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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 February 1, 2003
OR
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 1-3381
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The Pep Boys - Manny, Moe & Jack
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0962915
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3111 West Allegheny Avenue, Philadelphia, PA 19132
- --------------------------------------------- ---------
(Address of principal executive office) (Zip code)
215-430-9000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $1.00 par value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (x)
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes X No
----- -----
As of the close of business on April 5, 2003, the aggregate market value of the
voting stock held by nonaffiliates of the registrant was approximately
$386,587,362.
As of April 5, 2003, there were 53,844,848 shares of the registrant's common
stock outstanding.
2
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 28, 2003.
3
This Annual Report on Form 10-K for the year ended February 1, 2003 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.
4
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 sale of automotive parts, tires and accessories and the provision of
automotive maintenance and service including the installation of parts,
tires and accessories. The Company's primary operating unit is its SUPERCENTER
format. As of February 1, 2003, the Company operated 629 stores consisting of
616 SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of 6,527
service bays, as well as 12 non-service/non-tire format PEP BOYS EXPRESS
stores. The Company operates approximately 12,867,000 gross square feet of
retail space, including service bays. The SUPERCENTERS average approximately
20,700 square feet and the 12 PEP BOYS EXPRESS stores average approximately
9,600 square feet. The Company believes that its unique SUPERCENTER format
offers the broadest capabilities in the industry and positions the Company to
gain market share and increase its profitability by serving "do-it-yourself"
(retail) and "do-it-for-me" (service labor, installed merchandise/commercial
and tires) customers with the highest quality merchandise and service
offerings.
5
As of February 1, 2003 the Company operated its stores in 36 states and Puerto
Rico. The following table indicates by state the number of stores of the
Company in operation at the end of fiscal 1999, 2000, 2001 and 2002 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 1999 THROUGH 2002
1999 2000 2001 2002
Year Year Year Year
State End Opened Closed End Opened Closed End Opened Closed End
- ------ --- ------ ------ --- ------ ------ --- ------ ------ ---
Alabama 1 - - 1 - - 1 - - 1
Arizona 23 - - 23 - - 23 - - 23
Arkansas 1 - - 1 - - 1 - - 1
California 136 - 1 135 - - 135 - 1 134
Colorado 8 - - 8 - - 8 - - 8
Connecticut 9 - 1 8 - - 8 - - 8
Delaware 6 - - 6 - - 6 - - 6
Florida 48 - 1 47 - - 47 - - 47
Georgia 26 - - 26 - - 26 - - 26
Illinois 25 - 1 24 - - 24 - - 24
Indiana 13 - 4 9 - - 9 - - 9
Kansas 2 - - 2 - - 2 - - 2
Kentucky 4 - - 4 - - 4 - - 4
Louisiana 12 - 2 10 - - 10 - - 10
Maine 1 - - 1 - - 1 - - 1
Maryland 19 - - 19 - - 19 - - 19
Massachusetts 10 - 2 8 - - 8 - - 8
Michigan 17 - 10 7 - - 7 - - 7
Minnesota 3 - - 3 - - 3 - - 3
Missouri 1 - - 1 - - 1 - - 1
Nevada 12 - - 12 - - 12 - - 12
New Hampshire 4 - - 4 - - 4 - - 4
New Jersey 28 - - 28 - - 28 1 - 29
New Mexico 8 1 1 8 - - 8 - - 8
New York 33 1 5 29 1 - 30 1 - 31
North Carolina 11 - - 11 - - 11 - - 11
Ohio 15 - 2 13 - - 13 - - 13
Oklahoma 6 - - 6 - - 6 - - 6
Oregon 3 - 3 - - - - - - -
Pennsylvania 46 - - 46 - 1 45 - - 45
Puerto Rico 25 2 - 27 - - 27 - - 27
Rhode Island 3 - - 3 - - 3 - - 3
South Carolina 6 - - 6 - - 6 - - 6
Tennessee 7 - - 7 - - 7 - - 7
Texas 61 - 1 60 - - 60 - - 60
Utah 6 - - 6 - - 6 - - 6
Virginia 17 - - 17 - - 17 - - 17
Washington 6 1 5 2 - - 2 - - 2
---- --- -- --- ---- -- ---- ---- -- ----
Total 662 5 39 628 1 1 628 2 1 629
=== == == === == == === == === ===
6
DEVELOPMENT
The Company's primary focus in fiscal 2002 was improving the performance of its
existing stores. Accordingly, during fiscal 2002, the Company only opened 2
SUPERCENTERS and closed 1 SUPERCENTER.
In fiscal 2003, the Company does not plan to open new stores and will
continue to focus much of its energy on improving the performance of its
existing stores. The Company anticipates spending approximately $36,400,000
in connection with maintaining and improving its stores and expects
funding to come from net cash generated by operating activities.
PRODUCTS AND SERVICES
Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries a similar product
line, with variations based on the number and type of cars registered in the
markets where the store is located. A full complement of inventory at a
typical SUPERCENTER includes an average of approximately 24,000 items
(approximately 23,000 items at a PEP BOYS EXPRESS store). The Company's
automotive product line includes: tires (not stocked at PEP BOYS EXPRESS
stores); batteries; new and remanufactured parts for domestic and import
vehicles; chemicals and maintenance items; car, truck, van and SUV accessories;
and mobile electronics.
In addition to offering a wide variety of high quality, name brand products,
the Company sells an array of high quality products under various private label
names. The Company sells tires under the names CORNELL (R) and FUTURA (R); and
batteries under the name PROSTART (R). The Company also sells wheel covers
under the name FUTURA (R); water pumps and cooling system parts under the name
PROCOOL (R); air filters, anti-freeze, chemicals, cv axles, lubricants, oil,
oil filters, oil treatments, transmission fluids, alloy wheels and wiper blades
under the name PROLINE (R); shock absorbers under the name PRO RYDER (R);
alternators, battery booster packs, and starters under the name PROSTART (R);
power steering hoses and power steering pumps under the name PROSTEER (tm);
brakes under the name PROSTOP (R); temperature gauges under the name
PROTEMP (R); and paints under the name VARSITY (R). All products sold by the
Company under various private label names accounted for approximately 33% of
the Company's merchandise sales in fiscal 2002 and approximately 34% in fiscal
2001 and 36% in fiscal 2000. Revenues from the sale of tires accounted for
16.0% of the Company's total revenues in fiscal 2002 and approximately 17.0%
in fiscal years 2001 and 2000. No other class of products accounted for as
much as 10% of the Company's total revenues.
7
The Company has service bays in 617 of its 629 locations. Each service
department performs virtually every type of automotive service (except body
work) ranging from complete engine diagnostics and repair to computerized wheel
alignment and balancing to tire, battery and accessory installation for both
domestic and import vehicles. Revenues from maintaining or repairing
automobiles and installing products, accounted for approximately 19.1%, 19.2%
and 19.1% of the Company's total revenues in fiscal 2002, 2001 and 2000,
respectively.
The Company's commercial automotive parts delivery program, branded PEP EXPRESS
PARTS (PEP) (R), is designed to increase the Company's market share with the
professional installer and to leverage its inventory investment. The program
satisfies the installed merchandise customer by taking advantage of the breadth
and quality of the Company's parts inventory as well as its experience
supplying its own service bays and mechanics. As of February 1, 2003, 495, or
approximately 79%, of the Company's stores provide commercial parts delivery.
The Company has a point-of-sale system in all of its stores which gathers sales
and gross profit data by stock-keeping unit from each store on a daily basis.
This information is then used by the Company to help formulate its pricing,
marketing and merchandising strategies.
The Company has an electronic parts catalog and an electronic commercial
invoicing system in all of its stores.
The Company has an electronic work order system in all of its service centers.
This system creates a service history for each vehicle, provides customers
with a comprehensive sales document and enables the Company to maintain a
service customer database.
The Company primarily uses an "Everyday Low Price" (EDLP) strategy in
establishing its selling prices. Management believes that EDLP provides better
value to its customers on a day-to-day basis, helps level customer demand and
allows more efficient management of inventories. On occasion, the Company
employs a promotional pricing strategy on select items to drive increased
customer traffic.
The Company uses various forms of advertising to promote its category-dominant
product offering, its state-of-the-art automotive service and repair
capabilities and its commitment to customer service and satisfaction. The
Company's advertising vehicles include, but are not limited to, television and
radio commercials, newspaper inserts and 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 2002, approximately 49% 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.
8
STORE OPERATIONS AND MANAGEMENT
All Pep Boys stores are open seven days a week. Each SUPERCENTER generally has
a manager, a service manager and one or more assistant managers. Each PEP BOYS
EXPRESS store has a manager and one or more assistant managers. Stores with
the PEP EXPRESS PARTS program have a commercial sales manager in addition to
the management previously mentioned. A store manager's average length of
service with the Company is approximately seven years.
The Company coordinates the operation and merchandising of each store through a
network of district and regional managers. The regional managers report to the
Divisional Vice Presidents of Operations, who report to the Company's Vice
President of Customer Satisfaction, who reports to the Company's Senior Vice
President - Store Operations, who reports to the Company's President & Chief
Financial Officer, who reports to the Company's Chairman of the Board & Chief
Executive Officer. Supervision and control over the individual stores are
facilitated by means of the Company's computer system, operational handbooks
and regular visits to the individual stores by the district operations managers
and loss prevention personnel.
All of the Company's advertising, accounting, purchasing and most of its
management information systems and administrative functions are conducted at
its corporate headquarters in Philadelphia, Pennsylvania. Certain
administrative functions for the Company's western, southwestern, southeastern,
midwestern and Puerto Rico operations are performed at various regional offices
of the Company. See "Properties."
INVENTORY CONTROL AND DISTRIBUTION
Most of the Company's merchandise is distributed to its stores from its
warehouses primarily by dedicated and contract carriers. Target levels of
inventory for each product have been established for each of the Company's
warehouses and stores and are based upon prior shipment history, sales trends
and seasonal demand. Inventory on hand is compared to the target levels on a
weekly basis at each warehouse. If the inventory on hand at a warehouse is
below the target levels, the Company's buyers order merchandise from its
suppliers.
Each Pep Boys store has an automatic inventory replenishment system that
automatically orders additional inventory when a store's inventory on hand
falls below the target level. In addition, the Company's centralized buying
system, coupled with continued advancement in its warehouse and distribution
systems, has enhanced the Company's ability to control its inventory.
9
SUPPLIERS
During fiscal 2002, the Company's ten largest suppliers accounted for
approximately 48% of the merchandise purchased by the Company. No single
supplier accounted for more than 21% of the Company's purchases. The Company
has no long-term contracts under which the Company is required to purchase
merchandise. Management believes that the relationships the Company has
established with its suppliers are generally good.
In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply and believes that adequate alternative sources
of supply exist, at substantially similar cost, for virtually all types of
merchandise sold in its stores.
COMPETITION
The business of the Company is generally highly competitive. The Company
encounters competition from nationwide and regional chains and from local
independent merchants. The Company's competitors include general, full
range, discount or traditional department stores which carry automotive
parts and accessories and/or have automotive service centers, as well as
specialized automotive retailers similar to the Company. Generally, the
specialized automotive retailers focus on either the "do-it-yourself" or
"do-it-for-me" areas of the business. The Company believes that its
operation in both the "do-it-yourself" and "do-it-for-me" areas of the business
positively differentiates it from most of its competitors. However, certain of
its competitors are larger in terms of sales volume, store size, and/or number
of stores, have access to greater capital and management resources and have
been operating longer in particular geographic areas than the Company.
Although the Company's competition varies by geographic area, the Company
believes that it generally has a favorable competitive position in terms of
depth and breadth of product line, price, quality of personnel and customer
service.
The Company believes that its warranty policies in connection with the higher
priced items it sells, such as tires, batteries, brake linings and other major
automotive parts and accessories, are comparable or superior to those of its
competitors.
REGULATION
The Company is subject to federal, state and local provisions relating
to the protection of the environment, including provisions with respect to the
disposal of oil at its store locations. Estimated capital expenditures
relating to compliance with such environmental provisions are not deemed
material.
10
EMPLOYEES
At February 1, 2003, the Company employed 21,705 persons as follows:
Full-time Part-time Total
Description Numbers % Numbers % Numbers %
------- ---- ------- ---- ------- ----
Store Sales 6,464 44.3 5,173 72.6 11,637 53.6
Store Service 6,149 42.1 1,821 25.6 7,970 36.7
------- ----- ----- ----- ------- -----
STORE TOTAL 12,613 86.4 6,994 98.2 19,607 90.3
Warehouses 764 5.3 106 1.5 870 4.0
Offices 1,205 8.3 23 .3 1,228 5.7
------- ------ ------- ------- ------- ------
TOTAL EMPLOYEES 14,582 100.0 7,123 100.0 21,705 100.0
====== ===== ===== ===== ====== =====
The Company had no union employees as of February 1, 2003. At the end of
fiscal 2001, the Company employed 16,049 full-time and 6,152 part-time
employees and at the end of fiscal 2000, the Company employed 17,082
full-time and 6,054 part-time employees.
11
RISK FACTORS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Annual
Report on Form 10-K and other materials filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contain statements that are forward-looking. Such statements may relate to
trends in the automotive aftermarket, competition, business development
activities, future capital expenditures, financing sources and availability,
and the effects of regulation. Although the Company believes that the
expectations reflected in such forward-looking statements are based on
reasonable assumptions, it can give no assurance that its expectations will
be achieved. The Company's actual results may differ materially from the
results discussed in the forward-looking statements due to factors beyond the
control of the Company, including the strength of the national and regional
economies and retail and commercial consumers' ability to spend, the health of
the various sectors of the automotive aftermarket, the weather in geographical
regions with a high concentration of the Company's stores, competitive pricing,
location and number of competitors' stores and product and labor costs. The
Company assumes no obligation to update or supplement forward-looking
statements that become untrue because of subsequent events. The Company refers
to itself as "we" or "our" in the following risk factors.
Risks Related to Pep Boys
If we are unable to generate sufficient cash flows from our operations, our
liquidity will suffer and we may be unable to satisfy our obligations.
We require significant capital to fund our business. While we believe we
have the ability to sufficiently fund our planned operations and capital
expenditures for fiscal 2003, circumstances could arise that would
materially affect our liquidity. For example, cash flows from our
operations could be affected by changes in consumer spending habits or the
failure to maintain favorable vendor payment terms or our inability to
successfully implement sales growth initiatives. We may be unsuccessful in
securing alternative financing when needed, on terms that we consider
acceptable, or at all.
In September 2000, we entered into a $143.0 million real estate operating
lease facility with leased property trusts established through an
unconsolidated special purpose entity. As of February 1, 2003, the
outstanding balance under the real estate operating lease facility was
$132.0 million, which is off balance sheet, in accordance with generally
accepted accounting principles. Recent changes in accounting standards for
special purpose entities (now referred to as variable interest entities)
will result in the consolidation of this entity with us, effective on
August 3, 2003, unless we are able to refinance this lease facility in such
a way that we will continue to account for this facility as off balance
sheet in accordance with the new accounting guidance of FASB Interpretation
46, "Consolidation of Variable Interest Entities."
We depend on our relationships with our vendors and a disruption of these
relationships or of our vendors' operations could have a material adverse
effect on our business and results of operations.
Our business depends on developing and maintaining productive relationships
with our vendors. Many factors outside our control may harm these
relationships. For example, financial difficulties that some of our vendors
may face may increase the cost of the products we purchase from them. In
addition, our failure to promptly pay, or order sufficient quantities of
inventory from, our vendors may increase the cost of products we purchase or
may lead to vendors refusing to sell products to us at all. The recent trend
towards consolidation among automotive parts suppliers may also disrupt our
relationship with some vendors. To enhance our supply of top-quality,
competitively-priced tires and batteries, we have selected a primary vendor
who supplies over 90% of our needs in each of these two product categories.
While each of these vendors is contractually obligated to satisfy all of our
product needs in the respective categories and we maintain contingency plans
to minimize the impact of a supply chain disruption from these vendors,
there can be no assurance that these relationships can be maintained without
disruption. A disruption of our vendor relationships or a disruption in our
vendors' operations could have a material adverse effect on our business and
results of operations.
12
We depend on our senior management team and our other personnel, and we face
substantial competition for qualified personnel.
Our success depends on the efforts of our senior management team. No
assurance can be given that the loss of one or more of our executive
officers would not have an adverse impact on us.
Our continued success will also be dependent upon our ability to retain
existing, and attract additional, qualified field personnel to meet our
needs. We face substantial competition, both from within and outside of
the automotive aftermarket to retain and attract qualified personnel. In
addition, we believe that the number of qualified automotive service
technicians in the industry is insufficient to meet demand.
We are subject to environmental laws and may be subject to environmental
liabilities that could have a material adverse effect on us in the future.
We are subject to various federal, state and local laws and governmental
regulations relating to the operation of our business, including those
governing the handling, storage and disposal of hazardous substances
contained in the products we sell and use in our service bays, the recycling
of batteries, tires and used lubricants, and the ownership and operation of
real property. As a result of investigations undertaken in connection with a
number of our store acquisitions and financings, we are aware that soil or
groundwater may be contaminated at some of our properties. There can be no
assurance that compliance with environmental laws and regulations will not
have a material adverse effect on us in the future.
Over the year we intend to install a new point-of-sale information system, and
if the systems integration is not completed on schedule, within budget, or at
all, we may be at a competitive disadvantage relative to our competitors.
We are currently developing and intend, over the next year, to introduce a
fully integrated web-enabled system in all of our stores that we expect will
improve our stores' operating efficiency and product sourcing. With our
outside vendors, we are currently developing the software and designing the
hardware architecture to implement this system and expect to begin a store
by store roll-out by the end of 2003. There can be no assurance that the
development and introduction of our new store system will be completed on
schedule, within budget, or at all. In addition to increased demand on
capital which would be caused by difficulties in the development and
introduction of our new store system, delays in its introduction could lead
to a competitive disadvantage relative to our competitors.
Risks Related to Our Industry
Our industry is highly competitive, and price competition in some categories of
the automotive aftermarket or a loss of trust in our participation in the
"do-it-for-me" market, could cause a material decline in our revenues and
earnings.
The automotive aftermarket retail and service industry is highly competitive
and subjects us to a wide variety of competitors. We compete primarily with
the following types of businesses in each category of the automotive
aftermarket:
13
Do-It-Yourself
Retail
* automotive parts and accessories stores
* automobile dealers that supply manufacturer replacement parts and
accessories
* mass merchandisers and wholesale clubs that sell automotive products
Do-It-For-Me
Service Labor
* regional and local full service automotive repair shops
* automobile dealers that provide repair and maintenance services
* national and regional (including franchised) tire retailers that provide
additional automotive repair and maintenance services
* national and regional (including franchised) specialized automotive (such
as exhaust, brake and transmission) repair facilities that provide
additional automotive repair and maintenance services
Installed Merchandise/Commercial
* mass merchandisers, wholesalers and jobbers (some of which are associated
with national parts distributors or associations)
Tire Sales
* national and regional (including franchised) tire retailers
* mass merchandisers and wholesale clubs that sell tires
A number of our competitors have more financial resources, are more
geographically diverse or have better name recognition than us, which might
place us at a competitive disadvantage to those competitors. Because we seek
to offer competitive prices, if our competitors reduce their prices we may
be forced to reduce our prices, which could cause a material decline in our
revenues and earnings and hinder our ability to service our debt.
With respect to the service labor category, the majority of consumers are
unfamiliar with their vehicle's mechanical operation and, as a result, often
select a service provider based on trust. Potential occurrences of negative
publicity associated with the Pep Boys brand, the products we sell or
installation or repairs performed in our service bays, whether or not
factually accurate, could cause consumers to lose confidence in our products
and services in the short or long term, and cause them to choose our
competitors for their automotive service needs.
Vehicle miles driven may decrease, resulting in a decline of our revenues and
negatively affecting our results of operations.
