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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 3, 2002
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from to
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Commission File No. 1-3381
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The Pep Boys - Manny, Moe & Jack
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0962915
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(State or other jurisdiction of (I.R.S. Employer ID number)
incorporation or organization)
3111 W. Allegheny Ave. Philadelphia, PA 19132
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(Address of principal executive offices) (Zip code)
215-430-9000
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(Registrant's telephone number, including area code)
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 and 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 ( )
As of August 31, 2002 there were 51,534,944 shares of the registrant's Common
Stock outstanding.
1
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Index Page
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets -
August 3, 2002 and February 2, 2002 3
Consolidated Statements of Earnings -
Thirteen and Twenty-six weeks ended
August 3, 2002 and August 4, 2001 4
Consolidated Statements of
Cash Flows - Twenty-six weeks ended
August 3, 2002 and August 4, 2001 5
Notes to Condensed Consolidated
Financial Statements 6-21
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 22-32
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 33
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of
Security Holders 34
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURE PAGE 36
CERTIFICATIONS 37
INDEX TO EXHIBITS 38
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except per share amounts)
Aug. 3, 2002 Feb. 2, 2002*
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 86,865 $ 15,981
Accounts receivable, net.................................... 20,125 18,052
Merchandise inventories..................................... 522,355 519,473
Prepaid expenses............................................ 27,581 42,170
Deferred income taxes....................................... 14,917 15,820
Other....................................................... 41,571 52,308
Assets held for disposal.................................... 5,972 16,007
------------ ------------
Total Current Assets..................................... 719,386 679,811
Property and Equipment-at cost:
Land........................................................ 278,236 277,726
Buildings and improvements.................................. 927,350 922,065
Furniture, fixtures and equipment........................... 590,068 583,918
Construction in progress.................................... 12,820 10,741
----------- ------------
1,808,474 1,794,450
Less accumulated depreciation and amortization.............. 715,027 676,964
------------ ------------
Total Property and Equipment............................. 1,093,447 1,117,486
Other......................................................... 40,526 15,355
------------ ------------
Total Assets................................................... $1,853,359 $1,812,652
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 219,892 $ 216,085
Accrued expenses............................................ 240,490 241,273
Current maturities of long-term debt and obligations
under capital leases....................................... 148,400 124,615
------------ ------------
Total Current Liabilities................................. 608,782 581,973
Long-term debt and obligations under capital leases,
less current maturities...................................... 385,318 544,418
Convertible long-term debt, less current maturities........... 150,000 -
Deferred income taxes......................................... 62,747 64,027
Deferred gain on sale leaseback............................... 4,399 4,444
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $1 per share:
Authorized 500,000,000 shares; Issued 63,910,577 shares.... 63,911 63,911
Additional paid-in capital.................................. 177,244 177,244
Retained earnings........................................... 624,894 601,944
------------ ------------
866,049 843,099
Less cost of shares in treasury - 10,199,363 shares
and 10,284,446 shares..................................... 164,672 166,045
Less cost of shares in benefits trust - 2,195,270 shares...... 59,264 59,264
------------ ------------
Total Stockholders' Equity............................... 642,113 617,790
------------ ------------
Total Liabilities and Stockholders' Equity..................... $1,853,359 $1,812,652
============ ============
See notes to condensed consolidated financial statements.
*Taken from the audited financial statements at Feb. 2, 2002.
3
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollar amounts in thousands, except per share amounts)
UNAUDITED
Thirteen weeks ended Twenty-six weeks ended
--------------------------------- ---------------------------------
Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001
-------------- -------------- -------------- --------------
Merchandise Sales.................................... $ 477,847 $ 463,403 $ 931,618 $ 906,397
Service Revenue...................................... 107,938 109,671 213,140 218,254
-------------- -------------- -------------- --------------
Total Revenues....................................... 585,785 573,074 1,144,758 1,124,651
Costs of Merchandise Sales........................... 331,989 326,742 650,752 642,791
Costs of Service Revenue............................. 82,220 82,028 160,495 161,825
-------------- -------------- -------------- --------------
Total Costs of Revenues.............................. 414,209 408,770 811,247 804,616
Gross Profit from Merchandise Sales.................. 145,858 136,661 280,866 263,606
Gross Profit from Service Revenue.................... 25,718 27,643 52,645 56,429
-------------- -------------- -------------- --------------
Total Gross Profit................................... 171,576 164,304 333,511 320,035
Selling, General and Administrative Expenses......... 133,336 132,140 263,118 260,638
-------------- -------------- -------------- --------------
Operating Profit..................................... 38,240 32,164 70,393 59,397
Non-operating Income................................. 997 875 1,820 1,498
Interest Expense..................................... 12,420 13,694 24,201 27,206
-------------- -------------- -------------- --------------
Earnings Before Income Taxes......................... 26,817 19,345 48,012 33,689
Income Taxes......................................... 10,134 7,060 17,764 12,296
-------------- -------------- -------------- --------------
Net Earnings Before Extraordinary Item............... 16,683 12,285 30,248 21,393
Extraordinary Item, Net of Tax....................... (129) 234 (129) 234
-------------- -------------- -------------- --------------
Net Earnings......................................... 16,554 12,519 30,119 21,627
Retained Earnings, Beginning of Period............... 611,871 586,400 601,944 581,668
Cash Dividends....................................... 3,475 3,466 6,948 6,926
Effect of Stock Options.............................. (16) 48 149 48
Dividend Reinvestment Plan........................... 72 83 72 999
-------------- -------------- -------------- --------------
Retained Earnings, End of Period..................... $ 624,894 $ 595,322 $ 624,894 $ 595,322
============== ============== ============== ==============
Basic Earnings per Share:
Before Extraordinary Item.......................... $ .32 $ .24 $ .59 $ .42
Extraordinary Item, Net of Tax..................... - - - -
------------- ------------- ------------- -------------
Basic Earnings per Share............................. $ .32 $ .24 $ .59 $ .42
============= ============= ============= =============
Diluted Earnings per Share:
Before Extraordinary Item.......................... $ .30 $ .24 $ .56 $ .42
Extraordinary Item, Net of Tax..................... - - - -
------------- ------------- ------------- -------------
Diluted Earnings per Share........................... $ .30 $ .24 $ .56 $ .42
============= ============= ============= =============
Cash Dividends per Share............................. $ .0675 $ .0675 $ .1350 $ .1350
============= ============= ============= =============
See notes to condensed consolidated financial statements.
