 11.00
- ---------------------------------------------------------------------------------------------------------------------------
41
The following table summarizes information about stock options
outstanding at January 29, 2000:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 1/29/00 Life Price at 1/29/00 Price
- ----------------------------------------------------------------------------------------------------------------------------------
$ 8.84 to $20.00 2,242,415 8 years $15.18 627,975 $13.87
$20.01 to $25.00 1,673,575 7 years 22.96 666,925 22.87
$25.01 to $30.00 145,017 4 years 27.96 139,717 27.97
$30.01 to $37.38 1,352,615 6 years 31.71 1,054,545 31.97
- ----------------------------------------------------------------------------------------------------------------------------------
$ 8.84 to $37.38 5,413,622 2,489,162
- ----------------------------------------------------------------------------------------------------------------------------------
The Company applies APB No. 25, "Accounting for Stock Issued to
Employees," in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for its stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant dates and recognized as compensation expense on a
straight-line basis over the vesting period of the grant consistent with the
method of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net earnings and net earnings per share would have been reduced to
the pro forma amounts indicated below:
- -----------------------------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 1998 Fiscal 1997
- -----------------------------------------------------------------------------------------------------------
Net earnings:
As reported $29,303 $ 4,974 $49,611
Pro forma $24,450 $ (757) $46,120
Net earnings per share:
As reported
Basic $ .58 $ .08 $ .81
Diluted $ .58 $ .08 $ .80
Pro forma
Basic $ .48 $ (.01) $ .75
Diluted $ .48 $ (.01) $ .75
- -----------------------------------------------------------------------------------------------------------
The pro forma effects on net earnings for fiscal years 1999, 1998 and
1997 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 1999, 1998
and 1997 is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions: (i) dividend
yield of 0.78%, 0.70% and 0.70%, respectively, (ii) expected volatility of 34%,
35% and 33%, respectively, (iii) risk-free interest rate ranges of 5.0% to
6.5%, 4.0% to 5.7% and 5.5% to 6.9%, respectively, and (iv) ranges of expected
lives of 4 years to 8 years for fiscal years 1999 and 1998 and 3.5 years to 6.5
years for fiscal 1997.
NOTE 10 - CONTINGENCIES
The Company is a defendant in a purported class action entitled
"Brian Lee, Anthony Baxton, and Harry Schlein v. The Pep Boys - Manny, Moe &
Jack," in the Circuit Court of Mobile County, Alabama. The Company has moved to
dismiss the case for failure to state a claim. The Company's motion to dismiss
is pending before the Circuit Court of Mobile County, Alabama. In their
complaint, the plaintiffs allege that the Company sold old or used automotive
batteries to consumers as if those batteries were new. The complaint purports
to state causes of action for fraud and deceit, negligent misrepresentation,
breach of contract and violation of state consumer protection statutes. The
plaintiffs are seeking compensatory and punitive damages, as well as injunctive
and other equitable relief. The Company believes the claims are without merit
and intends to vigorously defend this action.
42
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:
January 29, 2000 January 30, 1999
------------------------ ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 18,485 $ 18,485 $ 114,548 $ 114,548
Accounts receivable 17,281 17,281 17,393 17,393
Liabilities:
Accounts payable 320,066 320,066 240,391 240,391
Long-term debt including
current maturities 612,851 489,824 527,021 502,033
Convertible subordinated notes
including current maturities - - 72,294 71,029
Zero coupon convertible
subordinated notes 171,356 148,079 164,863 139,248
- --------------------------------------------------------------------------------------------------------------------------
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, CONVERTIBLE SUBORDINATED NOTES
INCLUDING CURRENT MATURITIES AND ZERO COUPON CONVERTIBLE SUBORDINATED NOTES
Interest rates that are currently available to the Company for
issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues that are not quoted on an exchange.
The fair value estimates presented herein are based on pertinent
information available to management as of January 29, 2000 and January 30,
1999. 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.