Our industry depends on the number of vehicle miles driven. Factors that may
cause the number of vehicle miles and our revenues and our results of
operations to decrease include:
* the weather-as vehicle maintenance may be deferred during periods of
inclement weather
* the economy-as during periods of poor economic conditions, customers may
defer vehicle maintenance or repair, and during periods of good economic
conditions, consumers may opt to purchase new vehicles rather than service
the vehicles they currently own and replace worn or damaged parts
* gas prices-as increases in gas prices may deter consumers from using their
vehicles
* travel patterns-as changes in travel patterns may cause consumers to rely
more heavily on train and airplane transportation
14
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 57 24 Chairman of the Board since 1994;
Chief Executive Officer
since 1990
George Babich, Jr. 51 7 President since 2002; Chief
Financial Officer since 2000
Mark L. Page 46 27 Senior Vice President - Store
Operations since 1993
Frederick A. Stampone 47 20 Senior Vice President since 1987;
Chief Administrative Officer
since 1993; Secretary since 1988
Don Casey 51 3 Senior Vice President -
Merchandise Supply Chain
since 2000
Messrs. Leibovitz, Page and Stampone have been executive officers
of the Company for more than the past five years. In December 2002, the
Company's Board of Directors determined that, after 24 years of valued
and loyal service to the Company, it was in the best interests of the
Company, its shareholders and Mr. Leibovitz to plan for Mr. Leibovitz's
eventual retirement and to initiate the process of seeking his successor.
In connection therewith, the Company notified Mr. Leibovitz of its
intention not to renew his employment agreement. Mr. Leibovitz' successor,
Lawrence N. Stevenson, was appointed Chief Executive Officer
on April 28, 2003.
Mr. Babich was elected to his current position effective March 16, 2002.
From March 2001 until March 2002, Mr. Babich served as Executive Vice President
and Chief Financial Officer. From March 2000 until March 2001, Mr. Babich
served as Senior Vice President - Finance and Chief Financial Officer. From
September 1996 through March 2000, Mr. Babich served as Vice President -
Finance.
Mr. Casey rejoined the Company as Senior Vice President-Merchandising in
July 2000. From June 1999 through June 2000, Mr. Casey was Vice President of
Purchasing and Supply Chain for Discount Auto Parts, Inc. From February 1987
through May 1999, Mr. Casey served in various merchandising positions of
increasing seniority with the Company.
Each of the officers serves at the pleasure of the Board of Directors of the
Company.
15
ITEM 2 PROPERTIES
The Company owns its five-story, approximately 300,000 square foot corporate
headquarters in Philadelphia, Pennsylvania. The Company also owns the following
administrative regional offices -- approximately 4,000 square feet of space in
each of Melrose Park, Illinois and Bayamon, Puerto Rico. In addition, the
Company leases approximately 4,000 square feet of space for administrative
regional offices in each of Decatur, Georgia and Richardson, Texas. The
Company owns a three-story, approximately 60,000 square foot structure in Los
Angeles, California in which it occupies 7,200 square feet and leases the
remainder to tenants.
Of the 629 store locations operated by the Company at February 1, 2003, 343 are
owned and 286 are leased.
The following table sets forth certain information regarding the owned and
leased warehouse space utilized by the Company for its 629 store locations at
February 1, 2003:
Warehouse Products Square Owned or Stores States
Location Warehoused Footage Leased Serviced Serviced
- --------- ---------- ------- ------ -------- -------
Los Angeles, CA All except 216,000 Owned 164 AZ, CA, NM,
tires NV, UT, WA
Los Angeles, CA Tires/parts 73,000 Leased 164 AZ, CA, NM,
NV, UT, WA
Los Angeles, CA All except 137,000 Leased 164 AZ, CA, NM,
tires NV, UT, WA
Atlanta, GA All 392,000 Owned 139 AL, FL, GA,
LA, NC, PR,
SC, TN, VA
Mesquite, TX All 244,000 Owned 96 AR, AZ, CO,
LA, NM, OK,
TX
Plainfield, IN All 403,000 Leased 91 IL, IN, KS,
KY, MI, MN,
MO, NY, OH,
OK, PA, TN,
VA
Chester, NY All 400,400 Leased 139 CT, DE, MA,
---------- MD, ME, NH,
NJ, NY, PA,
RI, VA
Total 1,865,400
==========
The Company anticipates that its existing warehouse space will accommodate
inventory necessary to support store expansion and any increase in
stock-keeping units through the end of fiscal 2003.
16
ITEM 3 LEGAL PROCEEDINGS
The Company's California subsidiary is a defendant in a consolidated action
entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack" that is currently
pending in the California Superior Court in Orange County. The two consolidated
actions were originally filed on March 29, 2000 and July 25, 2000.
Plaintiffs are former and current store management employees who claim that
they were improperly classified as exempt from the overtime provisions of
California law and seek to be compensated for all overtime hours worked.
Plaintiffs filed a Motion to certify the case as a class action to represent
all persons employed in California as salaried store managers, assistant store
managers, service managers and assistant service managers since March 29, 1996.
Plaintiffs' Motion to certify the case as a class action was previously granted
by the trial court. The Company's appeals of that decision through the
California Supreme Court were unsuccessful. The Company is now preparing to
move the trial court for reconsideration of its decision to certify the class.
No trial date has been set for the underlying case. The Company intends to
vigorously defend this action and believes that it is not material to the
Company's financial position. An adverse outcome in this action, however,
may have a material adverse effect on the Company's results of operations
for the year in which a judgment, if any, is rendered.
An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys
Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was
previously instituted against the Company in the Court of First Instance of
Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was
subsequently removed to, and is currently pending in, the United States
District Court for the District of Puerto Rico. Plaintiffs are distributors of
a product that claims to improve gas mileage. The plaintiffs allege that the
Company entered into an agreement with them to act as the exclusive retailer of
the product in Puerto Rico that was breached when the Company determined to
stop selling the product. The Company became aware of a Federal Trade
Commission investigation regarding the accuracy of advertising claims
concerning the product's effectiveness. The plaintiffs further allege that
they were negotiating with the manufacturer of the product to obtain the
exclusive distribution rights throughout the United States and that those
negotiations failed. Plaintiffs are seeking damages including payment for the
product that they allege Pep Boys ordered and expenses and loss of sales in
Puerto Rico and the United States resulting from the alleged breach. The
Company believes that the claims are without merit and continues to vigorously
defend this action.
The Company is also party to various other lawsuits and claims, including
purported class actions, arising in the normal course of business. In the
opinion of management, these lawsuits and claims, are not, singularly or in the
aggregate, material to the Company's financial position or results of
operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended February 1, 2003.
17
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 3,029 registered
shareholders of the Company's common stock as of February 1, 2003. The
following table sets forth for the periods listed, the high and low sale prices
and the cash dividends paid on the Company's common stock.
- ---------------------------------------------------------------------------------------------------------------
MARKET PRICE PER SHARE
Market Price Per Share Cash Dividends
Fiscal year ended February 1, 2003 High Low Per Share
- ----------------------------------- ---- --- ---------
First Quarter $19.38 $13.55 $.0675
Second Quarter 19.04 10.75 .0675
Third Quarter 15.23 8.75 .0675
Fourth Quarter 12.64 10.06 .0675
Fiscal year ended February 2, 2002
- ----------------------------------
First Quarter $ 7.00 $ 4.40 $.0675
Second Quarter 13.97 5.35 .0675
Third Quarter 13.70 8.80 .0675
Fourth Quarter 18.48 11.88 .0675
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.
EQUITY COMPENSATION PLANS
The following table sets forth The Company's shares authorized for issuance
under its equity compensation plans at February 1, 2003:
Equity Equity
compensation compensation
plans approved plans not approved
by shareholders by shareholders Total
- --------------------------------------------------------------------------------------
Number of securities to
be issued upon exercise
of outstanding options 6,898,170 - 6,898,170
Weighted average exercise
price of outstanding
options $ 16.57 $ - $ 16.57
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in top row) 2,390,104 - 2,390,104
- --------------------------------------------------------------------------------------
18
ITEM 6 SELECTED FINANCIAL DATA
The following tables sets forth the selected financial data for the Company and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto included elsewhere herein.
SELECTED FINANCIAL DATA (UNAUDITED)
(dollar amounts in thousands, except per share amounts)
Year ended Feb. 1, 2003 Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999
- --------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Merchandise sales $ 1,756,675 $ 1,765,643 $ 1,957,480 $ 1,954,010 $ 1,991,340
Service revenue 415,813 418,917 460,988 440,523 407,368
Total revenues 2,172,488 2,184,560 2,418,468 2,394,533 2,398,708
Gross profit from merchandise sales 529,848 (1) 515,235 (2) 452,038 (3) 538,957 492,443 (4)
Gross profit from service revenue 104,263 (1) 103,006 (2) 79,813 (3) 84,078 79,453
Total gross profit 634,111 (1) 618,241 (2) 531,851 (3) 623,035 571,896 (4)
Selling, general and
administrative expenses 520,446 (1) 513,946 (2) 559,883 (3) 528,838 517,827 (4)
Operating profit (loss) 113,665 (1) 104,295 (2) (28,032) (3) 94,197 54,069 (4)
Non-operating income 3,097 3,444 2,245 2,327 2,145
Interest expense 46,858 51,335 57,882 51,557 48,930
Earnings (Loss) before income taxes and
extraordinary items 69,904 (1) 56,404 (2) (83,669) (3) 44,967 7,284 (4)
Net earnings (loss) before extraordinary items 44,039 (1) 36,100 (2) (53,148) (3) 29,303 4,974 (4)
Extraordinary items (239) (765) 2,054 - -
Net earnings (loss) 43,800 (1) 35,335 (2) (51,094) (3) 29,303 4,974 (4)
BALANCE SHEET DATA
Working capital $ 130,680 $ 115,201 $ 122,741 $ 185,206 $ 251,935
Current ratio 1.24 to 1 1.21 to 1 1.22 to 1 1.35 to 1 1.51 to 1
Merchandise inventories $ 488,882 $ 519,473 $ 547,735 $ 582,898 $ 527,397
Property and equipment - net 1,088,037 1,117,486 1,194,235 1,335,749 1,330,256
Total assets 1,799,910 1,806,135 1,898,084 2,064,948 2,089,993
Long-term debt (includes
all convertible debt) 525,577 544,418 654,194 784,024 691,714
Stockholders' equity 649,992 617,790 594,766 658,284 811,784
DATA PER COMMON SHARE
Basic earnings (loss) before
extraordinary items $ .85 (1) $ .70 (2) $ (1.04) (3) $ .58 $ .08 (4)
Basic earnings (loss) .85 (1) .69 (2) (1.00) (3) .58 .08 (4)
Diluted earnings (loss) before
extraordinary items .82 (1) .69 (2) (1.04) (3) .58 .08 (4)
Diluted earnings (loss) .82 (1) .68 (2) (1.00) (3) .58 .08 (4)
Cash dividends .27 .27 .27 .27 .26
Stockholders' equity 12.59 12.01 11.60 12.91 13.18
Common share price range:
high 19.38 18.48 7.69 21.63 26.69
low 8.75 4.40 3.31 7.13 12.38
OTHER STATISTICS
Return on average
stockholders' equity 6.9% 5.8% (8.2)% 4.0% 0.6%
Common shares issued and outstanding 51,644,578 51,430,861 51,260,663 50,994,099 61,615,140
Capital expenditures $ 43,911 $ 25,375 $ 57,336 $ 104,446 $ 167,876
Number of retail outlets 629 628 628 662 638
Number of service bays 6,527 6,507 6,498 6,895 6,608
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes pretax charges of $2,529 related to the Profit Enhancement Plan
of which $2,014 reduced gross profit from merchandise sales, $491 reduced
gross profit from service revenue and $24 was included in selling, general
and administrative expenses.
(2) Includes pretax charges of $5,197 related to the Profit Enhancement Plan
of which $4,169 reduced gross profit from merchandise sales, $813 reduced
gross profit from service revenue and $215 was included in selling, general
and administrative expenses.
(3) Includes pretax charges of $74,945 related to the Profit Enhancement Plan
of which $67,085 reduced the gross profit from merchandise sales, $5,232
reduced gross profit from service revenue and $2,628 was included in
selling, general and administrative expenses.
(4) Includes pretax charges of $29,451 ($20,109 net of tax or $.33 per
share-basic and diluted), $27,733 of which reduced gross profit from
merchandise sales with the remaining $1,718 included in selling, general
and administrative expenses. These charges were associated with the closure
and sale of 109 Express stores.
19
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise principally from the capital expenditures
related to existing stores, offices and warehouses, the need to finance the
acquisition, construction and equipping of new stores and to purchase
inventory. The primary capital expenditures for fiscal 2002 were attributed to
capital maintenance of the Company's existing stores and offices. The Company
opened two new stores in fiscal 2002, compared with one new store in fiscal
2001 and five new stores in fiscal 2000. In fiscal 2002, the Company increased
its levels of capital expenditures 73.1% compared to fiscal 2001. In fiscal
2002, with a decrease in net inventory levels offset, in part, by the increase
in capital expenditures, the Company decreased its debt by $41,574,000 and
increased its cash and cash equivalents by $26,789,000. In fiscal 2001, with a
decrease in net inventory levels coupled with decreased levels of capital
expenditures, the Company decreased its debt by $143,913,000 and increased its
cash and cash equivalents by $7,986,000. In fiscal 2000, with an increase in
net inventory levels offset, in part, by decreased levels of capital
expenditures, the Company increased its debt by $28,739,000 and decreased its
cash and cash equivalents by $10,490,000. The following table indicates the
Company's principal cash requirements for the past three fiscal years:
(dollar amounts Fiscal Fiscal Fiscal
in thousands) 2002 2001 2000 Total
- ---------------------------------------------------------------------------------------------------------------
Cash Requirements:
Capital expenditures $ 43,911 $ 25,375 $ 57,336 $126,622
Net inventory
(decrease) increase(1) (14,559) (39,592) 80,148 25,997
- ---------------------------------------------------------------------------------------------------------------
Total $ 29,352 $ (14,217) $137,484 $152,619
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities
(excluding the change
in net inventory) $123,841 $128,301 $ 99,739 $351,881
- ---------------------------------------------------------------------------------------------------------------
(1) Net inventory (decrease) increase is the change in inventory less the
change in accounts payable.
In fiscal 2002, merchandise inventories decreased as the Company continued its
focus on improving inventory management. Additionally, the Company decreased
the average number of stock-keeping units per store to approximately 24,000 in
fiscal 2002, compared to 25,000 in fiscal 2001 and 26,000 in fiscal 2000. In
fiscal 2001, merchandise inventories decreased as the Company maintained its
net store count and completed the exit of the two distribution centers closed
in fiscal 2000 as part of the Profit Enhancement Plan. In fiscal 2000,
merchandise inventories decreased as the Company decreased its net store count
by 34 and closed the two distribution centers.
The Company's working capital was $130,680,000 at February 1, 2003,
$115,201,000 at February 2, 2002 and $122,741,000 at February 3, 2001. The
Company's long-term debt, as a percentage of its total capitalization, was 45%
at February 1, 2003, 47% at February 2, 2002 and 52% at February 3, 2001. As of
February 1, 2003, the Company had an available line of credit totaling
$139,047,000.
The Company has no plans to open any new stores in fiscal 2003. Management
estimates capital expenditures relating to existing stores, warehouses and
offices during fiscal 2003 will be approximately $55,000,000. The Company
anticipates that its net cash provided by operating activities and its existing
line of credit will exceed its principal cash requirements for capital
expenditures and net inventory in fiscal 2003.
20
The following tables represent the Company's total contractual obligations
and commercial commitments as of February 1, 2003:
(dollar amounts
in thousands) Due in less Due in Due in Due after
Obligation Total than 1 year 1-3 years 3-5 years 5 years
- ---------------------------------------------------------------------------------------------
Long-term debt (1) $ 626,711 $101,183 $226,579 $298,703 $ 246
Operating leases 500,640 46,640 80,119 72,800 301,081
Capital leases 748 699 49 - -
Unconditional purchase
obligation 23,393 5,993 17,400 - -
Other 4,900 4,900 - - -
- ---------------------------------------------------------------------------------------------
Total Cash Obligations $1,156,392 $159,415 $324,147 $371,503 $301,327
- ---------------------------------------------------------------------------------------------
(1) Long-term debt includes current maturities.
(dollar amounts
in thousands) Due in less Due in Due in Due after
Commercial Commitments Total than 1 year 1-3 years 3-5 years 5 years
- ---------------------------------------------------------------------------------------------
Import letters
of credit $ 2,399 $ 2,399 $ - $ - $ -
Standby letters
of credit 40,480 40,480 - - -
Surety bonds 9,375 9,375 - - -
- ---------------------------------------------------------------------------------------------
Total Commercial
Commitments $ 52,254 $ 52,254 $ - $ - $ -
- ---------------------------------------------------------------------------------------------
The other commitment due in the next year of $4,900,000 is related to the
non-renewal of the Chairman and CEO's employment agreement. The letters of
credit are used primarily to secure the Company's insurance claims and are
renewable on an annual basis. The operating leases shown above are exclusive of
any lease obligations for stores for which reserves were created in conjunction
with the Profit Enhancement Plan. The Company anticipates that its net cash
provided by operating activities, its existing line of credit and its access to
capital markets will exceed its cash obligations presented in the tables above.
In January 2003, the Company reclassified $6,000,000 of other notes payable,
due January 1, 2004, to current liabilities on the consolidated balance sheet.
In the third quarter of fiscal 2002, the Company retired $42,875,000 aggregate
principal amount of the remaining $43,005,000 of the Medium-Term Notes with an
original maturity date of September 2007. These notes were redeemed at the
option of the holders. The Company repurchased these notes with a portion of
the proceeds from the sale of the 4.25% Senior Convertible Notes. The after-tax
extraordinary loss was $110,000.
In the second quarter of fiscal 2002, the Company reclassified the $75,000,000,
6.625% notes with a stated maturity date of May 15, 2003 to current liabilities
on the consolidated balance sheet. The Company anticipates being able to
repurchase these notes with cash from operations and its existing line of
credit.
In the second quarter of fiscal 2002, the Company retired $49,915,000 aggregate
principal amount of the $50,000,000 Medium-Term Notes with an original maturity
date of July 2007. These notes were redeemed at the option of the holders. The
Company repurchased these notes with a portion of the proceeds from the sale of
the 4.25% Senior Convertible Notes. The after-tax extraordinary loss was
$129,000.
21
On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of
4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and
jointly and severally guaranteed by the Company's wholly-owned direct and
indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California,
Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack
of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys common
stock at any time prior to their maturity unless they have been previously
repurchased or redeemed by the Company. The conversion rate is 44.6484 shares
per each $1,000 principal amount of notes, equivalent to a conversion price of
approximately $22.40 per share. Interest on the notes is payable by the Company
on June 1 and December 1 of each year, beginning December 1, 2002. The proceeds
from the sale of the notes were used to retire debt.
In fiscal 2001, the Company repurchased the remaining $241,504,000 face value
of its Liquid Yield Option Notes (LYONs). The book value of the repurchased
LYONs was $161,812,000 and the net after-tax extraordinary loss was $765,000.
In June 2001, the Company obtained $90,000,000 in a Senior Secured Credit
Facility. The facility, which is secured by certain equipment and real estate
with a total book value as of February 1, 2003 of $89,960,000, was issued in
two tranches. Tranche A is a term loan for $45,000,000 with an interest rate
based on London Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is
structured as a two-year term loan payable in equal installments with the final
payment due in 2003. Tranche B is a term loan for $45,000,000 with an interest
rate of LIBOR plus 3.95%. Tranche B is structured as a five-year term loan
payable in equal installments with the final payment due in 2006. The Senior
Secured Credit Facility is subject to certain financial covenants. The Company
used the proceeds from the facility to repurchase the outstanding LYONs that
were put back to the Company in fiscal 2001.
In May 2001, the Company sold certain operating assets for $14,000,000. The
assets were leased back from the purchaser in a lease structured as a one-year
term with three one-year renewal options. The resulting lease is being
accounted for as an operating lease and the gain of $3,817,000 from the sale of
the certain operating assets is deferred until the lease term is completed and
the residual guarantee is satisfied, at which time the gain will be recorded in
costs of merchandise sales and costs of service revenue on the consolidated
statement of operations. The Company used the proceeds from the sale to retire
debt.
In fiscal 2000, the Company repurchased $30,200,000 face value of its LYONs at
a price of $520 per LYON. The book value of the repurchased LYONs was
$19,226,000 and the after-tax extraordinary gain was $2,025,000.
In September 2000, the Company entered into a new revolving credit agreement.
The new revolving credit agreement provides up to $225,000,000 of borrowing
availability, which is collateralized by inventory and accounts receivable.
Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days
prior to each anniversary date, the Company may request and, upon agreement
with the bank, extend the maturity of this facility an additional year. The
interest rate on any loan is equal to the LIBOR plus 1.75%, and increases in
0.25% increments as the excess availability falls below $50,000,000. The
revolver is subject to financial covenants. The Company recorded an after-tax
extraordinary loss related to the restructuring of its revolving line of credit
of $931,000 in the third quarter of fiscal 2000.
22
In September 2000, the Company entered into a $143,000,000 real estate
operating lease facility with leased property trusts, established as an
unconsolidated special-purpose entity. The real estate operating lease
facility, which has an interest rate of LIBOR plus 1.85%, replaces $143,000,000
of leases, which had an interest rate of LIBOR plus 2.27%. The Company, as a
result of replacing the existing operating leases, recorded a pretax charge to
fiscal 2000 earnings of $1,630,000 of unamortized lease costs, which was
recorded in the costs of merchandise sales of the consolidated statement of
operations. The $143,000,000 real estate operating lease facility has a
four-year term with a guaranteed residual value. At February 1, 2003, the
Company had approximately $132,000,000 of real estate leased under the facility
and the maximum amount of the residual guarantee relative to the real estate
under the lease is approximately $92,372,000. The Company expects the fair
market value of the leased real estate, subject to the purchase option or sale
to a third party, to substantially reduce or eliminate the Company's payment
under the residual guarantee at the end of the lease term.
In September 2000, the Company retired $70,000,000 of Senior Notes, at par,
using the proceeds from the $225,000,000 revolving line of credit. The retired
notes were issued in a private placement in February 1999 in two tranches. The
first tranche was for $45,000,000 and had a coupon of 8.45% with a maturity of
2011. The second tranche was for $25,000,000 and had a coupon of 8.30% with a
maturity of 2009.
In June 2000, the Company repurchased $5,995,000 face value of the $49,000,000
Medium-Term Note. The after-tax extraordinary gain was $960,000.
PENSION PLANS
The Company has a defined benefit pension plan covering its full-time employees
hired on or before February 1, 1992 and an unfunded Supplemental Executive
Retirement Plan (SERP). The pension expense for fiscal 2002, 2001 and 2000 was
$3,243,000, $1,754,000 and $1,477,000, respectively. This expense is calculated
based upon a number of actuarial assumptions, including an expected return on
plan assets of 8.5% and a discount rate of 6.75%. In developing the expected
return on asset assumptions, the Company evaluated input from its actuaries,
including their review of asset class return expectations. The discount rate
utilized by the Company is based on a review of AA bond performance. The
Company intends to change the expected rate of return on plan assets to 6.75%
for fiscal 2003. Due to the effect of the unrecognized actuarial losses and
based upon an expected return on plan assets of 6.75%, a discount rate of 6.75%
and various other assumptions, the Company estimates the pension expense,
exclusive of settlement accounting discussed below, will approximate $3,750,000
for both plans in fiscal 2003. The Company will continue to evaluate its
actuarial assumptions and adjust as necessary. In fiscal 2002, the Company
contributed $6,975,000 to the defined benefit pension plan. Based upon the
current funded status of the defined benefit pension plan, cash contributions
are not anticipated in fiscal 2003.
In fiscal 2003, the Company anticipates an approximate settlement of
$12,200,000 related to the SERP obligation for the Chairman and CEO. This
obligation will result in an expense for settlement accounting under Statement
of Financial Accounting Standards (SFAS) No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," of approximately $4,900,000 in fiscal 2003.
23
EFFECTS OF INFLATION
The Company uses the LIFO method of inventory valuation. Thus, the cost of
merchandise sold approximates current cost. Although the Company cannot
accurately determine the precise effect of inflation on its operations, it does
not believe inflation has had a material effect on revenues or results of
operations during fiscal 2002, fiscal 2001 or fiscal 2000.
IMPAIRMENT CHARGES
During fiscal 2000, the Company, as a result of its ongoing review of the
performance of its stores, identified certain stores whose cash flow trend
indicated that the carrying value may not be fully recoverable. An impairment
charge of $5,735,000 was recorded for these stores in costs of merchandise
sales on the consolidated statement of operations. The charge reflects the
difference between carrying value and fair value. Fair value was based on sales
of similar assets or other estimates of fair value developed by Company
management. Management's judgment is necessary to estimate fair value.
Accordingly, actual results could vary from such estimates.
PROFIT ENHANCEMENT PLAN
In the third quarter of fiscal 2000, the Company comprehensively reviewed its
field, distribution and Store Support Center infrastructure and the performance
of each of its stores. As a result, the Company implemented a number of changes
that have improved its performance. These changes included the closure of 38
under-performing stores and two distribution centers and reductions in store
operating hours and the Store Support Center infrastructure.
PLAN UPDATE
The Company is progressing towards the disposal of the 38 stores (11 owned and
27 leased), two distribution centers and two development parcels that were
closed or abandoned in connection with the Profit Enhancement Plan. As of
February 1, 2003, the Company had disposed of 22 of the closed stores, the two
distribution centers and the two development parcels. During fiscal 2002, the
Company decided to lease rather than sell three of the closed stores due to
changes in the real estate market. As a result, the Company reclassified these
three owned properties as assets held for use. The Company estimates that the
remaining closed stores (one owned and 12 leased) will be disposed of by the
end of the third quarter of fiscal 2003.
ASSETS HELD FOR DISPOSAL
As of February 1, 2003, the assets held for disposal included the building and
land of one remaining closed store owned by the Company, which has a carrying
value of $1,146,000. This property was sold in the first quarter of fiscal
2003. The Company has sold nine of the 13 owned properties originally held for
sale, which included the two development parcels. Additionally, the Company
decided to lease rather than sell three of the closed stores due to changes in
the real estate market. As a result, the Company reclassified these three owned
properties as assets held for use at their estimated market value. The market
value of each such property was lower than cost adjusted for depreciation.
In fiscal 2002, the Company sold six and reclassified three (as assets held for
use) of the 13 owned properties. The six properties were sold for $8,446,000,
net of commissions, and resulted in a loss of $666,000, which was recorded in
costs of merchandise sales on the consolidated statement of operations. In
addition, the Company adjusted the carrying values of certain assets held for
disposal, which resulted in a net decrease of $160,000, which was recorded in
costs of merchandise sales on the consolidated statement of operations.
24
In fiscal 2001, the Company sold three of the 13 owned properties for
$4,103,000, net of commissions, and resulted in a loss of $691,000, which was
recorded in costs of merchandise sales and selling, general and administrative
expenses on the consolidated statement of operations. In addition, the Company
recorded a downward revision in the estimated values for certain properties of
$1,496,000 in fiscal 2001. This expense was recorded in costs of merchandise
sales on the consolidated statement of operations. In fiscal 2001, the Company
recorded a loss for equipment held for disposal of $162,000, which was due
primarily to a reduction in the Company's estimated proceeds.
In fiscal 2000, the Company recorded charges related to the write-down of
assets to fair value of $58,754,000. These charges were associated with the
closure of the 38 stores, two distribution centers, the write-off of certain
equipment and the abandonment of two development parcels.
LEASE RESERVE
As of February 1, 2003, the Company was able to sublease eight and exit the
lease of an additional seven of the 27 leased stores. The Company expects the
remaining 12 closed stores that are leased to be subleased or otherwise
disposed of by the end of the third quarter of fiscal 2003.
The Company increased the lease reserve $901,000 during fiscal 2002. This
increase is due primarily to an increase in the time that it is expected to
take to sublease certain properties, offset, in part, by an increase in the
estimated sublease rates. The effect of these adjustments was recorded in costs
of merchandise sales and costs of service revenue on the consolidated statement
of operations.
The Company increased the lease reserve $1,644,000 during fiscal 2001. This
change in the reserve was a result of a $3,834,000 increase due primarily to an
increase in the estimated amount of time it was expected to take the Company to
sublease certain properties and a decrease in estimated sublease rates. The
reserve increase was offset, in part, by a $2,190,000 decrease due primarily to
lower than estimated commissions and lease exit costs on subleases for certain
properties. The effects of these adjustments were recorded in costs of
merchandise sales and costs of service revenue on the consolidated statement of
operations.
In fiscal 2000, the Company recorded a reserve of $7,916,000 for leases of
properties included in the Profit Enhancement Plan. The Company increased the
reserve by $113,000 during the remainder of fiscal 2000. These changes in the
reserve were a result of a $1,176,000 increase due to an increase in the
estimated lease payments related to the closed stores. The increase was offset,
in part, by a $1,063,000 decrease due primarily to an increase in the estimated
sublease rates coupled with lower lease-related expenses. The effects of these
adjustments were recorded in costs of merchandise sales and costs of service
revenue on the consolidated statement of operations.
ON-GOING EXPENSES
The on-going expense reserve represents exit activity costs which are not
associated with or do not benefit the Company's continuing activities. These
costs are necessary to maintain the remaining closed stores until sold, sublet
or otherwise disposed. The on-going costs reserve includes general maintenance
costs such as utilities, security, telephone, real estate taxes and personal
property taxes which will be incurred until the properties are disposed. The
reserve for on-going costs will diminish as sites are sold, sublet or otherwise
disposed. These disposals are expected to be completed by the end of the third
quarter of fiscal 2003.
In fiscal 2002, the Company increased the on-going expense reserve by $802,000.
This increase is due primarily to an increase in the length of time that it is
expected to take to sublease, sell or otherwise dispose of the remaining
properties. This adjustment was recorded in costs of merchandise sales, costs
of service revenue and selling, general and administrative expenses on the
consolidated statement of operations.
25
In fiscal 2001, the Company increased the on-going expense reserve by $595,000.
This increase was due primarily to a $1,214,000 increase in the reserve due to
an increase in the estimated time it was expected to take to sublease, sell or
otherwise dispose of the remaining properties offset, in part, by a $619,000
decrease due to lower than anticipated cost for utilities and security. This
adjustment was recorded in costs of merchandise sales, costs of service revenue
and selling, general and administrative expenses on the consolidated statement
of operations.
In fiscal 2000, the Company recorded a reserve of $3,944,000 for on-going
expenses associated with the properties included in the Profit Enhancement
Plan. The Company increased the on-going expense reserve by $361,000 during the
remainder of fiscal 2000. This increase was due to an increase in the estimated
time it was expected to take to sublease, sell or otherwise dispose of the
remaining properties. This adjustment was recorded in costs of merchandise
sales, costs of service revenue and selling, general and administrative
expenses on the consolidated statement of operations.
SEVERANCE RESERVE
In fiscal 2001, the severance reserve was completed. Therefore, there was no
activity to this reserve in fiscal 2002. In fiscal 2001, the Company reversed
$69,000 of severance because certain employees who originally expected to
receive severance failed to qualify to receive payments. In addition, final
severance payments were lower than estimated. Each of these reversals was
recorded through the line it was originally charged in the consolidated
statement of operations.
In fiscal 2000, the Company recorded a reserve of $1,694,000 for severance
associated with the Profit Enhancement Plan. During the remainder of fiscal
2000, the Company reversed $272,000 of severance due to certain employees'
acceptance into other positions within the Company and other employees failing
to qualify to receive payments. Each reversal was recorded through the line it
was originally charged in the consolidated statement of operations.
The total number of employees separated due to the Profit Enhancement Plan was
approximately 1,000. The 1,000 employees were composed of 76% store employees,
13% distribution employees, and 11% Store Support Center and field
administrative employees. The total severance paid in connection with the
Profit Enhancement Plan was $1,353,000.
NON-RESERVABLE EXPENSES
Non-reservable expenses are those costs which could not be reserved, but were
incurred as a result of the Profit Enhancement Plan. These expenses related to
costs incurred which had a future economic benefit to the Company, such as the
transferring of inventory and equipment out of properties closed by the Profit
Enhancement Plan.
There were no expenses of this nature incurred in fiscal 2002. In fiscal 2001,
expenses of this nature incurred were $678,000. These expenses related to the
completion of the removal of inventory and equipment from the closed
distribution centers. In fiscal 2000, expenses of this nature incurred were
$3,611,000. These expenses were for inventory and equipment handling related
to the closure of the 38 stores and the two distribution centers. The fiscal
2000 expenses were offset by a recovery of certain benefit expenses related to
the reduction in workforce.
26
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Following are tables summarizing expenses related to the Profit Enhancement
Plan for fiscal 2002, 2001 and 2000. The details and reasons for the original
charge and changes to the charge are as described above in the respective
reserve categories.
(dollar amounts
in thousands)
Income Statement Fiscal Fiscal Fiscal
Classification 2002 2001 2000
- -----------------------------------------------------------------
Costs of
merchandise sales $2,014 $4,169 $67,085
Costs of
service revenue 491 813 5,232
Selling, general and
administrative 24 215 2,628
- -----------------------------------------------------------------
Total Expenses $2,529 $5,197 $74,945
- -----------------------------------------------------------------
At the end of the third quarter of fiscal 2000, the Company set up a reserve
liability account, which is included in accrued expenses on the consolidated
balance sheet. This liability account tracks all accruals including remaining
rent on leases net of sublease income, severance, and on-going expenses for
the closed properties. The following chart reconciles the change in reserve:
(dollar amounts Lease Fixed On-going
in thousands) Expenses Assets Severance Expenses Total
- -----------------------------------------------------------------------------------------
Reserve Balance
at Feb. 3, 2001 $ 7,054 $ - $ 209 $ 2,960 $ 10,223
Addition 3,834 2,440 - 1,214 7,488
Utilization (5,548) (2,349) (140) (2,235) (10,272)
Adjustment (2,190) (91) (69) (619) (2,969)
- -----------------------------------------------------------------------------------------
Reserve Balance
at Feb. 2, 2002 3,150 - - 1,320 4,470
Addition 1,825 826 - 802 3,453
Utilization (2,959) (826) - (1,680) (5,465)
Adjustment (924) - - - (924)
- -----------------------------------------------------------------------------------------
Reserve Balance
at Feb. 1, 2003 $ 1,092 $ - $ - $ 442 $ 1,534
- -----------------------------------------------------------------------------------------
27
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in the
consolidated statements of operations as a percentage of total revenues (except
as otherwise provided) and the percentage change in dollar amounts of such
items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change
- -----------------------------------------------------------------------------------------------------------------------------------
Feb. 1, 2003 Feb. 2, 2002 Feb. 3, 2001 Fiscal 2002 vs. Fiscal 2001 vs.
Year ended (Fiscal 2002) (Fiscal 2001) (Fiscal 2000) Fiscal 2001 Fiscal 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Merchandise Sales 80.9% 80.8% 80.9% (0.5)% (9.8)%
Service Revenue(1) 19.1 19.2 19.1 (0.7) (9.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 100.0 (0.6) (9.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales(2) 69.8 (3) 70.8 (3) 76.9 (3) (1.9) (16.9)
Costs of Service Revenue(2) 74.9 (3) 75.4 (3) 82.7 (3) (1.4) (17.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 70.8 71.7 78.0 (1.8) (17.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 30.2 (3) 29.2 (3) 23.1 (3) 2.8 14.0
Gross Profit from Service Revenue 25.1 (3) 24.6 (3) 17.3 (3) 1.2 29.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 29.2 28.3 22.0 2.6 16.2
- -----------------------------------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expenses 24.0 23.5 23.2 1.3 (8.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 5.2 4.8 (1.2) 9.0 472.1
Non-operating Income 0.2 0.2 0.1 (10.1) 53.4
Interest Expense 2.2 2.3 2.4 (8.7) (11.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 3.2 2.7 (3.5) 23.9 167.4
- -----------------------------------------------------------------------------------------------------------------------------------
Income Taxes 37.0 (4) 36.0 (4) 36.5 (4) 27.4 166.5
- -----------------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Before Extraordinary Items 2.0 1.7 (2.2) 22.0 167.9
- -----------------------------------------------------------------------------------------------------------------------------------
Extraordinary Items, Net of Tax - - 0.1 (68.8) (137.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) 2.0 1.7 (2.1) 24.0 169.2
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed
parts or materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include
service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
(3) As a percentage of related sales or revenue, as applicable.
(4) As a percentage of earnings (loss) before income taxes.
28
FISCAL 2002 VS. FISCAL 2001
Total revenues for fiscal 2002 decreased 0.6%. This decrease was due primarily
to a decrease in comparable store revenues (revenues generated by stores in
operation during the same period) of 0.7%, offset slightly by an increase in
the number of stores in operation in fiscal 2002 versus fiscal 2001. Comparable
store service revenue decreased 0.9%, while comparable store merchandise sales
decreased 0.6%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 30.2% in fiscal 2002 from 29.2% in fiscal 2001. This increase was due
primarily to higher merchandise margins, as a percentage of merchandise sales,
offset, in part, by a charge related to the Profit Enhancement Plan of
$2,014,000 in fiscal 2002 versus $4,169,000 in fiscal 2001. The improved
merchandise margins were a result of a combination of an improvement in the mix
of sales, selectively higher retail pricing, lower product acquisition costs
and improved inventory controls.
Selling, general and administrative expenses increased, as a percentage of
total revenues, to 24.0% in fiscal 2002 from 23.5% in fiscal 2001. This
increase, as a percentage of total revenues, was due primarily to obligations
associated with the non-renewal of the Chairman and CEO's employment agreement
and related search fees, coupled with $4,905,000, or 72%, higher net media
expense. The increase in selling, general and administrative expenses, as a
percentage of total revenues, was offset, in part, by a decrease in store
operating expenses. The increase in net media expense was due to increases in
radio and circular advertising expenses, offset, in part, by a decrease in
television advertising expense and an increase in cooperative advertising. The
decrease in store expenses, as a percentage of total revenues, was due
primarily to decreases in store payroll, as a percentage of total revenues.
Interest expense decreased $4,477,000, or 8.7%, due primarily to lower debt
levels coupled with lower average interest rates on the Company's borrowings.
Net earnings increased, as a percentage of total revenues, due primarily to
an increase in gross profit from merchandise sales, as a percentage of
merchandise sales, and a decrease in interest expense, offset by an increase
in selling, general and administrative expenses, as a percentage of total
revenues, and a net charge related to the Profit Enhancement Plan of $1,593,000
in fiscal 2002 versus $3,326,000 in fiscal 2001.
FISCAL 2001 VS. FISCAL 2000
Total revenues for fiscal 2001, which included 52 weeks, decreased 9.7%
compared to fiscal 2000, which included 53 weeks, due primarily to less stores
in operation during fiscal 2001 versus fiscal 2000 coupled with a decrease in
comparable store revenues (revenues generated by stores in operation during the
same months of each period) of 6%. Total revenues for fiscal 2001 compared to
fiscal 2000, excluding the extra week, decreased by 8% on an overall basis and
remained at a decrease of 6% on a comparable store basis. Comparable store
merchandise sales decreased 6% while comparable store service revenue decreased
5% compared to fiscal 2000 on a 52 week basis. This decline in total and
comparable revenue reflected the impact of the closure of the 38 stores and
other steps taken in October 2000 in conjunction with implementing the
Company's Profit Enhancement Plan.