43
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------
Net Earnings Cash Market Price
Year Ended Total Gross Operating Net (Loss) Per Share Dividends Per Share
Jan. 29, 2000 Revenues Profit Profit (Loss) Earnings (Loss) Basic Diluted Per Share High Low
- --------------------------------------------------------------------------------------------------------------------------------
1st Quarter $598,316 $162,027 $29,040 $10,093 $.20 $.20 $.0675 20 3/16 14 1/4
2nd Quarter 635,403 176,520 43,852 20,065 .40 .39 .0675 21 5/8 14 3/16
3rd Quarter 605,833 157,769 27,575 9,930 .20 .20 .0675 17 7/16 11 5/16
4th Quarter 554,981 126,719 (6,270) (10,785) (.21) (.21) .0675 13 7 1/8
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended
Jan. 30, 1999
- --------------------------------------------------------------------------------------------------------------------------------
1st Quarter $584,224 $154,382 $28,143 $10,058 $.16 $.16 $.0650 26 11/16 21 5/16
2nd Quarter 635,301 172,408 40,368 17,704 .29 .29 .0650 23 3/4 16 13/16
3rd Quarter 615,967 140,077 5,635 (3,921) (.06) (.06) .0650 17 7/8 12 3/8
4th Quarter 563,216 105,029 (20,077) (18,867) (.31) (.31) .0650 17 1/16 12 1/2
- --------------------------------------------------------------------------------------------------------------------------------
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.
44
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material contained in the registrant's definitive proxy statement,
which will be filed pursuant to Regulation 14A not later than 120 days after
the end of the Company's fiscal year (the "Proxy Statement"), under the caption
"Election of Directors" is hereby incorporated herein by reference. The
information regarding executive officers called for by Item 401 of Regulation
S-K is included in Part I, in accordance with General Instruction G(3) to Form
10-K.
ITEM 11 EXECUTIVE COMPENSATION
The material in the Proxy Statement under the caption "Executive
Compensation" other than the material under the caption "Executive
Compensation - Report of Compensation Committee of the Board of Directors on
Executive Compensation" and "Executive Compensation - Performance Graph" is
hereby incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The material in the Proxy Statement under the caption "Outstanding
Shares, Voting Rights and Shareholdings of Certain Persons - Share Ownership
of Certain Beneficial Owners and Management" is hereby incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The material in the Proxy Statement under the caption "Executive
Compensation - Certain Relationships and Related Transactions" is hereby
incorporated herein by reference.
45
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 26
Consolidated Balance Sheets - January 29, 2000
and January 30, 1999 27
Consolidated Statements of Earnings - Years ended January 29, 2000,
January 30, 1999 and January 31, 1998 28
Consolidated Statements of Stockholders' Equity Years ended January
29, 2000, January 30, 1999 and January 31, 1998 29
Consolidated Statements of Cash Flows - Years ended January 29, 2000,
January 30, 1999, and January 31, 1998 30
Notes to Consolidated Financial Statements 31
2. The following consolidated financial statement schedule of The Pep
Boys - Manny, Moe & Jack is included.
Schedule II Valuation and Qualifying Accounts and Reserves 55
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
(Declassification of Board of Directors)
(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
46
(4.2) Indenture, dated as of August Incorporated by reference from
31, 1994, between the Company the Registration Statement on
and First Fidelity Bank, Form S-3 (File No. 33-55115).
National Association as Trustee,
including Form of Debenture
(4.3) Indenture, dated as of June Incorporated by reference from
12, 1995, between the Company the Registration Statement on
and First Fidelity Bank, Form S-3 (File No. 33-59859).
National Association as Trustee,
including Form of Debenture
(4.4) Indenture, dated as of September Incorporated by reference from
20, 1996, between the Company and the Registration Statement on
the Trustee, providing for the Form S-3 (File No. 333-00985).