29
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 29.2% in fiscal 2001 from 23.1% in fiscal 2000. This increase, as a
percentage of merchandise sales, was due primarily to Profit Enhancement Plan
charges recorded in fiscal 2001 of $4,169,000 compared to charges recorded in
fiscal 2000 of $67,085,000 and $5,735,000 associated with the Profit
Enhancement Plan and asset impairments, respectively. Higher merchandise
margins and a decrease in warehousing costs, as a percentage of merchandise
sales, offset, in part, by an increase in store occupancy costs, as a
percentage of merchandise sales, also contributed to the increase in gross
profit from merchandise sales. The improved merchandise margins, as a
percentage of merchandise sales, were a result of a combination of improvement
in the mix of sales, selectively higher retail pricing and lower product
acquisition costs. The decrease in warehousing costs, as a percentage of
merchandise sales, were a result of the effects of a supply chain initiative
implemented in late fiscal 2000 to improve efficiencies. The increase in store
occupancy costs, as a percentage of merchandise sales, was a result of higher
utilities costs, particularly in California.
Gross profit from service revenue increased, as a percentage of service
revenue, to 24.6% in fiscal 2001 from 17.3% in fiscal 2000. This increase, as a
percentage of service revenue, was due primarily to a decrease in service
personnel costs, as a percentage of service revenue, coupled with Profit
Enhancement Plan charges recorded in fiscal 2001 of $813,000 compared to
$5,232,000 recorded in fiscal 2000. The decrease in service center personnel
costs, as a percentage of service revenue, was a result of the steps taken in
the Profit Enhancement Plan.
Selling, general and administrative expenses increased, as a percentage of
total revenues, to 23.5% in fiscal 2001 from 23.2% in fiscal 2000. This
increase, as a percentage of total revenues, was due primarily to an increase
in media expenses from fiscal 2000 to fiscal 2001 of $6,828,000 or 0.3% of
total revenues, offset, in part, by a decrease in general office expense, as a
percentage of total revenues, and Profit Enhancement Plan charges recorded in
fiscal 2001 of $215,000 compared to $2,628,000 recorded in fiscal 2000. The
increase in media expense, as a percentage of total revenues, was a result of
lower vendor reimbursements. The decrease in general office expense, as a
percentage of total revenues, was a result of lower legal expense, as a
percentage of total revenues.
Interest expense in fiscal 2001 was $6,547,000 or 11.3% lower than fiscal 2000
due primarily to lower debt levels coupled with lower average interest rates.
Net earnings increased, as a percentage of total revenues, due primarily to a
net Profit Enhancement Plan charge recorded in fiscal 2001 of $3,326,000
compared to net charges recorded in fiscal 2000 of $47,609,000 and $3,643,000
associated with Profit Enhancement Plan and asset impairments, respectively.
Also contributing to the net earnings increase, as a percentage of total
revenues, were increases in both gross profit from merchandise sales and
service revenue, as a percentage of merchandise sales and service revenue,
respectively, and a decrease in interest expense, as a percentage of total
revenues. These gross profit increases were offset, in part, by an increase in
selling, general and administrative expenses, as a percentage of total
revenues, coupled with a net extraordinary loss of $765,000 in fiscal 2001
compared to a $2,054,000 net extraordinary gain in fiscal 2000.
30
RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
SFAS No. 148 amends the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends SFAS No. 123 to require
more prominent and frequent disclosures in financial statements pertaining to
the effect on reported net income with respect to stock-based compensation.
These provisions are effective for fiscal years ending after December 15, 2002.
The Company adopted the provisions of SFAS No. 148 with respect to the
disclosure requirements in the fourth quarter of fiscal 2002.
In November 2002, the FASB issued Financial Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor in its financial statements regarding
certain guarantees that it has issued, and requires the guarantor to recognize,
at the inception of the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. In addition, FIN 45 requires a
reconciliation of changes in an entity's product warranty liabilities. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company has adopted this statement in the fourth quarter of fiscal 2002 with no
material effect on its consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." This consensus addresses the accounting
issues pertaining to cash consideration received by a reseller from a vendor,
and is applicable for new arrangements or modification of existing arrangements
entered into after December 31, 2002. The Company has adopted the provisions of
this consensus in the fourth quarter of fiscal 2002 with no material effect on
its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 replaces EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring)."
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred instead of at
the date an entity commits to an exit plan. SFAS No. 146 will be effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company has adopted this statement in the fourth quarter of fiscal 2002 with no
material effect on its consolidated financial statements.
In fiscal 2001, the EITF issued EITF 01-09, "Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products)."
This consensus deals with accounting for certain types of sales incentives and
other consideration offered by companies to their customers. This pronouncement
is effective in fiscal years beginning after December 15, 2001. The Company
adopted this statement in the first quarter of fiscal 2002 with no material
effect on its consolidated financial statements.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and the reporting provisions of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the Disposal of a Segment
of a Business." SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company adopted this statement in the first quarter of
fiscal 2002 with no material effect on its consolidated financial statements.
31
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business
combinations should be accounted for using the purchase method of accounting;
use of the pooling-of-interests method is prohibited. The provisions of the
statement apply to all business combinations initiated after June 30, 2001.
SFAS 142 applies to all acquired intangible assets whether acquired singly, as
part of a group, or in a business combination. Adoption of SFAS 142 will result
in an entity ceasing amortization of goodwill. All of the provisions of the
statement are effective in fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were initially
recognized. The Company adopted this statement in the first quarter of fiscal
2002 with no material effect on its consolidated financial statements as it
does not have goodwill or other acquired tangible assets on its consolidated
balance sheet.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46, an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," changes the criteria by which one company
includes another entity in its consolidated financial statements. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of any expected losses from the variable
interest entity's activities, is entitled to receive any expected residual
returns of the variable interest entity, or both. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and applies in the
first fiscal period beginning after June 15, 2003, for variable interest
entities created prior to February 1, 2003.
The Company has adopted the guidance of FIN 46 for newly created variable
interest entities in the fourth quarter of fiscal 2002 with no material effect
on its consolidated financial statements. The Company will adopt FIN 46 for
variable interest entities created prior to February 1, 2003 in the third
quarter of fiscal 2003. The adoption of FIN 46 will apply to the $132,000,000
of real estate leased by the Company under its $143,000,000 operating lease
facility, which would qualify as a variable interest entity under this
interpretation. If this operating lease facility exists as of August 3, 2003,
the Company would consolidate this entity and record a liability of
$132,000,000 and the corresponding assets, net of accumulated depreciation.
The Company is planning to refinance this facility prior to August 3, 2003,
so that it is not required to consolidate this entity under FIN 46.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
As a result of rescinding FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," gains and losses from extinguishment of debt
should be classified as extraordinary items only if they meet the criteria of
APB Opinion No. 30, "Reporting the Results of Operations." This statement also
amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Additional amendments
include changes to other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. The Company will adopt the provisions of SFAS No. 145
during the first quarter of fiscal 2003. For the fiscal years ended
February 1, 2003, February 2, 2002 and February 3, 2001, the Company recorded
extraordinary items pertaining to the extinguishment of debt, net of tax, of
$(239,000), $(765,000) and $2,054,000, respectively. Accordingly,
reclassifications of these items to earnings before extraordinary items will be
made throughout fiscal 2003 to maintain comparability for the reported periods.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after
June 15, 2002. The Company will adopt the provisions of SFAS No. 143 in the
first quarter of fiscal 2003, and will recognize an asset of $2,844,000,
accumulated depreciation of $2,247,000, a liability of $4,540,000 and a
cumulative effect of a change in accounting principle before taxes of
$3,943,000 ($2,484,000, net of tax) on its consolidated financial statements.
32
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's primary market risk exposure with regard
to financial instruments is to changes in interest rates. Pursuant to the terms
of its revolving credit agreement and senior secured credit facility, changes
in the lenders' prime rate or LIBOR could affect the rates at which the Company
could borrow funds thereunder. At February 1, 2003, the Company had outstanding
borrowings of $43,135,000 against these credit facilities. The table below
summarizes the fair value and contract terms of fixed rate debt instruments
held by the Company at February 1, 2003:
(dollar amounts Average
in thousands) Amount Interest Rate
- ----------------------------------------------------------------
Fair value at
February 1, 2003 $550,491
Expected maturities:
2003 81,000 6.6%
2004 108,000 6.7
2005 100,000 7.0
2006 143,000 6.9
2007 150,215 4.3
- -----------------------------------------------------------------
At February 2, 2002, the Company held fixed rate debt instruments with an
aggregate fair value of $491,120.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to customer incentives, product returns and warranty obligations,
bad debts, inventories, income taxes, financing operations, restructuring
costs, retirement benefits, risk participation agreements and contingencies and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
33
The Company believes that the following represent its more critical estimates
and assumptions used in the preparation of the consolidated financial
statements, although not inclusive:
*The Company evaluates whether inventory is stated at the lower of cost
or market based on historical experience with the carrying value and
life of inventory. The assumptions used in this evaluation are based
on current market conditions and the Company believes inventory is
stated at the lower of cost or market in the consolidated financial
statements. In addition, historically the Company has been able to
return excess items to vendors for credit. Future changes by vendors
in their policies or willingness to accept returns of excess inventory
could require a revision in the estimates.
*The Company has risk participation arrangements with respect to
casualty and health care insurance. The amounts included in the
Company's costs related to these arrangements are estimated and can
vary based on changes in assumptions, claims experience or the
providers included in the associated insurance programs.
*The Company records reserves for future product returns and warranty
claims. The reserves are based on current sales of products and
historical claim experience. If claims experience differs from
historical levels, revisions in the Company's estimates may be
required.
FORWARD-LOOKING STATEMENTS
Certain information contained herein may contain statements that are
forward-looking. Such statements may relate to trends in the automotive
aftermarket, competition, business development activities, future capital
expenditures, financing sources and availability, and the effects of
regulation. Although the Company believes that the expectations reflected in
such forward-looking statements are based on reasonable assumptions, it can
give no assurance that its expectations will be achieved. The Company's actual
results may differ materially from the results discussed in the forward-looking
statements due to factors beyond the control of the Company, including the
strength of the national and regional economies and retail and commercial
consumers' ability to spend, the health of the various sectors of the
automotive aftermarket, the weather in geographical regions with a high
concentration of the Company's stores, competitive pricing, location and number
of competitors' stores, product and labor costs and the additional factors
described in the Company's filings with the Securities and Exchange Commission.
The Company assumes no obligation to update or supplement forward-looking
statements that become untrue because of subsequent events.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The material in Item 7 of this filing titled "Quantitative and Qualitative
Disclosures about Market Risk" are hereby incorporated herein by reference.
34
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 (the "Company") as of
February 1, 2003 and February 2, 2002, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended February 1, 2003. Our audits also included the financial
statement schedule listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and 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 as of February 1, 2003 and February 2, 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended February 1, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 13, 2003
(March 26, 2003 as to Note 14)
35
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
February 1, February 2,
2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 42,770 $ 15,981
Accounts receivable, less allowance for
uncollectible accounts of $422 and $725 17,916 18,052
Merchandise inventories 488,882 519,473
Prepaid expenses 43,746 42,170
Deferred income taxes 13,723 9,303
Other 56,687 52,308
Assets held for disposal 1,146 16,007
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 664,870 673,294
- ----------------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 279,109 277,726
Buildings and improvements 936,770 922,065
Furniture, fixtures and equipment 604,531 583,918
Construction in progress 19,450 10,741
- ----------------------------------------------------------------------------------------------------------------------------------
1,839,860 1,794,450
Less accumulated depreciation and amortization 751,823 676,964
- ----------------------------------------------------------------------------------------------------------------------------------
Total Property and Equipment - Net 1,088,037 1,117,486
- ----------------------------------------------------------------------------------------------------------------------------------
Other 47,003 15,355
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,799,910 $ 1,806,135
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 200,053 $ 216,085
Accrued expenses 232,255 217,393
Current maturities of long-term debt and obligations
under capital leases 101,882 124,615
- ----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 534,190 558,093
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital leases,
less current maturities 375,577 544,418
Convertible long-term debt, less current maturities 150,000 -
Other long-term liabilities 25,156 23,880
Deferred income taxes 60,663 57,510
Deferred gain on sale leaseback 4,332 4,444
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $1 per share: Authorized 500,000,000 shares;
Issued 63,910,577 63,911 63,911
Additional paid-in capital 177,244 177,244
Retained earnings 630,847 601,944
Accumulated other comprehensive loss (151) -
- ----------------------------------------------------------------------------------------------------------------------------------
871,851 843,099
Less cost of shares in treasury - 10,070,729 shares and 10,284,446 shares 162,595 166,045
Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 649,992 617,790
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,799,910 $ 1,806,135
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF OPERATIONS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
February 1, February 2, February 3,
Year ended 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $1,756,675 $1,765,643 $1,957,480
Service Revenue 415,813 418,917 460,988
- ----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 2,172,488 2,184,560 2,418,468
- ----------------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 1,226,827 1,250,408 1,505,442
Costs of Service Revenue 311,550 315,911 381,175
- ----------------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 1,538,377 1,566,319 1,886,617
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 529,848 515,235 452,038
Gross Profit from Service Revenue 104,263 103,006 79,813
- ----------------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 634,111 618,241 531,851
- ----------------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 520,446 513,946 559,883
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 113,665 104,295 (28,032)
Non-operating Income 3,097 3,444 2,245
Interest Expense 46,858 51,335 57,882
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 69,904 56,404 (83,669)
Income Tax Expense (Benefit) 25,865 20,304 (30,521)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Before Extraordinary Items 44,039 36,100 (53,148)
Extraordinary Items, Net of Tax of $(140), $(430) and $1,180 (239) (765) 2,054
Net Earnings (Loss) $ 43,800 $ 35,335 $ (51,094)
- ----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share:
Before Extraordinary Items $ .85 $ .70 $ (1.04)
Extraordinary Items, Net of Tax - (.01) .04
- ----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share $ .85 $ .69 $ (1.00)
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share:
Before Extraordinary Items $ .82 $ .69 $ (1.04)
Extraordinary Items, Net of Tax - (.01) .04
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) per Share $ .82 $ .68 $ (1.00)
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
Accumulated
Additional Other Total
Common Stock Paid-in Retained Treasury Stock Comprehensive Benefits Stockholders'
Shares Amount Capital Earnings Shares Amount Loss Trust Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 2000 63,910,577 $63,911 $177,247 $649,487 (10,721,208) $(173,097) $ - $(59,264) $658,284
Comprehensive loss -
Net loss (51,094)
Total Comprehensive Loss (51,094)
Cash dividends ($.27 per share) (13,793) (13,793)
Dividend reinvestment plan (3) (2,932) 266,564 4,304 1,369
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, February 3, 2001 63,910,577 63,911 177,244 581,668 (10,454,644) (168,793) - (59,264) 594,766
Comprehensive income -
Net earnings 35,335
Total Comprehensive Income 35,335
Cash dividends ($.27 per share) (13,864) (13,864)
Exercise of stock options
and related tax benefits (94) 17,000 275 181
Dividend reinvestment plan (1,101) 153,198 2,473 1,372
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, February 2, 2002 63,910,577 63,911 177,244 601,944 (10,284,446) (166,045) - (59,264) 617,790
Comprehensive income -
Net earnings 43,800
Minimum pension liability
adjustment, net of tax (151)
Total Comprehensive Income 43,649
Cash dividends ($.27 per share) (13,911) (13,911)
Exercise of stock options
and related tax benefits (21) (632) 111,000 1,792 1,139
Dividend reinvestment plan 21 (354) 102,717 1,658 1,325
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, February 1, 2003 63,910,577 $63,911 $177,244 $630,847 (10,070,729) $(162,595) $ (151) $(59,264) $649,992
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
38
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
February 1, February 2, February 3,
Year ended 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Earnings (Loss) $ 43,800 $ 35,335 $ (51,094)
Adjustments to Reconcile Net Earnings (Loss) to Net Cash
Provided by Operating Activities:
Extraordinary item, net of tax 239 765 (2,054)
Depreciation and amortization 79,551 84,693 99,308
Deferred income taxes (1,176) 7,424 (24,575)
Deferred gain on sale leaseback (112) (26) -
Accretion of bond discount - 3,256 6,425
Loss on assets held for disposal 826 2,349 53,740
Loss on asset impairment - - 5,735
(Gain) Loss from sale of assets (1,913) (1,090) 3,651
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable, prepaid expenses
and other (13,409) (18,726) 9,802
Decrease in merchandise inventories 30,591 28,262 35,163
(Decrease) Increase in accounts payable (16,032) 11,330 (115,311)
Increase (Decrease) in accrued expenses 14,759 12,095 (2,255)
Increase in other long-term liabilities 1,276 2,226 1,056
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 138,400 167,893 19,591
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (43,911) (25,375) (57,336)
Proceeds from sales of assets 11,058 26,760 14,380
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (32,853) 1,385 (42,956)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net (payments) borrowings under line of credit
agreements (70,295) (56,876) 117,535
Repayment of life insurance policy loan (20,686) - -
Payments on capital lease obligations (642) - -
Reduction of long-term debt (121,938) (18,571) (75,028)
Reduction of convertible debt - (161,056) (17,208)
Net proceeds from issuance of notes 146,250 87,522 -
Dividends paid (13,911) (13,864) (13,793)
Proceeds from exercise of stock options 1,139 181 -
Proceeds from dividend reinvestment plan 1,325 1,372 1,369
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (78,758) (161,292) 12,875
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 26,789 7,986 (10,490)
Cash and Cash Equivalents at Beginning of Year 15,981 7,995 18,485
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 42,770 $ 15,981 $ 7,995
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Income taxes $ 22,856 $ 6,570 $ -
Interest, net of amounts capitalized 44,840 47,081 53,415
Non-cash financing activities:
Equipment capital leases 1,301 89 -
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
39
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 1, 2003, February 2, 2002 and February 3, 2001 (dollar
amounts in thousands, except per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Pep Boys - Manny, Moe & Jack and subsidiaries (the "Company") is
engaged principally in the retail sale of automotive parts and accessories,
automotive maintenance and service and the installation of parts through a
chain of stores. The Company currently operates stores in 36 states and Puerto
Rico.
FISCAL YEAR END The Company's fiscal year ends on the Saturday nearest to
January 31. Fiscal 2002 and 2001 were comprised of 52 weeks, while fiscal 2000
was comprised of 53 weeks.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States necessarily requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost
(last-in, first-out) or market. If the first-in, first-out method of valuing
inventories had been used by the Company, the inventory valuation difference
would have been immaterial on both February 1, 2003 and February 2, 2002.
CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly
liquid investments with a maturity of three months or less when purchased.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method over
the following estimated useful lives: building and improvements, 5 to 40 years;
furniture, fixtures and equipment, 3 to 10 years.
SOFTWARE CAPITALIZATION In 1998, the Company adopted Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." In accordance with this standard, certain direct
development costs associated with internal-use software are capitalized,
including external direct costs of material and services, and payroll costs
for employees devoting time to the software projects. These costs are
amortized over a period not to exceed five years beginning when the asset is
substantially ready for use. Costs incurred during the preliminary project
stage, as well as maintenance and training costs, are expensed as incurred.
CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection
with the construction of certain long-term assets. Capitalized interest
amounted to $44, $1 and $489 in fiscal 2002, 2001 and 2000, respectively.
REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise
at the time the merchandise is sold. Service revenues are recognized upon
completion of the service. The Company records revenue net of an allowance for
estimated future returns. Return activity is immaterial to revenue and results
of operations in all periods presented.
40
WARRANTY RESERVE The Company provides warranties for both its merchandise sales
and service labor. Warranties for merchandise are generally covered by its
vendors, with the Company covering any costs above the vendor's stipulated
allowance. Service labor warranties are covered in full by the Company on a
limited lifetime basis. The Company establishes its warranty reserves based on
historical data of warranty transactions.
Components of the reserve for warranty costs for fiscal years ending
February 1, 2003 and February 2, 2002 are as follows:
- ------------------------------------------------------------------------
Beginning balance at February 3, 2001 $ 553
Additions related to current year sales 12,006
Warranty costs incurred in current year (10,282)
Adjustments to accruals related to
prior year sales -
- ------------------------------------------------------------------------
Ending Balance at February 2, 2002 2,277
Additions related to current year sales 8,813
Warranty costs incurred in current year (10,179)
Adjustments to accruals related to
prior year sales -
- ------------------------------------------------------------------------
Ending Balance at February 1, 2003 $ 911
- ------------------------------------------------------------------------
SERVICE REVENUE Service revenue consists of the labor charge for installing
merchandise or maintaining or repairing vehicles, excluding the sale of any
installed parts or materials.
COSTS OF REVENUES Costs of merchandise sales include the cost of products sold,
buying, warehousing and store occupancy costs. Costs of service revenue include
service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
PENSION EXPENSE The Company reports all information on its pension and savings
plan benefits in accordance with Statement of Financial Accounting Standards
(SFAS) No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits."
INCOME TAXES The Company uses the liability method of accounting for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred income taxes are determined based upon enacted tax
laws and rates applied to the differences between the financial statement and
tax bases of assets and liabilities.
41
ADVERTISING The Company expenses the production costs of advertising
the first time the advertising takes place. The Company nets cooperative
advertising reimbursements against costs incurred. Net advertising expense for
fiscal 2002, 2001 and 2000 was $11,733, $6,828 and $0, respectively. No
advertising costs were recorded as assets as of February 1, 2003 or
February 2, 2002.
STORE OPENING COSTS The costs of opening new stores are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived
assets in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This standard prescribes the method for asset
impairment evaluation for long-lived assets and certain identifiable
intangibles that are either held and used or to be disposed of. The Company
evaluates the ability to recover long-lived assets whenever events or
circumstances indicate that the carrying value of the asset may not be
recoverable. In the event assets are impaired, losses are recognized to the
extent the carrying value exceeds the fair value. In addition, the Company
reports assets to be disposed of at the lower of the carrying amount or the
fair market value less selling costs.
During fiscal 2000, the Company, as a result of its ongoing review of the
performance of its stores, identified certain stores whose cash flow trend
indicated that the carrying value may not be fully recoverable. An impairment
charge of $5,735 was recorded for these stores in costs of merchandise sales
on the consolidated statement of operations. The charge reflects the difference
between carrying value and fair value. Fair value was based on sales of similar
assets or other estimates of fair value developed by Company management.
EARNINGS PER SHARE Earnings per share for all periods have been computed in
accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share is
computed by dividing earnings by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed by dividing
earnings by the weighted average number of common shares outstanding during the
year plus the assumed conversion of dilutive convertible debt and incremental
shares that would have been outstanding upon the assumed exercise of dilutive
stock options.
42
ACCOUNTING FOR STOCK-BASED COMPENSATION At February 1, 2003, the Company has
two stock-based employee compensation plans, which are described in full in
Note 10, "Stock Option Plans." The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board (APB)
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected in net
earnings, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net earnings and earnings per share
if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation:
February 1, February 2, February 3,
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss):
As reported $ 43,800 $ 35,335 $ (51,094)
Less: Total stock-based compensation
expense determined under fair
value-based method, net of tax (3,510) (3,892) (4,217)
- -----------------------------------------------------------------------------------------------------------
Pro forma $ 40,290 $ 31,443 $ (55,311)
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) per share:
Basic:
As reported $ .85 $ .69 $ (1.00)
Pro forma $ .78 $ .62 $ (1.08)
- -----------------------------------------------------------------------------------------------------------
Diluted:
As reported $ .82 $ .68 $ (1.00)
Pro forma $ .75 $ .61 $ (1.08)
- -----------------------------------------------------------------------------------------------------------
The fair value of each option granted during fiscal 2002, 2001 and 2000 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
- -------------------------------------------------------------------------------
February 1, February 2, February 3,
Year ended 2003 2002 2001
- -------------------------------------------------------------------------------
Dividend yield 1.44% 1.29% .90%
Expected volatility 41% 39% 40%
Risk-free interest rate range:
high 5.4% 5.5% 6.7%
low 2.3% 2.8% 5.8%
Ranges of expected lives in years 4-8 4-8 4-8
- -------------------------------------------------------------------------------
43
COMPREHENSIVE INCOME Comprehensive income is reported in accordance with SFAS
No. 130, "Reporting Comprehensive Income." Other comprehensive income includes
minimum pension liability adjustments.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company
accounts for derivative instruments and hedging activities in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES In November
2002, the Financial Accounting Standards Board (FASB) issued Financial
Interpretation Number (FIN) 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 elaborates on the disclosures to be made by a guarantor in
its financial statements regarding certain guarantees that it has issued,
and requires the guarantor to recognize, at the inception of the guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. In addition, FIN 45 requires a reconciliation of changes in an
entity's product warranty liabilities.
SEGMENT INFORMATION The Company reports segment information in accordance with
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." The Company operates in one industry, the automotive aftermarket.
In accordance with SFAS No. 131, the Company aggregates all of its stores and
reports one operating segment.
Sales by major product categories are as follows:
February 1, February 2, February 3,
Year ended 2003 2002 2001
- ----------------------------------------------------------------------------------------
Parts and accessories $1,409,398 $1,404,104 $1,547,020
Tires 347,277 361,539 410,460
- ----------------------------------------------------------------------------------------
Total merchandise sales 1,756,675 1,765,643 1,957,480
Service 415,813 418,917 460,988
- ----------------------------------------------------------------------------------------
Total Revenues $2,172,488 $2,184,560 $2,418,468
========================================================================================
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.
44
RECENTLY ADOPTED ACCOUNTING STANDARDS In December 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
SFAS No. 148 amends the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends SFAS No. 123 to require more
prominent and frequent disclosures in financial statements pertaining to the
effect on reported net income with respect to stock-based compensation. These
provisions are effective for fiscal years ending after December 15, 2002. The
Company adopted the provisions of SFAS No. 148 with respect to the disclosure
requirements in the fourth quarter of fiscal 2002.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a
guarantor in its financial statements regarding certain guarantees that it has
issued, and requires the guarantor to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. In addition, FIN 45 requires a reconciliation of changes
in an entity's product warranty liabilities. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company has adopted this
statement in the fourth quarter of fiscal 2002 with no material effect on its
consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." This consensus addresses the accounting
issues pertaining to cash consideration received by a reseller from a vendor,
and is applicable for new arrangements or modification of existing arrangements
entered into after December 31, 2002. The Company has adopted the provisions of
this consensus in the fourth quarter of fiscal 2002 with no material effect on
its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 replaces EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring)."
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred instead of at
the date an entity commits to an exit plan. SFAS No. 146 will be effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company has adopted this statement in the fourth quarter of fiscal 2002 with no
material effect on its consolidated financial statements.
In fiscal 2001, the EITF issued EITF 01-09, "Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products)."
This consensus deals with accounting for certain types of sales incentives and
other consideration offered by companies to their customers. This consensus is
effective in fiscal years beginning after December 15, 2001. The Company
adopted this statement in the first quarter of fiscal 2002 with no material
effect on its consolidated financial statements.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," and the reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted this statement in the first quarter of fiscal 2002 with no material
effect on its consolidated financial statements.
45
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business
combinations should be accounted for using the purchase method of accounting;
use of the pooling-of-interests method is prohibited. The provisions of the
statement apply to all business combinations initiated after June 30, 2001.
SFAS 142 applies to all acquired intangible assets whether acquired singly,
as part of a group, or in a business combination. Adoption of SFAS 142 will
result in ceasing amortization of goodwill. All of the provisions of the
statement are effective in fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets recognized in an entity's statement
of financial position at that date, regardless of when those assets were
initially recognized. The Company adopted this statement in the first quarter
of fiscal 2002 with no material effect on its consolidated financial
statements as it does not have goodwill or other acquired tangible assets on
its consolidated balance sheet.
NEW ACCOUNTING STANDARDS In January 2003, the FASB issued FIN 46,
"Consolidation of Variable Interest Entities." FIN 46, an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
changes the criteria by which one company includes another entity in its
consolidated financial statements. FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of
any expected losses from the variable interest entity's activities, is
entitled to receive any expected residual returns of the variable interest
entity, or both. FIN 46 applies immediately to variable interest entities
created after January 31, 2003, and applies in the first fiscal period
beginning after June 15, 2003, for variable interest entities created prior
to February 1, 2003.
The Company has adopted the guidance of FIN 46 for newly created variable
interest entities in the fourth quarter of fiscal 2002 with no material effect
on its consolidated financial statements. The Company will adopt FIN 46 for
variable interest entities created prior to February 1, 2003 in the third
quarter of fiscal 2003. The adoption of FIN 46 will apply to the $132,000 of
real estate leased by the Company under its $143,000 operating lease facility,
which would qualify as a variable interest entity under this interpretation.
If this operating lease facility exists as of August 3, 2003, the Company
would consolidate this entity and record a liability of $132,000 and the
corresponding assets, net of accumulated depreciation. The Company is planning
to refinance this facility prior to August 3, 2003, so that it is not required
to consolidate this entity under FIN 46.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." As a result of rescinding FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," gains and losses from extinguishment
of debt should be classified as extraordinary items only if they meet the
criteria of APB Opinion No. 30, "Reporting the Results of Operations." This
statement also amends FASB Statement No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.
Additional amendments include changes to other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The Company will adopt
the provisions of SFAS No. 145 during the first quarter of fiscal 2003. For the
fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001, the
Company recorded extraordinary items pertaining to the extinguishment of debt,
net of tax, of $(239), $(765), and $2,054, respectively. Accordingly,
reclassifications of these items to earnings before extraordinary items will be
made throughout fiscal 2003 to maintain comparability for the reported periods.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after
June 15, 2002. The Company will adopt the provisions of SFAS No. 143 in the
first quarter of fiscal 2003, and will recognize an asset of $2,844,
accumulated depreciation of $2,247, a liability of $4,540 and a cumulative
effect of a change in accounting principle before taxes of $3,943 ($2,484, net
of tax) on its consolidated financial statements.
RECLASSIFICATIONS Certain reclassifications have been made to the prior years'
consolidated financial statements to provide comparability with the current
year's presentation.
46
NOTE 2 - DEBT
LONG-TERM DEBT
- ------------------------------------------------------------------------------------------------------------
February 1, 2003 February 2, 2002
- ------------------------------------------------------------------------------------------------------------
Medium-term notes, 6.7% to 6.9%, due
March 2004 through March 2006 $100,000 $100,000
7% notes due June 2005 100,000 100,000
6.92% Term enhanced remarketable securities,
due July 2016 100,000 100,000
6.625% notes due May 2003 75,000 75,000
Medium-term notes, 6.4% to 6.7%, due
November 2004 through September 2007 51,215 144,005
Senior secured credit facility, payable
through July 2003 and July 2006 42,588 71,625
Other notes payable, 3.8% to 8% 7,361 7,472
Capital lease obligations, payable
through July 2004 748 89
Revolving credit agreement 547 70,842
- ------------------------------------------------------------------------------------------------------------
477,459 669,033
Less current maturities 101,882 124,615
- ------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $375,577 $544,418
- ------------------------------------------------------------------------------------------------------------
In January 2003, the Company reclassified $6,000 of other notes payable, due
January 1, 2004, to current liabilities on the consolidated balance sheet.
In the third quarter of fiscal 2002, the Company retired $42,875 aggregate
principal amount of the remaining $43,005 of the Medium-Term Notes with an
original maturity date of September 2007. These notes were redeemed at the
option of the holders. The after-tax extraordinary loss was $110.
In the second quarter of fiscal 2002, the Company reclassified the $75,000,
6.625% notes with a stated maturity date of May 15, 2003 to current liabilities
on the consolidated balance sheet.
In the second quarter of fiscal 2002, the Company retired $49,915 aggregate
principal amount of the $50,000 Medium-Term Note with an original maturity date
of July 2007. These notes were redeemed at the option of the holders. The
after-tax extraordinary loss was $129.
In June 2001, the Company obtained $90,000 in a Senior Secured Credit Facility.
The Facility, which is secured by certain equipment and real estate with a
total book value as of February 1, 2003 of $89,960, was issued in two tranches.
Tranche A is a term loan for $45,000 with an interest rate based on London
Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is structured as a
two-year term loan payable in equal installments with the final payment due in
fiscal 2003. The weighted average interest rate on Tranche A was 5.5% at
February 1, 2003 and 6.7% at February 2, 2002. Tranche B is a term loan for
$45,000 with an interest rate of LIBOR plus 3.95%. Tranche B is structured as a
five-year term loan payable in equal installments with the final payment due in
2006. The weighted average interest rate on Tranche B was 5.8% at February 1,
2003 and 6.9% at February 2, 2002. The Senior Secured Credit Facility is
subject to certain financial covenants.
In September 2000, the Company entered into a new revolving credit agreement.
The new revolving credit agreement provides up to $225,000 of borrowing
availability, which is collateralized by inventory and accounts receivable.
Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days
prior to each anniversary date, the Company may request and, upon agreement
with the bank, extend the maturity of this facility an additional year. The
interest rate on any loan is equal to the LIBOR plus 1.75%, and increases in
0.25% increments as the excess availability falls below $50,000. The revolver
is subject to financial covenants. This revolver replaces the previous revolver
the Company had with nine major banks, which provided up to $200,000 in
borrowings. The Company recorded an after-tax extraordinary loss related to the
extinguishment of its previous revolving credit agreement of $931. The weighted
average interest rate on borrowings under the revolving credit agreement was
3.8% and 6.2% at February 1, 2003 and February 2, 2002, respectively.
47
In June 2000, the Company repurchased $5,995 face value of the $49,000
Medium-Term Note. The after-tax extraordinary gain was $960.
In February 1998, the Company established a Medium-Term Note program which
permitted the Company to issue up to $200,000 of Medium-Term Notes. Under this
program the Company sold $100,000 principal amount of Senior Notes, ranging in
annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006.
Additionally, in July 1998, under this note program, the Company sold $100,000
of Term Enhanced ReMarketable Securities with a stated maturity date of July
2017. The Company also sold a call option with the securities, which allows the
securities to be remarketed to the public in July 2006 under certain
circumstances. If the securities are not remarketed, the Company will be
obligated to repay the principal amount in full in July 2017. The level yield
to maturity on the securities is approximately 6.85% and the coupon rate is
6.92%.
The other notes payable have a weighted average interest rate of 5.7% at
February 1, 2003 and 4.9% at February 2, 2002, and mature at various times
through August 2016. Certain of these notes are collateralized by land and
buildings with an aggregate carrying value of approximately $7,116 and $7,260
at February 1, 2003 and February 2, 2002, respectively.
CONVERTIBLE DEBT
- ------------------------------------------------------------------------------------------------------------
February 1, 2003 February 2, 2002
- ------------------------------------------------------------------------------------------------------------
4.25% Senior convertible notes,
due June 2007 $150,000 $ -
Less current maturities - -
- ------------------------------------------------------------------------------------------------------------
Total Long-Term Convertible Debt $150,000 $ -
- ------------------------------------------------------------------------------------------------------------
On May 21, 2002, the Company issued $150,000 aggregate principal amount of
4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and
jointly and severally guaranteed by the Company's wholly-owned direct and
indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California,
Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack
of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys common
stock at any time prior to their maturity unless they have been previously
repurchased or redeemed by the Company. The conversion rate is 44.6484 shares
per each $1,000 principal amount of notes, equivalent to a conversion price of
approximately $22.40 per share. Interest on the notes is payable by the
Company on June 1 and December 1 of each year, beginning December 1, 2002.
In fiscal 2001, the Company repurchased the remaining $241,504 face value of
its Liquid Yield Option Notes (LYONs). The book value of the repurchased LYONs
was $161,812 and the net after-tax extraordinary loss was $765.
In fiscal 2000, the Company repurchased $30,200 face value of its LYONs. The
book value of the repurchased LYONs was $19,226 and the after-tax extraordinary
gain was $2,025.
On September 20, 1996, the Company issued $271,704 principal amount (at
maturity) of LYONs with a price to the public of $150,000. The net proceeds to
the Company were $146,250. These notes were retired in fiscal 2001 as stated
above.
48
Several of the Company's debt agreements require the maintenance of certain
financial ratios and compliance with covenants. Approximately $37,319 of the
Company's net worth was not restricted by these covenants as of February 1,
2003. The Company was in compliance with all such ratios and covenants at
February 1, 2003.
The annual maturities of all long-term debt and capital lease commitments for
the next five years are:
Long-Term Capital
Year Debt Leases Total
- ------------------------------------------------------------------------------
2003 $ 101,183 $ 699 $ 101,882
2004 117,562 49 117,611
2005 109,017 - 109,017
2006 148,468 - 148,468
2007 150,235 - 150,235
Thereafter 246 - 246
- ------------------------------------------------------------------------------
Total $ 626,711 $ 748 $ 627,459
- ------------------------------------------------------------------------------
The Company was contingently liable for outstanding letters of credit in the
amount of approximately $42,879 at February 1, 2003. The Company was also
contingently liable for surety bonds in the amount of approximately $9,375 at
February 1, 2003.
NOTE 3 - ACCRUED EXPENSES
The Company's accrued expenses for fiscal years ended February 1, 2003 and
February 2, 2002 were as follows:
February 1, February 2,
Year ended 2003 2002
- -----------------------------------------------------------
Medical and casualty insurance $ 124,571 $ 111,136
Accrued compensation and
related taxes 49,923 45,494
Other 57,761 60,763
- -----------------------------------------------------------
Total $ 232,255 $ 217,393
- -----------------------------------------------------------
49
NOTE 4 - LEASE AND OTHER COMMITMENTS
In May 2001, the Company sold certain operating assets for $14,000. The assets
were leased back from the purchaser in a lease structured as a one-year term
with three one-year renewal options. The resulting lease is being accounted
for as an operating lease and the gain of $3,817 from the sale of the certain
operating assets is deferred until the lease term is completed and the residual
guarantee is satisfied, at which time the gain will be recorded in costs of
merchandise sales and costs of service revenue on the consolidated statement
of operations.
In January 2001, the Company sold certain assets for $10,464. The assets were
leased back from the purchaser on a month to month renewable term basis with a
residual guarantee given by the Company at the end of the lease term. The
resulting lease is being accounted for as an operating lease and the gain of
$593 from the sale of the certain assets is deferred until the lease term is
completed and the residual guarantee is satisfied, at which time the gain will
be recorded in costs of merchandise sales on the consolidated statement of
operations.
In September 2000, the Company entered into a $143,000 real estate operating
lease facility with leased property trusts, established as an unconsolidated
special-purpose entity. The real estate operating lease facility, which has an
interest rate of LIBOR plus 1.85%, replaces $143,000 of leases, which had an
interest rate of LIBOR plus 2.27%. The Company, as a result of replacing the
existing operating leases, recorded a pretax charge to fiscal 2000 earnings of
$1,630 of unamortized lease costs, which was recorded in the costs of
merchandise sales section of the consolidated statement of operations. The
$143,000 real estate operating lease facility has a four-year term with a
guaranteed residual value. At February 1, 2003, the Company had approximately
$132,000 of real estate leased under the facility and the maximum amount of
the residual guarantee relative to the real estate under the lease is
approximately $92,372. The Company expects the fair market value of the leased
real estate, subject to the purchase option or sale to a third party, to
substantially reduce or eliminate the Company's payment under the residual
guarantee at the end of the lease term.
50
The Company leases certain property and equipment under operating leases and
capital leases which contain renewal and escalation clauses. Future minimum
rental commitments for noncancelable operating leases and capital leases in
effect as of February 1, 2003 are shown in the table below. All amounts are
exclusive of lease obligations and sublease rentals applicable to stores for
which reserves in conjunction with the Profit Enhancement Plan have previously
been established. The aggregate minimum rental commitments for such leases
having terms of more than one year are approximately:
- -------------------------------------------------------------------------------
Operating Capital
Year Leases Leases
- -------------------------------------------------------------------------------
2003 $ 46,640 $ 734
2004 43,485 49
2005 36,634 -
2006 36,487 -
2007 36,313 -
Thereafter 301,081 -
-------- --------
Aggregate minimum lease commitments $500,640 783
========
Less: Interest on capital leases 35
-------
Present Value of Net Minimum Lease
Commitments $ 748
========
- -------------------------------------------------------------------------------
Rental expenses incurred for operating leases in fiscal 2002, 2001 and 2000
were $64,266, $64,434 and $63,206, respectively.