Issuance of the LYONs
(4.5) Indenture, dated as of July 15, 1997, Incorporated by reference from
between the Company and PNC the Registration Statement on
Bank, National Association, as Form S-3 (File No. 333-30295).
Trustee, providing for the issuance
of Senior Debt Securities, and form
of security
(4.6) Indenture, dated as of July 15, 1997, Incorporated by reference from
between the Company and PNC the Registration Statement on
Bank, National Association, as Form S-3 (File No. 333-30295)
Trustee, providing for the issuance
of Subordinated Debt Securities, and
form of security
(10.1)* Medical Reimbursement Plan of Incorporated by reference from
the Company the Company's Form 10-K for the
fiscal year ended January 31,
1982.
(10.2)* 1982 Incentive Stock Option Plan Incorporated by reference from
the Company's Form 10-K for the
fiscal year ended January 31,
1982.
(10.3)* 1984 Non-Qualified Stock Option Incorporated by reference from
Plan the Company's Form 10-K for the
fiscal year ended February 2,
1985.
(10.4)* 1985 Non-Qualified Stock Option Incorporated by reference from
Plan the Company's Form 10-K for the
fiscal year ended February 2,
1985.
(10.5) 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
47
(10.6)* Directors' Deferred Compensation Incorporated by reference from
Plan, as amended the Company's Form 10-K for the
fiscal year ended January 30,
1988.
(10.7)* Form of Employment Agreement, as Incorporated by reference from
amended, dated as of December 12, the Company's Form 10-K for the
1989 fiscal year ended February 3, 1990.
(10.8)* Amendment No. 1 to the 1985 Incorporated by reference from
Non-Qualified Stock Option Plan the Company's Form 10-K for the
fiscal year ended January 28, 1989.
(10.9)* Amendment No. 1 to the 1982 Incorporated by reference from
Incentive Stock Option Plan the Company's Form 10-K for the
fiscal year ended January 28,
1989.
(10.10) 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).
(10.11)* 1990 Stock Incentive Plan Incorporated by reference from
the Company's Form 10-Q for the
quarter ended November 3, 1990.
(10.12)* Amendment No. 1 to 1990 Stock Incorporated by reference from
Incentive Plan the Company's Form 10-K for the
fiscal year ended February 1, 1992.
(10.13)* 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
(10.14)* 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
(10.15)* 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.
(10.16)* Amendment No. 2 to the 1982 Incorporated by reference from
Incentive Stock Option Plan the Company's Form 10-Q for the
quarter ended October 31, 1992.
(10.17)* Amendment No. 3 to the Non- Incorporated by reference from
Qualified Stock Option Plan the Company's Form 10-Q for the
quarter ended October 31, 1992.
48
(10.18)* Amendment No. 2 to the 1990 Incorporated by reference from
Stock Incentive Plan the Company's Form 10-Q for the
quarter ended October 31, 1992.
(10.19) Not Used
(10.20) Flexible Employee Benefits Trust Incorporated by reference from
the Company's Form 8-K dated May
6, 1994.
(10.21) Not Used
(10.22) Credit Agreement dated as of Incorporated by reference from
April 21, 1995 between the the Company's Form 10-Q for the
Company and The Chase Manhattan quarter ended April 29, 1995.
Bank (Agent)
(10.23) Transaction Agreement, including Incorporated by reference from
amendments, among The Pep Boys - the Company's Form 10-K for the
Manny, Moe & Jack, State Street year ended February 1, 1997.
Bank and Trust Company (Trustee) and
Citicorp Leasing, Inc., dated as of
November 13, 1995
(10.24) Master Lease, including amendments, Incorporated by reference from
between State Street Bank and Trust the Company's Form 10-K for the
Company (Trustee) and The Pep Boys - Manny, year ended February 1, 1997.
Moe & Jack, dated as of November 13,
1995
(10.25) Master Lease, including amendments, Incorporated by reference from
between State Street Bank and Trust the Company's Form 10-K for the
Company (Trustee) and The Pep Boys - Manny, year ended January 31, 1998.
Moe & Jack dated as of February 28,
1997
(10.26) Transaction Agreement, including Incorporated by reference from
amendments, between State Street the Company's Form 10-K for the
Bank and Trust Company (Trustee) and The year ended January 31, 1998.
Pep Boys - Manny, Moe & Jack dated as
of February 28, 1997
(10.27) Amendment No. 1 to the Credit Incorporated by reference from
Agreement dated as of April 21, 1995 the Company's Form 10-K for the
between the Company and The Chase year ended January 31, 1998.
Manhattan Bank (Agent)
(10.28)* The Pep Boys - Manny, Moe & Jack Incorporated by reference from
Pension Plan the Company's Form 10-K for the
year ended January 31, 1998.
49
(10.29)* The Pep Boys Savings Plan Incorporated by reference from
the Company's Form 10-K for the
year ended January 31, 1998.
(10.30)* The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from
the Company's Form 10-K for the
year ended January 31, 1998.
(10.31) Amendment No. 2 dated as of July 31,1998 Incorporated by reference from
to the Credit Agreement dated as of April the Company's Form 10-Q for the
21, 1995 between the Company, the Banks quarter ended August 1, 1998.
signatory thereto and The Chase Manhattan
Bank (Agent)
(10.32) Amendment to Transaction Agreement between Incorporated by reference from
the Company and State Street Bank and Trust the Company's Form 10-Q for the
Company (Trustee) dated as of February 28, 1997 quarter ended August 1, 1998.
(10.33) Amendment dated as of July 31, 1998 to Master Incorporated by reference from
Lease between the Company and State Street the Company's Form 10-Q for the
Bank and Trust Company (Trustee) dated as of quarter ended August 1, 1998.
November 13, 1995
(10.34) Amendment dated as of July 31, 1998 to Master Incorporated by reference from
Lease between the Company and State Street the Company's Form 10-Q for the
Bank and Trust Company (Trustee) dated as of quarter ended August 1, 1998.
February 28, 1997
(10.35) Amendment No. 3 dated as of October 31, 1998 Incorporated by reference from
to the Amended and Restated Credit Agreement the Company's Form 10-Q for the
dated as of April 21, 1995 among the Company, quarter ended October 31, 1998.
the Banks signatory thereto and The Chase
Manhattan Bank, as Agent.
(10.36) Third Amendment dated as of October 31, 1998 Incorporated by reference from
to Transaction Agreement between the Company and the Company's Form 10-Q for the
State Street Bank and Trust Company (Trustee) dated quarter ended October 31, 1998.
as of February 28, 1997.
(10.37) Third Amendment dated as of October 31, 1998 Incorporated by reference from
to Master Lease between the Company and State the Company's Form 10-Q for the
Street Bank and Trust Company (Trustee) dated as of quarter ended October 31, 1998.
November 13, 1995.
(10.38) Second Amendment dated as of October 31, 1998 Incorporated by reference from
to Master Lease between the Company and State the Company's Form 10-Q for the
Street Bank and Trust Company (Trustee) dated as of quarter ended October 31, 1998.
February 28, 1997.
(10.39) Fourth Amendment dated as of October 31, 1998 Incorporated by reference from
to Transaction Agreement between the Company the Company's Form 10-Q for the
and State Street Bank and Trust Company (Trustee) quarter ended October 31, 1998.
dated as of November 13, 1995.
(10.40)* 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.
50
(10.41)* 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.
(10.42) Third Amendment dated as of January 21, 1999 Incorporated by reference from
to Master Lease between the Company and State the Company's Form 10-K for the
Street Bank and Trust Company (Trustee) dated as of year ended January 30, 1999.
February 28, 1997.
(10.43) Fourth Amendment dated as of January 21, 1999 Incorporated by reference from
to Transaction Agreement between the Company the Company's Form 10-K for the
and State Street Bank and Trust Company (Trustee) year ended January 30, 1999.
dated as of February 28, 1997.