In October 2001, the Company entered into a contractual commitment to purchase
media advertising services with equal annual purchase requirements totaling
$39,773 over four years. As of February 1, 2003, the Company was obligated to
purchase an outstanding balance of $23,393. The minimum required purchases for
each of the remaining three years of this commitment are as follows: 2003 -
$5,993; 2004 - $9,943; 2005 - $7,457.
The Company has a commitment due in the next year of $4,900 related to the
non-renewal of the Chairman and CEO's employment agreement.
NOTE 5 - STOCKHOLDERS' EQUITY
SHARE REPURCHASE - TREASURY STOCK On February 1, 1999, the Company repurchased
11,276,698 of its common shares outstanding pursuant to a Dutch Auction
self-tender offer at a price of $16.00 per share. The repurchased shares
included 1,276,698 common shares which were repurchased as a result of the
Company exercising its option to purchase an additional 2% of its outstanding
shares. Expenses related to the share repurchase were approximately $1,638 and
were included as part of the cost of the shares acquired. A portion of the
treasury shares will be used by the Company to provide benefits to employees
under its compensation plans and in conjunction with the Company's dividend
reinvestment program. As of February 1, 2003, the Company has reflected
10,070,729 shares of its common stock at a cost of $162,595 as "cost of
shares in treasury" on the Company's consolidated balance sheet.
51
RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend
one common share purchase right on each of its common shares. The rights will
not be exercisable or transferable apart from the Company's common stock until
a person or group, as defined in the rights agreement (dated December 5, 1997),
without the proper consent of the Company's Board of Directors, acquires 15% or
more, or makes an offer to acquire 15% or more of the Company's outstanding
stock. When exercisable, the rights entitle the holder to purchase one share of
the Company's common stock for $125. Under certain circumstances, including the
acquisition of 15% of the Company's stock by a person or group, the rights
entitle the holder to purchase common stock of the Company or common stock of
an acquiring company having a market value of twice the exercise price of the
right. The rights do not have voting power and are subject to redemption by
the Company's Board of Directors for $.01 per right anytime before a 15%
position has been acquired and for 10 days thereafter, at which time the rights
become nonredeemable. The rights expire on December 31, 2007.
BENEFITS TRUST On April 29, 1994, the Company established a flexible employee
benefits trust with the intention of purchasing up to $75,000 worth of the
Company's common shares. The repurchased shares will be held in the trust and
will be used to fund the Company's existing benefit plan obligations including
healthcare programs, savings and retirement plans and other benefit
obligations. The trust will allocate or sell the repurchased shares through
2023 to fund these benefit programs. As shares are released from the trust, the
Company will charge or credit additional paid-in capital for the difference
between the fair value of shares released and the original cost of the shares
to the trust. For financial reporting purposes, the trust is consolidated with
the accounts of the Company. All dividend and interest transactions between the
trust and the Company are eliminated. In connection with the Dutch Auction
self-tender offer, 37,230 shares were tendered at a price of $16.00 per share
in fiscal 1999. At February 1, 2003, the Company has reflected 2,195,270 shares
of its common stock at a cost of $59,264 as "cost of shares in benefits trust"
on the Company's consolidated balance sheet.
NOTE 6 - PROFIT ENHANCEMENT PLAN
In the third quarter of fiscal 2000, the Company comprehensively reviewed its
field, distribution and Store Support Center infrastructure and the performance
of each of its stores. As a result, the Company implemented a number of changes
that have improved its performance. These changes included the closure of 38
under-performing stores and two distribution centers and reductions in store
operating hours and the Store Support Center infrastructure.
PLAN UPDATE
The Company is progressing towards the disposal of the 38 stores (11 owned and
27 leased), two distribution centers and two development parcels that were
closed or abandoned in connection with the Profit Enhancement Plan. As of
February 1, 2003, the Company had disposed of 22 of the closed stores, the two
distribution centers and the two development parcels. During fiscal 2002, the
Company decided to lease rather than sell three of the closed stores due to
changes in the real estate market. As a result, the Company reclassified these
three owned properties as assets held for use. The Company estimates that the
remaining closed stores (one owned and 12 leased) will be disposed of by the
end of the third quarter of fiscal 2003.
ASSETS HELD FOR DISPOSAL
As of February 1, 2003, the assets held for disposal included the building and
land of one remaining closed store owned by the Company, which has a carrying
value of $1,146. This property was sold in the first quarter of fiscal 2003.
The Company has sold nine of the 13 owned properties originally held for sale,
which included the two development parcels. Additionally, the Company decided
to lease rather than sell three of the closed stores due to changes in the real
estate market. As a result, the Company reclassified these three owned
properties as assets held for use at their estimated market value. The market
value of each such property was lower than cost adjusted for depreciation.
52
In fiscal 2002, the Company sold six and reclassified three (as assets held for
use) of the 13 owned properties. The six properties were sold for $8,446, net
of commissions, and resulted in a loss of $666, which was recorded in costs of
merchandise sales on the consolidated statement of operations. In addition, the
Company adjusted the carrying values of certain assets held for disposal, which
resulted in a net decrease of $160, which was recorded in costs of merchandise
sales on the consolidated statement of operations.
In fiscal 2001, the Company sold three of the 13 owned properties for $4,103,
net of commissions, and resulted in a loss of $691, which was recorded in costs
of merchandise sales and selling, general and administrative expenses on the
consolidated statement of operations. In addition, the Company recorded a
downward revision in the estimated values for certain properties of $1,496 in
fiscal 2001. This expense was recorded in costs of merchandise sales on the
consolidated statement of operations. In fiscal 2001, the Company recorded a
loss for equipment held for disposal of $162, which was due primarily to a
reduction in the Company's estimated proceeds.
In fiscal 2000, the Company recorded charges related to the write-down of
assets to fair value of $58,754. These charges were associated with the
closure of the 38 stores, two distribution centers, the write-off of certain
equipment and the abandonment of two development parcels.
LEASE RESERVE
As of February 1, 2003, the Company was able to sublease eight and exit the
lease of an additional seven of the 27 leased stores. The Company expects the
remaining 12 closed stores that are leased to be subleased or otherwise
disposed of by the end of the third quarter of fiscal 2003.
The Company increased the lease reserve $901 during fiscal 2002. This increase
is due primarily to an increase in the time that it is expected to take to
sublease certain properties, offset, in part, by an increase in the estimated
sublease rates. The effect of these adjustments was recorded in costs of
merchandise sales and costs of service revenue on the consolidated statement of
operations.
The Company increased the lease reserve $1,644 during fiscal 2001. This change
in the reserve was a result of a $3,834 increase due primarily to an increase
in the estimated amount of time it was expected to take the Company to sublease
certain properties and a decrease in estimated sublease rates. The reserve
increase was offset, in part, by a $2,190 decrease due primarily to lower than
estimated commissions and lease exit costs on subleases for certain properties.
The effects of these adjustments were recorded in costs of merchandise sales
and costs of service revenue on the consolidated statement of operations.
In fiscal 2000, the Company recorded a reserve of $7,916 for leases of
properties included in the Profit Enhancement Plan. The Company increased the
reserve by $113 during the remainder of fiscal 2000. These changes in the
reserve were a result of a $1,176 increase due to an increase in the estimated
lease payments related to the closed stores. The increase was offset, in part,
by a $1,063 decrease due primarily to an increase in the estimated sublease
rates coupled with lower lease-related expenses. The effects of these
adjustments were recorded in costs of merchandise sales and costs of service
revenue on the consolidated statement of operations.
ON-GOING EXPENSES
The on-going expense reserve represents exit activity costs which are not
associated with or do not benefit the Company's continuing activities. These
costs are necessary to maintain the remaining closed stores until sold, sublet
or otherwise disposed. The on-going costs reserve includes general maintenance
costs such as utilities, security, telephone, real estate taxes and personal
property taxes which will be incurred until the properties are disposed. The
reserve for on-going costs will diminish as sites are sold, sublet or otherwise
disposed. These disposals are expected to be completed by the end of the third
quarter of fiscal 2003.
53
In fiscal 2002, the Company increased the on-going expense reserve by $802.
This increase is due primarily to an increase in the length of time that it is
expected to take to sublease, sell or otherwise dispose of the remaining
properties. This adjustment was recorded in costs of merchandise sales, costs
of service revenue, and selling, general and administrative expenses on the
consolidated statement of operations.
In fiscal 2001, the Company increased the on-going expense reserve by $595.
This increase was due primarily to a $1,214 increase in the reserve due to an
increase in the estimated time it was expected to take to sublease, sell or
otherwise dispose of the remaining properties offset, in part, by a $619
decrease due to lower than anticipated cost for utilities and security. This
adjustment was recorded in costs of merchandise sales, costs of service
revenue, and selling, general and administrative expenses on the consolidated
statement of operations.
In fiscal 2000, the Company recorded a reserve of $3,944 for on-going expenses
associated with the properties included in the Profit Enhancement Plan. The
Company increased the on-going expense reserve by $361 during the remainder of
fiscal 2000. This increase was due to an increase in the estimated time it was
expected to take to sublease, sell or otherwise dispose of the remaining
properties. This adjustment was recorded in costs of merchandise sales, costs
of service revenue, and selling, general and administrative expenses on the
consolidated statement of operations.
SEVERANCE RESERVE
In fiscal 2001, the severance reserve was completed. Therefore, there was no
activity to this reserve in fiscal 2002. In fiscal 2001, the Company reversed
$69 of severance because certain employees who originally expected to receive
severance failed to qualify to receive payments. In addition, final severance
payments were lower than estimated. Each of these reversals was recorded
through the line it was originally charged in the consolidated statements of
operations.
In fiscal 2000, the Company recorded a reserve of $1,694 for severance
associated with the Profit Enhancement Plan. During the remainder of fiscal
2000, the Company reversed $272 of severance due to certain employees'
acceptance into other positions within the Company and other employees failing
to qualify to receive payments. Each reversal was recorded through the line it
was originally charged in the consolidated statements of operations.
The total number of employees separated due to the Profit Enhancement Plan was
approximately 1,000. The 1,000 employees were composed of 76% store employees,
13% distribution employees, and 11% Store Support Center and field
administrative employees. The total severance paid in connection with the
Profit Enhancement Plan was $1,353.
NON-RESERVABLE EXPENSES
Non-reservable expenses are those costs which could not be reserved, but were
incurred as a result of the Profit Enhancement Plan. These expenses related to
costs incurred which had a future economic benefit to the Company, such as the
transferring of inventory and equipment out of properties closed by the Profit
Enhancement Plan.
There were no expenses of this nature incurred in fiscal 2002. In fiscal 2001,
expenses of this nature incurred were $678. These expenses related to the
completion of the removal of inventory and equipment from the closed
distribution centers. In fiscal 2000, expenses of this nature incurred were
$3,611. These expenses were for inventory and equipment handling related to the
closure of the 38 stores and the two distribution centers. The fiscal 2000
expenses were offset by a recovery of certain benefit expenses related to the
reduction in workforce.
54
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Following are tables summarizing expenses related to the Profit Enhancement
Plan for fiscal 2002, 2001 and 2000. The details and reasons for the original
charge and changes to the charge are as described above in the respective
reserve categories.
Income Statement Fiscal Fiscal Fiscal
Classification 2002 2001 2000
- -----------------------------------------------------------------
Costs of
merchandise sales $2,014 $4,169 $67,085
Costs of
service revenue 491 813 5,232
Selling, general and
administrative 24 215 2,628
- -----------------------------------------------------------------
Total Expenses $2,529 $5,197 $74,945
- -----------------------------------------------------------------
At the end of the third quarter of fiscal 2000, the Company set up a reserve
liability account, which is included in accrued expenses on the consolidated
balance sheet. This liability account tracks all accruals including remaining
rent on leases net of sublease income, severance, and on-going expenses for
the closed properties. The following chart reconciles the change in reserve:
Lease Fixed On-going
Expenses Assets Severance Expenses Total
- -----------------------------------------------------------------------------------------
Reserve Balance
at Feb. 3, 2001 $ 7,054 $ - $ 209 $ 2,960 $ 10,223
Addition 3,834 2,440 - 1,214 7,488
Utilization (5,548) (2,349) (140) (2,235) (10,272)
Adjustment (2,190) (91) (69) (619) (2,969)
- -----------------------------------------------------------------------------------------
Reserve Balance
at Feb. 2, 2002 3,150 - - 1,320 4,470
Addition 1,825 826 - 802 3,453
Utilization (2,959) (826) - (1,680) (5,465)
Adjustment (924) - - - (924)
- -----------------------------------------------------------------------------------------
Reserve Balance
at Feb. 1, 2003 $ 1,092 $ - $ - $ 442 $ 1,534
- -----------------------------------------------------------------------------------------
55
NOTE 7 - SUPPLEMENTAL GUARANTOR INFORMATION - CONVERTIBLE SENIOR NOTES
On May 21, 2002, the Company issued $150,000 aggregate principal amount of
4.25% Convertible Senior Notes. The notes are jointly and severally guaranteed
by the Company's wholly-owned direct and indirect operating subsidiaries
("subsidiary guarantors"), The Pep Boys Manny Moe & Jack of California,
Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack
of Puerto Rico, Inc.
The following are consolidating balance sheets of the Company as of
February 1, 2003 and February 2, 2002 and the related consolidating statements
of operations and consolidating statements of cash flows for the fiscal years
ended February 1, 2003, February 2, 2002 and February 3, 2001:
CONSOLIDATING BALANCE SHEET
Non-
Subsidiary guarantor
Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 32,654 $ 9,714 $ 402 $ - $ 42,770
Accounts receivable, net 8,122 9,794 - - 17,916
Merchandise inventories 166,166 322,716 - - 488,882
Prepaid expenses 29,176 16,308 17,637 (19,375) 43,746
Deferred income taxes 6,812 (819) 7,730 - 13,723
Other 107 - 56,580 - 56,687
Assets held for disposal - 1,146 - - 1,146
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 243,037 358,859 82,349 (19,375) 664,870
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 92,540 186,569 - - 279,109
Buildings and improvements 313,927 622,843 - - 936,770
Furniture, fixtures and equipment 286,922 317,609 - - 604,531
Construction in progress 14,764 4,686 - - 19,450
- -----------------------------------------------------------------------------------------------------------------------------
708,153 1,131,707 - - 1,839,860
Less accumulated depreciation and amortization 326,820 425,003 - - 751,823
- -----------------------------------------------------------------------------------------------------------------------------
Total Property and Equipment - Net 381,333 706,704 - - 1,088,037
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,455,877 - 1,121,299 (2,577,176) -
Intercompany receivable - 631,438 335,640 (967,078) -
Other 41,972 5,031 - - 47,003
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,122,219 $ 1,702,032 $ 1,539,288 $ (3,563,629) $ 1,799,910
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 200,044 $ 9 $ - $ - $ 200,053
Accrued expenses 59,625 48,567 143,438 (19,375) 232,255
Current maturities of long-term debt and
obligations under capital leases 101,882 - - - 101,882
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 361,551 48,576 143,438 (19,375) 534,190
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 375,216 361 - - 375,577
Convertible long-term debt,
less current maturities 150,000 - - - 150,000
Other long-term liabilities 5,955 19,201 - - 25,156
Intercompany liabilities 544,877 422,201 - (967,078) -
Deferred income taxes 33,322 27,341 - - 60,663
Deferred gain on sale leaseback 1,306 3,026 - - 4,332
Stockholders' Equity:
Common stock 63,911 1,501 101 (1,602) 63,911
Additional paid-in capital 177,244 240,359 200,398 (440,757) 177,244
Retained earnings 630,847 939,466 1,195,351 (2,134,817) 630,847
Accumulated other comprehensive loss (151) - - - (151)
- -----------------------------------------------------------------------------------------------------------------------------
871,851 1,181,326 1,395,850 (2,577,176) 871,851
Less:
Cost of shares in treasury 162,595 - - - 162,595
Cost of shares in benefits trust 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 649,992 1,181,326 1,395,850 (2,577,176) 649,992
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,122,219 $ 1,702,032 $ 1,539,288 $ (3,563,629) $ 1,799,910
- -----------------------------------------------------------------------------------------------------------------------------
56
CONSOLIDATING BALANCE SHEET
Non-
Subsidiary guarantor
Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,796 $ 10,874 $ 311 $ - $ 15,981
Accounts receivable, net 17,124 928 - - 18,052
Merchandise inventories 176,696 342,777 - - 519,473
Prepaid expenses 42,384 (15,815) 17,851 (2,250) 42,170
Deferred income taxes 6,581 (4,220) 6,942 - 9,303
Other 3 - 67,305 (15,000) 52,308
Assets held for disposal 2,755 13,252 - - 16,007
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 250,339 347,796 92,409 (17,250) 673,294
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 92,661 185,065 - - 277,726
Buildings and improvements 308,444 613,621 - - 922,065
Furniture, fixtures and equipment 273,028 310,890 - - 583,918
Construction in progress 5,380 5,361 - - 10,741
- -----------------------------------------------------------------------------------------------------------------------------
679,513 1,114,937 - - 1,794,450
Less accumulated depreciation and amortization 293,704 383,260 - - 676,964
- -----------------------------------------------------------------------------------------------------------------------------
Total Property and Equipment - Net 385,809 731,677 - - 1,117,486
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,388,724 - 1,050,494 (2,439,218) -
Intercompany receivable - 567,825 301,321 (869,146) -
Other 13,355 2,000 - - 15,355
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,038,227 $ 1,649,298 $ 1,444,224 $ (3,325,614) $ 1,806,135
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 216,076 $ 9 $ - $ - $ 216,085
Accrued expenses 56,065 48,093 130,485 (17,250) 217,393
Current maturities of long-term debt and
obligations under capital leases 124,615 - - - 124,615
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 396,756 48,102 130,485 (17,250) 558,093
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 497,603 46,815 - - 544,418
Other long-term liabilities 6,339 17,541 - - 23,880
Intercompany liabilities 488,066 381,080 - (869,146) -
Deferred income taxes 30,357 27,153 - - 57,510
Deferred gain on sale leaseback 1,316 3,128 - - 4,444
Stockholders' Equity:
Common stock 63,911 1,501 101 (1,602) 63,911
Additional paid-in capital 177,244 240,359 200,398 (440,757) 177,244
Retained earnings 601,944 883,619 1,113,240 (1,996,859) 601,944
- -----------------------------------------------------------------------------------------------------------------------------
843,099 1,125,479 1,313,739 (2,439,218) 843,099
Less:
Cost of shares in treasury 166,045 - - - 166,045
Cost of shares in benefits trust 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 617,790 1,125,479 1,313,739 (2,439,218) 617,790
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,038,227 $ 1,649,298 $ 1,444,224 $ (3,325,614) $ 1,806,135
- -----------------------------------------------------------------------------------------------------------------------------
57
CONSOLIDATING STATEMENT OF OPERATIONS
Non-
Subsidiary guarantor
Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 603,294 $ 1,153,381 $ - $ - $ 1,756,675
Service Revenue 145,365 270,448 - - 415,813
Other Revenue - - 26,075 (26,075) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 748,659 1,423,829 26,075 (26,075) 2,172,488
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 419,006 807,821 - - 1,226,827
Costs of Service Revenue 105,358 206,192 - - 311,550
Costs of Other Revenue - - 29,498 (29,498) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 524,364 1,014,013 29,498 (29,498) 1,538,377
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 184,288 345,560 - - 529,848