(10.44) Fifth Amendment dated as of January 21, 1999 Incorporated by reference from
to Transaction Agreement between the Company the Company's Form 10-K for the
and State Street Bank and Trust Company (Trustee) year ended January 30, 1999.
dated as of November 13, 1995.
(10.45) Fourth Amendment dated as of January 21, 1999 Incorporated by reference from
to Master Lease between the Company and State the Company's Form 10-K for the
Street Bank and Trust Company (Trustee) dated year ended January 30, 1999.
as of November 13, 1995.
(10.46) Amendment No. 4 dated as of January 22, 1999 Incorporated by reference from
to the Amended and Restated Credit Agreement the Company's Form 10-K for the
dated as of April 21, 1995 among the Company, year ended January 30, 1999.
the Banks signatory thereto and The Chase
Manhattan Bank, as Agent.
(10.47) Note purchase agreement dated January 26, 1999 The Company hereby agrees to
relating to the sale of the Company's Series A file such document upon request
and Series B Senior Notes used for the financing of the Securities and Exchange
of the Company's self tender offer. Commission.
(10.48) 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.
(10.49) Amendments to The Pep Boys Savings Plan Incorporated by reference from
the Company's Form 10-Q for the
quarter ended May 1, 1999.
(10.50) 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.
(10.51) Amendment No. 5 dated as of July 23, 1999 Incorporated by reference from
to the Amended and Restated Credit the Company's Form 10-Q for the
Agreement dated as of April 21, 1995 among quarter ended July 31, 1999.
the Pep Boys - Manny, Moe & Jack, the Banks
signatory thereto and the Chase Manhattan
Bank, as Agent.
(10.52)* 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.
(11) Computation of Earnings per Share
(12) Computation of Ratio of Earnings
to Fixed Charges
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
(27) Financial Data Schedule
(b) None
* Management contract or compensatory plan or arrangement.
51
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: April 28, 2000 by: /s/ George Babich Jr.
-------------- ---------------------
George Babich Jr.
Senior Vice President and
Chief Financial Officer
52
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ---------- -------- ----
/s/ Mitchell G. Leibovitz Chairman of the Board, President April 28, 2000
Mitchell G. Leibovitz and Chief Executive Officer
(Principal Executive Officer)
/s/ George Babich Jr. Senior Vice President - April 28, 2000
George Babich Jr. Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Lennox K. Black Director April 28, 2000
Lennox K. Black
/s/ Bernard J. Korman Director April 28, 2000
Bernard J. Korman
/s/ J. Richard Leaman, Jr. Director April 28, 2000
J. Richard Leaman, Jr.
/s/ Malcolmn D. Pryor Director April 28, 2000
Malcolmn D. Pryor
/s/ Lester Rosenfeld Director April 28, 2000
Lester Rosenfeld
/s/ Benjamin Strauss Director April 28, 2000
Benjamin Strauss
/s/ Myles H. Tanenbaum Director April 28, 2000
Myles H. Tanenbaum
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FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT
TO THE REQUIREMENTS OF FORM 10-K
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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 January 29, 2000 $996 $3,254 $ - $3,424 $826
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended January 30, 1999 $265 $1,643 $ - $912 $996
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended January 31, 1998 $252 $541 $ - $528 $265
- ----------------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off.
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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 26
Consolidated Balance Sheets - January 29, 2000
and January 30, 1999 27
Consolidated Statements of Earnings - Years ended January 29,
2000, January 30, 1999 and January 31, 1998 28
Consolidated Statements of Stockholders' Equity Years ended
January 29, 2000, January 30, 1999 and January 31, 1998 29
Consolidated Statements of Cash Flows - Years ended January 29,
2000, January 30, 1999 and January 31, 1998 30
Notes to Consolidated Financial Statements 31
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
(3.3) Amendment to By-Laws
(Declassification of Board of Directors)
(11) Computation of Earnings per Share
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
(27) Financial Data Schedule
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