Gross Profit from Service Revenue 40,007 64,256 - - 104,263
Gross Loss from Other Revenue - - (3,423) 3,423 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 224,295 409,816 (3,423) 3,423 634,111
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 173,037 343,669 317 3,423 520,446
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 51,258 66,147 (3,740) - 113,665
Equity in Earnings of Subsidiaries 67,153 - 70,805 (137,958) -
Non-operating (Expense) Income (16,977) 47,332 21,113 (48,371) 3,097
Interest Expense 69,720 25,509 - (48,371) 46,858
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 31,714 87,970 88,178 (137,958) 69,904
Income Tax (Benefit) Expense (12,325) 32,124 6,066 - 25,865
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings Before Extraordinary Items 44,039 55,846 82,112 (137,958) 44,039
Extraordinary Items, Net of Tax (239) - - - (239)
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 43,800 $ 55,846 $ 82,112 $ (137,958) $ 43,800
- -----------------------------------------------------------------------------------------------------------------------------
58
CONSOLIDATING STATEMENT OF OPERATIONS
Non-
Subsidiary guarantor
Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 605,375 $ 1,160,268 $ - $ - $ 1,765,643
Service Revenue 148,396 270,521 - - 418,917
Other Revenue - - 22,588 (22,588) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 753,771 1,430,789 22,588 (22,588) 2,184,560
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 429,108 821,300 - - 1,250,408
Costs of Service Revenue 110,145 205,766 - - 315,911
Costs of Other Revenue - - 26,118 (26,118) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 539,253 1,027,066 26,118 (26,118) 1,566,319
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 176,267 338,968 - - 515,235
Gross Profit from Service Revenue 38,251 64,755 - - 103,006
Gross Loss from Other Revenue - - (3,530) 3,530 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 214,518 403,723 (3,530) 3,530 618,241
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 172,529 337,583 304 3,530 513,946
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 41,989 66,140 (3,834) - 104,295
Equity in Earnings of Subsidiaries 65,109 - 73,910 (139,019) -
Non-operating (Expense) Income (16,795) 49,962 22,979 (52,702) 3,444
Interest Expense 72,243 31,794 - (52,702) 51,335
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 18,060 84,308 93,055 (139,019) 56,404
Income Tax (Benefit) Expense (18,040) 31,643 6,701 - 20,304
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings Before Extraordinary Items 36,100 52,665 86,354 (139,019) 36,100
Extraordinary Items, Net of Tax (765) - - - (765)
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 35,335 $ 52,665 $ 86,354 $ (139,019) $ 35,335
- -----------------------------------------------------------------------------------------------------------------------------
59
CONSOLIDATING STATEMENT OF OPERATIONS
Non-
Subsidiary guarantor
Year ended February 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 670,807 $ 1,286,673 $ - $ - $ 1,957,480
Service Revenue 164,097 296,891 - - 460,988
Other Revenue - - 22,672 (22,672) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 834,904 1,583,564 22,672 (22,672) 2,418,468
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 507,069 998,373 - - 1,505,442
Costs of Service Revenue 132,944 248,231 - - 381,175
Costs of Other Revenue - - 24,097 (24,097) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 640,013 1,246,604 24,097 (24,097) 1,886,617
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 163,738 288,300 - - 452,038
Gross Profit from Service Revenue 31,153 48,660 - - 79,813
Gross Loss from Other Revenue - - (1,425) 1,425 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 194,891 336,960 (1,425) 1,425 531,851
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 246,171 311,978 309 1,425 559,883
- -----------------------------------------------------------------------------------------------------------------------------
Operating (Loss) Profit (51,280) 24,982 (1,734) - (28,032)
Equity in Earnings of Subsidiaries 52,268 - 85,390 (137,658) -
Non-operating (Expense) Income (19,742) 68,461 23,977 (70,451) 2,245
Interest Expense 93,812 34,521 - (70,451) 57,882
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings Before Income Taxes (112,566) 58,922 107,633 (137,658) (83,669)
Income Tax (Benefit) Expense (59,418) 21,112 7,785 - (30,521)
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings Before Extraordinary Items (53,148) 37,810 99,848 (137,658) (53,148)
Extraordinary Items, Net of Tax 2,054 - - - 2,054
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings $ (51,094) $ 37,810 $ 99,848 $ (137,658) $ (51,094)
- -----------------------------------------------------------------------------------------------------------------------------
60
CONSOLIDATING STATEMENT OF CASH FLOWS
Non-
Subsidiary guarantor
Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Earnings $ 43,800 $ 55,846 $ 82,112 $ (137,958) $ 43,800
Adjustments to Reconcile Net
Earnings to Net Cash Provided
By Operating Activities:
Extraordinary item, net of tax 239 - - - 239
Depreciation and amortization 33,858 45,693 - - 79,551
Deferred income taxes 2,823 (3,211) (788) - (1,176)
Deferred gain on sale leaseback (11) (101) - - (112)
Equity in earnings of subsidiaries (67,153) - (70,805) 137,958 -
Loss on assets held for disposal 11 815 - - 826
Gain from sale of assets (218) (1,695) - - (1,913)
Change in current assets and liabilities
Decrease (Increase) in accounts
receivable, prepaid expenses and other 14,769 (41,241) 10,938 2,125 (13,409)
Decrease in merchandise inventories 10,530 20,061 - - 30,591
Decrease in accounts payable (16,032) - - - (16,032)
Increase in accrued expenses 3,459 472 12,953 (2,125) 14,759
(Decrease) Increase in other
long-term liabilities (384) 1,660 - - 1,276
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 25,691 78,299 34,410 - 138,400
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (27,168) (16,743) - - (43,911)
Proceeds from sales of assets 2,050 9,008 - - 11,058
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (25,118) (7,735) - - (32,853)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net payments under line of credit
agreements (23,841) (46,454) - - (70,295)
Repayment of life insurance policy loan (17,908) (2,778) - - (20,686)
Payments on capital lease obligations (642) - - - (642)
Reduction of long-term debt (121,938) - - - (121,938)
Net proceeds from issuance of notes 146,250 - - - 146,250
Intercompany loan 56,811 (22,492) (34,319) - -
Dividends paid (13,911) - - - (13,911)
Proceeds from exercise of stock options 1,139 - - - 1,139
Proceeds from dividend reinvestment plan 1,325 - - - 1,325
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 27,285 (71,724) (34,319) - (78,758)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 27,858 (1,160) 91 - 26,789
Cash and Cash Equivalents at Beginning of Year 4,796 10,874 311 - 15,981
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 32,654 $ 9,714 $ 402 $ - $ 42,770
- -----------------------------------------------------------------------------------------------------------------------------
61
CONSOLIDATING STATEMENT OF CASH FLOWS
Non-
Subsidiary guarantor
Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Earnings $ 35,335 $ 52,665 $ 86,354 $ (139,019) $ 35,335
Adjustments to Reconcile Net
Earnings to Net Cash Provided
By Operating Activities:
Extraordinary item, net of tax 765 - - - 765
Depreciation and amortization 36,676 48,017 - - 84,693
Deferred income taxes 1,110 6,730 (416) - 7,424
Deferred gain on sale leaseback (12) (14) - - (26)
Equity in earnings of subsidiaries (65,109) - (73,910) 139,019 -
Accretion of bond discount 3,256 - - - 3,256
Loss on assets held for disposal 24 2,325 - - 2,349
Gain from sale of assets (47) (1,043) - - (1,090)
Change in current assets and liabilities
(Increase) Decrease in accounts
receivable, prepaid expenses and other (34,572) 35,258 (18,087) (1,325) (18,726)
Decrease in merchandise inventories 9,674 18,588 - - 28,262
Increase in accounts payable 11,330 - - - 11,330
(Decrease) Increase in accrued expenses (16,547) 18,253 9,064 1,325 12,095
Increase in other long-term liabilities 219 2,007 - - 2,226
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Operating Activities (17,898) 182,786 3,005 - 167,893
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (14,392) (10,983) - - (25,375)
Proceeds from sales of assets 7,205 19,555 - - 26,760
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (7,187) 8,572 - - 1,385
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net payments under line of credit
agreements (19,147) (37,729) - - (56,876)
Reduction of long-term debt (18,571) - - - (18,571)
Reduction of convertible debt (161,056) - - - (161,056)
Net proceeds from issuance of notes 87,522 - - - 87,522
Intercompany loan 152,962 (149,793) (3,169) - -
Dividends paid (13,864) - - - (13,864)
Proceeds from exercise of stock options 181 - - - 181
Proceeds from dividend reinvestment plan 1,372 - - - 1,372
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 29,399 (187,522) (3,169) - (161,292)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 4,314 3,836 (164) - 7,986
Cash and Cash Equivalents at Beginning of Year 482 7,038 475 - 7,995
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 4,796 $ 10,874 $ 311 $ - $ 15,981
- -----------------------------------------------------------------------------------------------------------------------------
62
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Non-
Subsidiary guarantor
Year ended February 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net (Loss) Earnings $ (51,094) $ 37,810 $ 99,848 $ (137,658) $ (51,094)
Adjustments to Reconcile Net
Earnings to Net Cash Provided
By Operating Activities:
Extraordinary item, net of tax (2,054) - - - (2,054)
Depreciation and amortization 41,455 57,853 - - 99,308
Deferred income taxes (4,459) (19,657) (459) - (24,575)
Equity in earnings of subsidiaries (52,268) - (85,390) 137,658 -
Accretion of bond discount 6,425 - - - 6,425
Loss on assets held for disposal 4,527 49,213 - - 53,740
Loss on asset impairment 2,469 3,266 - - 5,735
Loss from sale of assets 745 2,906 - - 3,651
Change in current assets and liabilities
Decrease (Increase) in accounts
receivable, prepaid expenses and other 13,162 (171) (3,339) 150 9,802
Decrease in merchandise inventories 324 34,839 - - 35,163
Decrease in accounts payable (114,964) - (347) - (115,311)
Increase (Decrease) in accrued expenses 3,818 (12,154) 6,231 (150) (2,255)
Increase in other long-term liabilities 116 940 - - 1,056
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Operating Activities (151,798) 154,845 16,544 - 19,591
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (24,296) (33,040) - - (57,336)
Proceeds from sales of assets 4,803 9,577 - - 14,380
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (19,493) (23,463) - - (42,956)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net borrowings under line of credit
agreements 33,446 84,089 - - 117,535
Reduction of long-term debt (75,028) - - - (75,028)
Reduction of convertible debt (17,208) - - - (17,208)
Intercompany loan 233,972 (217,590) (16,382) - -
Dividends paid (13,793) - - - (13,793)
Proceeds from dividend reinvestment plan 1,369 - - - 1,369
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 162,758 (133,501) (16,382) - 12,875
- -----------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (8,533) (2,119) 162 - (10,490)
Cash and Cash Equivalents at Beginning of Year 9,015 9,157 313 - 18,485
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 482 $ 7,038 $ 475 $ - $ 7,995
- -----------------------------------------------------------------------------------------------------------------------------
63
NOTE 8 - PENSION AND SAVINGS PLANS
The Company has a defined benefit pension plan covering substantially all of
its full-time employees hired on or before February 1, 1992. Normal retirement
age is 65. Pension benefits are based on salary and years of service. The
Company's policy is to fund amounts as are necessary on an actuarial basis to
provide assets sufficient to meet the benefits to be paid to plan members in
accordance with the requirements of ERISA.
The actuarial computations are made using the "projected unit credit method."
Variances between actual experience and assumptions for costs and returns on
assets are amortized over the remaining service lives of employees under the
plan.
As of December 31, 1996, the Company froze the accrued benefits under the plan
and active participants became fully vested. The plan's trustee will continue
to maintain and invest plan assets and will administer benefit payments.
The Company also has a Supplemental Executive Retirement Plan (SERP). This
unfunded plan provides key employees designated by the Board of Directors with
retirement and death benefits. Retirement benefits are based on salary and
bonuses; death benefits are based on salary. Benefits paid to a participant
under the defined pension plan are deducted from the benefits otherwise payable
under the SERP.
Effective March 25, 2002, the Company modified the benefit formula of the SERP.
These modifications resulted in a $2,101 change in benefit obligation in fiscal
2002.
In fiscal 2003, the Company anticipates an approximate settlement of $12,200
related to the SERP obligation for the Chairman and CEO. This obligation will
result in an expense for settlement accounting under SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits," of approximately $4,900 in fiscal 2003.
Pension expense includes the following:
February 1, February 2, February 3,
Year ended 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Service cost $ 587 $ 328 $ 335
Interest cost 2,934 2,526 2,443
Expected return on plan assets (2,300) (2,162) (2,261)
Amortization of transition obligation 274 60 60
Amortization of prior service cost 297 10 10
Recognized actuarial loss 1,451 992 890
- -----------------------------------------------------------------------------------------------------------------------------
Total Pension Expense $ 3,243 $ 1,754 $ 1,477
- -----------------------------------------------------------------------------------------------------------------------------
Pension plan assets are stated at fair market value and are composed primarily
of money market funds, stock index funds, fixed income investments with
maturities of less than five years, and the Company's common stock.
64
The following table sets forth the reconciliation of the benefit obligation,
fair value of plan assets and funded status of the Company's plans:
February 1, February 2,
Year ended 2003 2002
- --------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 37,098 $34,517
Service cost 587 328
Interest cost 2,934 2,526
Plan amendments 2,101 -
Actuarial loss 5,202 1,014
Benefits paid (1,335) (1,287)
- ---------------------------------------------------------------------------------------------------------------
Benefit Obligation at End of Year $ 46,587 $37,098
- ---------------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 27,314 $25,854
Actual return on plan assets (net of expenses) (1,867) 1,816
Employer contributions 6,975 931
Benefits paid (1,335) (1,287)
- ---------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at End of Year $ 31,087 $27,314
- ---------------------------------------------------------------------------------------------------------------
Reconciliation of the Funded Status:
Funded status $(15,500) $(9,785)
Unrecognized transition obligation 2,194 2,468
Unrecognized prior service cost 1,829 26
Unrecognized actuarial loss 11,857 3,933
Amount contributed after measurement date 5 214
- ---------------------------------------------------------------------------------------------------------------
Net Amount Recognized at Year-End $ 385 $(3,144)
- ---------------------------------------------------------------------------------------------------------------
Amounts Recognized on Consolidated Balance Sheets
Consist of:
Prepaid benefit cost $ 9,438 $ 3,960
Accrued benefit liability (13,318) (8,144)
Intangible asset 4,023 1,040
Accumulated other comprehensive loss 242 -
- ---------------------------------------------------------------------------------------------------------------
Net Amount Recognized at Year-End $ 385 $(3,144)
- ---------------------------------------------------------------------------------------------------------------
Weighted-Average Assumptions:
Discount rate 6.75% 7.25%
Expected return on plan assets 8.50% 8.50%
- ---------------------------------------------------------------------------------------------------------------
The following table sets forth additional fiscal year-end information for the
Company's SERP for which the accumulated benefit obligation is in excess of
plan assets:
February 1, February. 2,
Year ended 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Projected benefit obligation $15,752 $9,590
Accumulated benefit obligation 13,318 8,144
Fair value of plan assets - -
- ---------------------------------------------------------------------------------------------------------------
The Company recorded an other comprehensive loss attributable to the change in
the minimum pension liability of $242 ($151, net of tax) in fiscal 2002. The
Company had no other comprehensive loss or income attributable to the change
in the minimum pension liability in fiscal 2001 and 2000.
The Company has 401(k) savings plans which cover all full-time employees who
are at least 21 years of age with one or more years of service. The Company
contributes the lesser of 50% of the first 6% of a participant's contributions
or 3% of the participant's compensation. The Company's savings plans'
contribution expense was $4,417, $4,516 and $4,947 in fiscal 2002, 2001 and
2000, respectively.
65
NOTE 9 - EARNINGS PER SHARE
For fiscal 2002, 2001 and 2000, basic earnings per share are based on net
earnings divided by the weighted average number of shares outstanding during
the period. Diluted earnings per share assumes conversion of convertible senior
notes, zero coupon convertible subordinated notes and the dilutive effects of
stock options. Adjustments for the zero coupon convertible subordinated notes
were antidilutive in fiscal 2001 and 2000, and therefore excluded from the
computation of diluted EPS; the zero coupon convertible subordinated notes were
retired as of the end of fiscal 2001 and will not effect future calculations.
Options to purchase 4,588,670, 3,940,587 and 5,032,772 shares of common stock
were outstanding at February 1, 2003, February 2, 2002 and February 3, 2001,
respectively, but were not included in the computation of diluted EPS because
the options' exercise prices were greater than the average market prices of the
common shares on such dates.
The following schedule presents the calculation of basic and diluted earnings
per share for income before extraordinary items:
February 1, February 2, February 3,
Year ended 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Extraordinary Items:
Basic earnings (loss) before extraordinary
items available to common stockholders $44,039 $36,100 $(53,148)
Adjustment for interest on convertible
senior notes, net of tax 2,807 - -
- -------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) before extraordinary
items available to common stockholders $46,846 $36,100 $(53,148)
- -------------------------------------------------------------------------------------------------------------
Shares:
Basic average number of common shares
outstanding 51,517 51,348 51,088
Common shares assumed issued upon conversion
of convertible senior notes 4,729 - -
Common shares assumed issued upon exercise
of dilutive stock options 953 687 -
- -------------------------------------------------------------------------------------------------------------
Diluted average number of common shares
outstanding assuming conversion 57,199 52,035 51,088
- -------------------------------------------------------------------------------------------------------------
Per Share:
Basic earnings (loss) before extraordinary
items per share $ .85 $ .70 $ (1.04)
Diluted earnings (loss) before extraordinary
items per share $ .82 $ .69 $ (1.04)
- -------------------------------------------------------------------------------------------------------------
66
NOTE 10 - STOCK OPTION PLANS
Options to purchase the Company's common stock have been granted to key
employees and members of the Board of Directors. The option prices are at least
100% of the fair market value of the common stock on the grant date.
On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan which
authorized the issuance of restricted stock and/or options to purchase up to
1,000,000 shares of the Company's common stock. Additional shares in the
amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by stockholders
on June 4, 1997, May 31, 1995 and June 1, 1993, respectively. In April 2001,
the Board of Directors amended the 1990 Stock Incentive Plan to extend the
expiration date for the grant of non-qualified stock options and restricted
stock thereunder to directors, officers and employees until March 31, 2005.
Under this plan, both incentive and nonqualified stock options may be granted
to eligible participants. Incentive stock options are fully exercisable on the
second or third anniversary of the grant date or become exercisable over a
four-year period with one-fifth exercisable on the grant date and one-fifth on
each anniversary date for the four years following the grant date. Nonqualified
options are fully exercisable on the third anniversary of their grant date or
become exercisable over a four-year period with one-fifth exercisable on the
grant date and one-fifth on each anniversary date for the four years following
the grant date. Options cannot be exercised more than ten years after the grant
date. As of February 1, 2003, there are 200,354 shares remaining available for
grant.
On June 2, 1999, the stockholders approved the 1999 Stock Incentive Plan which
authorized the issuance of restricted stock and/or options to purchase up to
2,000,000 shares of the Company's common stock. Additional shares in the amount
of 2,500,000 were authorized by stockholders on May 29, 2002. Under this plan,
both incentive and nonqualified stock options may be granted to eligible
participants. The incentive stock options and nonqualified stock options are
fully exercisable on the third anniversary of the grant date or become
exercisable over a four-year period with one-fifth exercisable on the grant
date and one-fifth on each anniversary date for the four years following the
grant date. Options cannot be exercised more than ten years after the grant
date. As of February 1, 2003, there are 2,189,750 shares remaining available
for grant.
Equity Equity
compensation compensation
plans approved plans not approved
by shareholders by shareholders Total
- --------------------------------------------------------------------------------------
Number of securities to
be issued upon exercise
of outstanding options 6,898,170 - 6,898,170
Weighted average exercise
price of outstanding
options $ 16.57 $ - $ 16.57
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in top row) 2,390,104 - 2,390,104
- --------------------------------------------------------------------------------------
67
Stock option transactions for the Company's stock option plans are summarized
as follows:
Fiscal 2002 Fiscal 2001 Fiscal 2000
------------------------ ----------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding - beginning of year 6,316,787 $16.48 5,039,772 $19.63 5,413,622 $22.05
Granted 1,213,300 16.27 1,757,000 6.75 1,160,450 6.34
Exercised (108,880) 8.10 (19,400) 8.77 - -
Cancelled (523,037) 16.45 (460,585) 14.26 (1,534,300) 18.10
Outstanding - end of year 6,898,170 16.57 6,316,787 16.48 5,039,772 19.63
Options exercisable at year end 4,148,570 20.54 3,422,187 22.29 2,501,678 24.93
Weighted average estimated fair value
of options granted 7.20 2.85 2.54
- ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at February 1, 2003:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at Feb. 1, 2003 Life Price at Feb. 1, 2003 Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 5.31 to $13.00 2,186,100 8 years $ 6.51 595,400 $ 6.62
$13.01 to $21.00 2,428,850 8 years 15.91 1,269,950 15.58
$21.01 to $29.00 1,300,617 4 years 23.36 1,300,617 23.36
$29.01 to $37.38 982,603 3 years 31.63 982,603 31.63
- ---------------------------------------------------------------------------------------------------------------------------
$ 5.31 to $37.38 6,898,170 4,148,570
- ---------------------------------------------------------------------------------------------------------------------------
68
NOTE 11 - INCOME TAXES
The provision for income taxes includes the following:
February 1, February 2, February 3,
Year ended 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 25,102 $ 12,640 $ (6,300)
State 1,939 240 353
Deferred:
Federal (1,211) 6,680 (22,776)
State 35 744 (1,798)
- ----------------------------------------------------------------------------------------------------------------------------------
$ 25,865 $ 20,304 $ (30,521)
- ----------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the effective
rate of the provision for income taxes follows:
February 1, February 2, February 3,
Year ended 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal
tax benefits 1.9 1.2 1.2
Job credits (0.3) (0.3) 0.3
Other, net 0.4 0.1 -
- -----------------------------------------------------------------------------------------------------------------------------------
37.0% 36.0% 36.5%
- -----------------------------------------------------------------------------------------------------------------------------------
Items that gave rise to significant portions of the deferred tax accounts are
as follows:
February 1, February 2,
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Inventories $ 4,456 $ 3,841
Employee compensation 7,209 4,990
Store closing reserves 750 375
Legal 2,270 2,438
Real estate tax (2,188) (2,188)
Insurance 6,128 4,621
Benefit accruals (5,860) (5,693)
State tax credit 419 -
Valuation allowance (419) -
Other 958 919
- -----------------------------------------------------------------------------------------------------------------------------------
$ 13,723 $ 9,303
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation $ 72,944 $ 69,093
State taxes (3,046) (2,643)
Accrued leases (9,435) (8,955)
Other 200 15
- -----------------------------------------------------------------------------------------------------------------------------------
$ 60,663 $ 57,510
- -----------------------------------------------------------------------------------------------------------------------------------
Net Deferred Tax Liability $ 46,940 $ 48,207
- -----------------------------------------------------------------------------------------------------------------------------------
69
NOTE 12 - CONTINGENCIES
The Company's California subsidiary is a defendant in a consolidated action
entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack" that is currently
pending in the California Superior Court in Orange County. The two consolidated
actions were originally filed on March 29, 2000 and July 25, 2000.
Plaintiffs are former and current store management employees who claim that
they were improperly classified as exempt from the overtime provisions of
California law and seek to be compensated for all overtime hours worked.
Plaintiffs filed a Motion to certify the case as a class action to represent
all persons employed in California as salaried store managers, assistant store
managers, service managers and assistant service managers since March 29, 1996.
Plaintiffs' Motion to certify the case as a class action was previously granted
by the trial court. The Company's appeals of that decision through the
California Supreme Court were unsuccessful. The Company is now preparing to
move the trial court for reconsideration of its decision to certify the class.
No trial date has been set for the underlying case. The Company intends to
vigorously defend this action and believes that it is not material to the
Company's financial position. An adverse outcome in this action, however,
may have a material adverse effect on the Company's results of operations
for the year in which a judgment, if any, is rendered.
An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys
Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was
previously instituted against the Company in the Court of First Instance of
Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was
subsequently removed to, and is currently pending in, the United States
District Court for the District of Puerto Rico. Plaintiffs are distributors of
a product that claims to improve gas mileage. The plaintiffs allege that the
Company entered into an agreement with them to act as the exclusive retailer of
the product in Puerto Rico that was breached when the Company determined to
stop selling the product. The Company became aware of a Federal Trade
Commission investigation regarding the accuracy of advertising claims
concerning the product's effectiveness. The plaintiffs further allege that
they were negotiating with the manufacturer of the product to obtain the
exclusive distribution rights throughout the United States and that those
negotiations failed. Plaintiffs are seeking damages including payment for the
product that they allege Pep Boys ordered and expenses and loss of sales in
Puerto Rico and the United States resulting from the alleged breach. The
Company believes that the claims are without merit and continues to vigorously
defend this action.
The Company is also party to various other lawsuits and claims, including
purported class actions, arising in the normal course of business. In the
opinion of management, these lawsuits and claims, are not, singularly or in the
aggregate, material to the Company's financial position or results of
operations.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
February 1, 2003 February 2, 2002
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 42,770 $ 42,770 $ 15,981 $ 15,981
Accounts receivable 17,916 17,916 18,052 18,052
Liabilities:
Accounts payable 200,053 200,053 216,085 216,085
Long-term debt including
current maturities 477,459 462,609 669,033 635,080
Senior convertible notes 150,000 133,125 - -
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts approximate fair value because of the short maturity of
these items.
LONG-TERM DEBT INCLUDING CURRENT MATURITIES AND SENIOR CONVERTIBLE
SUBORDINATED NOTES
Interest rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities are used to estimate fair value for
debt issues that are not quoted on an exchange.
The fair value estimates presented herein are based on pertinent information
available to management as of February 1, 2003 and February 2, 2002. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
current estimates of fair value may differ significantly from amounts presented
herein.
70
NOTE 14 - SUBSEQUENT EVENT
On March 26, 2003, the Company announced that its Board of Directors authorized
a share repurchase program for the purchase of up to $25,000 of its outstanding
common stock. Share repurchases may be made from time to time in the open
market or in privately negotiated transactions.
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries
(dollar amounts in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Earnings(Loss) Net
Net Earnings Per Share Before Earnings
(Loss) Before Net Extraordinary (Loss) Cash Market Price
Year Ended Total Gross Operating Extraordinary Earnings Items Per Share Dividends Per Share
Feb. 1, 2003 Revenues Profit Profit Items (Loss) Basic Diluted Basic Diluted Per Share High Low
- -----------------------------------------------------------------------------------------------------------------------------------
1st Quarter $558,973 $161,935 $32,153 $ 13,565 $13,565 $ .26 $ .26 $ .26 $ .26 $.0675 $19.38 $13.55
2nd Quarter 585,785 171,576 38,240 16,683 16,554 .32 .30 .32 .30 .0675 19.04 10.75
3rd Quarter 544,944 163,042 35,220 15,625 15,515 .30 .28 .30 .28 .0675 15.23 8.75
4th Quarter 482,786 137,558 8,052 (1,834) (1,834) (.04) (.04) (.04) (.04) .0675 12.64 10.06
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
Feb. 2, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
1st Quarter $551,577 $155,731 $27,233 $ 9,108 $ 9,108 $ .18 $ .18 $ .18 $ .18 $.0675 $ 7.00 $ 4.40
2nd Quarter 573,074 164,304 32,164 12,285 12,519 .24 .24 .24 .24 .0675 13.97 5.35
3rd Quarter 551,501 155,952 27,608 11,016 10,022 .21 .21 .19 .19 .0675 13.70 8.80
4th Quarter 508,408 142,254 17,290 3,691 3,686 .07 .07 .07 .07 .0675 18.48 11.88
- -----------------------------------------------------------------------------------------------------------------------------------
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.
71
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material contained in the registrant's definitive proxy statement, which
will be filed pursuant to Regulation 14A not later than 120 days after the
end of the Company's fiscal year (the "Proxy Statement"), under the captions
"(ITEM 1) ELECTION OF DIRECTORS," other than "-Report of the Audit Committee of
the Board of Directors," and "-Independent Auditors' Fees" 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 "-Performance Graph" and "-Report of the
Compensation Committee of the Board of Directors on Executive Compensation" is
hereby incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The material in the Proxy Statement under the caption "SHARE OWNERSHIP" is
hereby incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The material in the Proxy Statement under the caption "EXECUTIVE
COMPENSATION-Certain Relationships and Related Transactions" is hereby
incorporated herein by reference.
ITEM 14 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under Securities and Exchange Commission (SEC) rules, the Company is required
to maintain disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Within the 90-day period prior to the filing date of
this report, the Company carried out an evaluation of the effectiveness of
the design and operation of its disclosure controls and procedures. The
Company's management, including the chief executive officer and chief
financial officer, supervised and participated in the evaluation. Based on
this evaluation, the chief executive officer and the chief financial officer
concluded that the Company's disclosure controls and procedures were effective
as of the evaluation date.
Changes In Internal Controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
72
PART IV
ITEM 15 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 35
Consolidated Balance Sheets - February 1, 2003
and February 2, 2002 36
Consolidated Statements of Operations - Years ended February 1, 2003,
February 2, 2002 and February 3, 2001 37
Consolidated Statements of Stockholders' Equity - Years ended February
1, 2003, February 2, 2002 and February 3, 2001 38
Consolidated Statements of Cash Flows - Years ended February 1, 2003,
February 2, 2002, and February 3, 2001 39
Notes to Consolidated Financial Statements 40
2. The following consolidated financial statement schedule of The Pep
Boys - Manny, Moe & Jack is included.
Schedule II Valuation and Qualifying Accounts and Reserves 82
All other schedules have been omitted because they are not applicable
or not required or the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits
(3.1) Articles of Incorporation, Incorporated by reference from
as amended the Company's Form 10-K for the
fiscal year ended January 30,
1988.
(3.2) By-Laws, as amended Incorporated by reference from
the Registration Statement on
Form S-3 (File No. 33-39225).
(3.3) Amendment to By-Laws Incorporated by reference from
(Declassification of Board of Directors) the Company's Form 10-K for the
fiscal year ended January 29,
2000.
(4.1) Indenture, dated as of March 22, Incorporated by reference from
1991 between the Company and the Registration Statement on
Bank America Trust Company of Form S-3 (File No. 33-39225).
New York as Trustee, including
Form of Debt Security
(4.2) Indenture, dated as of June Incorporated by reference from
12, 1995, between the Company the Registration Statement on
and First Fidelity Bank, Form S-3 (File No. 33-59859).
National Association as Trustee,
including Form of Debenture
73
(4.3) Indenture, dated as of July 15, 1997, Incorporated by reference from
between the Company and PNC the Registration Statement on
Bank, National Association, as Form S-3 (File No. 333-30295).
Trustee, providing for the issuance
of Senior Debt Securities, and form
of security
(4.4) Indenture, dated as of February 18, 1998 Incorporated by reference from
between the Company and PNC the Registration Statement on
Bank, National Association, as Form S-3/A (File No. 333-45793).
Trustee, providing for the issuance
of Senior Debt Securities, and form
of security
(4.5) Indenture, dated May 21, 2002, by and among The Incorporated by reference from
Pep Boys - Manny, Moe & Jack, as Issuer, The Pep the Registration Statement on
Boys Manny Moe & Jack of California, Pep Boys - Form S-3 (File No. 333-98255).
Manny, Moe & Jack of Delaware, Inc. and Pep Boys -
Manny, Moe & Jack of Puerto Rico, Inc. as Guarantors,
and Wachovia Bank, National Association, as
Trustee.
.
(10.1)* Medical Reimbursement Plan of Incorporated by reference from
the Company the Company's Form 10-K for the
fiscal year ended January 31,
1982.
(10.2) Rights Agreement dated as of Incorporated by reference from
December 5, 1997 between the the Company's Form 8-K dated
Company and First Union December 8, 1997.
National Bank
(10.3)* Directors' Deferred Compensation Incorporated by reference from
Plan, as amended the Company's Form 10-K for the
fiscal year ended January 30,
1988.
(10.4) Dividend Reinvestment and Stock Purchase Incorporated by reference from
Plan dated January 4, 1990 the Registration Statement on
Form S-3 (File No. 33-32857).
(10.5)* The Pep Boys - Manny, Moe & Incorporated by reference from
Jack Trust Agreement for the the Company's Form 10-K for the
Executive Supplemental Pension fiscal year ended February 1,
Plan and Certain Contingent 1992.
Compensation Arrangements,
dated as of February 13, 1992
(10.6)* 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.
(10.7)* Flexible Employee Benefits Trust Incorporated by reference from
the Company's Form 8-K dated May
6, 1994.
74
(10.8)* Form of Employment Agreement dated as of Incorporated by reference from
June 1998 between the Company and certain the Company's Form 10-Q for the
officers of the Company. quarter ended October 31, 1998.
(10.9)* 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.
(10.10)* 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.
(10.11)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from
1999 Stock Incentive Plan - Amended the Company's Form 10-Q for the
and Restated as of August 31, 1999. quarter ended October 30, 1999.
(10.12) Loan and Security Agreement between the Company and Incorporated by reference from
Congress Financial Corporation dated September 22, 2000. the Company's Form 8-K filed
October 18, 2000.
(10.13) Participation Agreement between the Company and Incorporated by reference from
The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed
September 22, 2000. October 18, 2000.
(10.14) Master Lease Agreement between the Company and Incorporated by reference from
The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed
September 22, 2000. October 18, 2000.
(10.15) Sale-leaseback agreement between the Company Incorporated by reference from
and ARI Fleet LT dated January 31, 2001. the Company's Form 10-K for the
year ended February 3, 2001.
(10.16)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from
1990 Stock Incentive Plan - Amended the Company's Form 10-K for the
and Restated as of March 26, 2001. year ended February 3, 2001.
(10.17) Credit Agreement between the Company Incorporated by reference from
and GMAC Business Credit, LLC dated the Company's Form 8-K filed
June 29, 2001. July 13, 2001.
(10.18) Amendment No. 1 dated as of June 29, 2001 Incorporated by reference from
to the Loan and Security Agreement dated the Company's Form 10-K for the
September 22, 2000 between the Company and year ended February 2, 2002.
Congress Financial Corporation.
(10.19)* The Pep Boys - Manny, Moe & Jack Incorporated by reference from
Pension Plan - Amended and Restated the Company's Form 10-K for the
as of September 10, 2001. year ended February 2, 2002.
(10.20) Advertising Purchase Agreement between Incorporated by reference from
the Company and ICON International, Inc. the Company's Form 10-K for the
dated October 3, 2001. year ended February 2, 2002.
(10.21) Amendment No. 2 dated as of December 13, 2001 Incorporated by reference from
to the Loan and Security Agreement dated the Company's Form 10-K for the
September 22, 2000 between the Company and year ended February 2, 2002.
Congress Financial Corporation.
(10.22)* Amendment and restatement as of September 3, 2002 of Incorporated by reference from
The Pep Boys Savings Plan. the Company's Form 10-Q for the
quarter ended November 2, 2002.
(10.23)* Amendment and restatement as of September 3, 2002 of Incorporated by reference from
The Pep Boys Savings Plan - Puerto Rico. the Company's Form 10-Q for the
quarter ended November 2, 2002.
(10.24)* Amendment Number One to The Pep Boys - Manny, Moe & Incorporated by reference from
Jack 1999 Stock Incentive Plan. the Company's Form 10-Q for the
quarter ended November 2, 2002.
75
(10.25) Amendment No. 3 to Loan and Security Agreement dated Incorporated by reference from
September 22, 2002 between the Company and Congress the Company's Form 10-Q for the
Financial Corporation. quarter ended November 2, 2002.
(10.26)* Long-Term Disability Salary Continuation Plan, amended
and restated as of March 26, 2002.
(10.27)* Amendment to and restatement of the Executive Supplemental
Pension Plan, effective as of March 26, 2002.
(10.28)* Employment agreement between George Babich, Jr. and
the Company dated as of February 28, 2003.
(12) Computation of Ratio of Earnings
to Fixed Charges
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
(99.1) Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(99.2) Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
* Management contract or compensatory plan or arrangement.
(b). The Company filed an 8-K on November 8, 2002 disclosing
the effectiveness of the Company's Form S-3 registering
the resale of its 4.25% convertible senior notes due
June 1, 2007 and the underlying common stock and an
update of the Company's legal proceedings. No exhibits
were attached.
The Company filed an 8-K on January 7, 2003 announcing the
pending retirement of its Chairman and Chief Executive
Officer, Mitchell G. Leibovitz. An exhibit containing a
press release announcing Mr. Leibovitz' retirement was
attached.
76
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, 2003 by: /s/ George Babich, Jr.
-------------- ----------------------
George Babich, Jr.,
President and
Chief Financial Officer
77
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 April 28, 2003
Mitchell G. Leibovitz and Chief Executive Officer
(Principal Executive Officer)
/s/ George Babich, Jr. President and April 28, 2003
George Babich, Jr. Chief Financial Officer
(Principal Financial
Officer)
/s/ Bernard K. McElroy Chief Accounting Officer April 28, 2003
Bernard K. McElroy and Treasurer (Principal
Accounting Officer)
/s/ Peter A. Bassi Director April 28, 2003
Peter A. Bassi
/s/ Bernard J. Korman Director April 28, 2003
Bernard J. Korman
/s/ J. Richard Leaman, Jr. Director April 28, 2003
J. Richard Leaman, Jr.
/s/ William Leonard Director April 28, 2003
William Leonard
/s/ Malcolmn D. Pryor Director April 28, 2003
Malcolmn D. Pryor
/s/ Lester Rosenfeld Director April 28, 2003
Lester Rosenfeld
/s/ Jane Scaccetti Director April 28, 2003
Jane Scaccetti
/s/ Benjamin Strauss Director April 28, 2003
Benjamin Strauss
/s/ John T. Sweetwood Director April 28, 2003
John T. Sweetwood
78
CHIEF EXECUTIVE OFFICER CERTIFICATION
- -------------------------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Mitchell G. Leibovitz, certify that:
1. I have reviewed this annual report on Form 10-K of The Pep Boys -
Manny, Moe & Jack;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 28, 2003 /s/ Mitchell G. Leibovitz
-------------------- -------------------------
Mitchell G. Leibovitz
Chairman of the Board and
Chief Executive Officer
79
CHIEF FINANCIAL OFFICER CERTIFICATION
- -------------------------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, George Babich, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of The Pep Boys -
Manny, Moe & Jack;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 28, 2003 /s/ George Babich, Jr.
-------------------- -----------------------
George Babich, Jr.
President and Chief
Financial Officer
80
FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT
TO THE REQUIREMENTS OF FORM 10-K
81
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------------
Additions Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Descriptions Period Expenses Accounts Deductions* Period
- ----------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended February 1, 2003 $725 $1,643 $ - $1,946 $422
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended February 2, 2002 $639 $1,674 $ - $1,588 $725
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended February 3, 2001 $826 $1,859 $ - $2,046 $639
- ----------------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off.
82
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 35
Consolidated Balance Sheets - February 1, 2003
and February 2, 2002 36
Consolidated Statements of Operations - Years ended February 1,
2003, February 2, 2002 and February 3, 2001 37
Consolidated Statements of Stockholders' Equity - Years ended
February 1, 2003, February 2, 2002 and February 3, 2001 38
Consolidated Statements of Cash Flows - Years ended February 1,
2003, February 2, 2002 and February 3, 2001 39
Notes to Consolidated Financial Statements 40
2. The following consolidated financial statement schedule of The Pep
Boys - Manny, Moe & Jack
is included.
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not
applicable or not required or the required information is included
in the consolidated financial statements or notes thereto.
3. Exhibits
(10.26) Long-Term Disability Salary Continuation Plan, amended
and restated as of March 26, 2002.
(10.27) Amendment to the Executive Supplemental pension Plan,
(amended effective March 31, 1995), dated as of
March 26, 2002.
(10.28) Employment agreement between George Babich, Jr. and
the Company dated as of February 28, 2003.
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries of the Company
(23) Independent Auditors' Consent
(99.1) Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(99.2) Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
83