4
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
UNAUDITED
Twenty-six weeks ended
----------------------------------
Aug. 3, 2002 Aug. 4, 2001
-------------- --------------
Cash Flows from Operating Activities:
Net earnings.................................................... $ 30,119 $ 21,627
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:
Extraordinary item, net of tax............................... 129 (234)
Depreciation and amortization................................ 40,535 43,271
Deferred income taxes........................................ (377) -
Accretion of bond discount................................... - 2,709
Loss on assets held for disposal............................. 1,360 309
Loss (Gain) from sale of assets.............................. 134 (1,940)
Changes in operating assets and liabilities:
Decrease in accounts receivable, prepaid expenses
and other................................................. 22,314 10,592
(Increase) decrease in merchandise inventories................ (2,882) 16,987
Increase in accounts payable................................. 3,807 38,445
(Decrease) Increase in accrued expenses....................... (708) 8,977
------------- -------------
Net Cash Provided by Operating Activities....................... 94,431 140,743
Cash Flows from Investing Activities:
Capital expenditures............................................ (13,252) (8,455)
Proceeds from sales of assets................................... 5,252 24,592
------------- -------------
Net Cash (Used in) Provided by Investing Activities............. (8,000) 16,137
Cash Flows from Financing Activities:
Net payments under line of credit agreements.................... (70,539) (87,393)
Repayment of life insurance policy loan......................... (20,686) -
Capital lease obligations....................................... 993 -
Reduction of long-term debt..................................... (65,769) (2,721)
Reduction of convertible debt................................... - (52,774)
Net proceeds from issuance of notes............................. 146,250 87,522
Dividends paid.................................................. (6,948) (6,926)
Proceeds from exercise of stock options......................... 475 33
Proceeds from dividend reinvestment plan........................ 677 695
------------- -------------
Net Cash Used in Financing Activities........................... (15,547) (61,564)
------------- -------------
Net Increase in Cash................................................. 70,884 95,316
Cash and Cash Equivalents at Beginning of Period..................... 15,981 7,995
------------- -------------
Cash and Cash Equivalents at End of Period........................... $ 86,865 $ 103,311
============= =============
See notes to condensed consolidated financial statements.
5
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Condensed Consolidated Financial Statements
The consolidated balance sheet as of August 3, 2002, the consolidated
statements of earnings for the thirteen and twenty-six week periods ended
August 3, 2002 and August 4, 2001 and the consolidated statements of cash
flows for the twenty-six week periods ended August 3, 2002 and August 4, 2001
have been prepared by the Company without audit. In the opinion of management,
all adjustments necessary to present fairly the financial position, results of
operations and cash flows at August 3, 2002 and for all periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's February 2, 2002 annual report to shareholders. The results of
operations for the thirteen and twenty-six week periods ended August 3, 2002
are not necessarily indicative of the operating results for the full year.
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the current year's presentation.
NOTE 2. 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 August 3, 2002 and February 2, 2002.
NOTE 3. Profit Enhancement Plan
In the third quarter 2000, the Company performed a comprehensive
review of its field, distribution, and Store Support Center infrastructure as
well as the performance of each store. As a result of this review, the Company
implemented a number of changes that have improved its performance. These
changes included the closure of 38 under-performing stores and two distribution
centers, a reduction in store operating hours and the Store Support Center
infrastructure.
PLAN UPDATE
The Company is progressing towards the disposal of the 38 stores, 11 which
were owned and 27 which were leased by the Company, two distribution centers
and two development parcels owned by the Company which were closed or abandoned
in connection with the Profit Enhancement Plan. As of August 3, 2002, the
Company had successfully disposed of 19 of the closed stores, the two
distribution centers and the two development parcels. Additionally, in the
second quarter 2002, due to changes in the real estate market affecting two of
its owned properties which were to be disposed of, the Company has opted to
lease rather than sell such stores. As a result, the Company has reclassified
two of its owned properties as assets held for use. The Company estimates the
remaining closed properties will be disposed of by the end of the first quarter
of fiscal 2003.
6
ASSETS HELD FOR DISPOSAL
As of August 3, 2002, the assets held for disposal included the building, land
and equipment of the remaining closed stores owned by the Company which have a
carrying value of $5,972,000. The Company has sold five of the 11 owned
properties originally held for sale, and the two development parcels.
In the second quarter 2002, due to changes in the real estate market affecting
two of its owned properties, the Company has opted to lease rather than sell
such stores. As a result, the Company has reclassified two of its owned
properties to assets held for use and began to depreciate them at the estimated
market value, which is lower than cost adjusted for depreciation.
The Company is actively marketing the remaining four owned properties and will
make adjustments to the property values in accordance with the change in market
values. As a result of the review of the market, the Company has extended the
original estimated time needed for selling the owned properties. It is
expected that two of these properties with a carrying value of $2,945,000 will
be disposed of by the end of the third quarter 2002, with the remaining two
properties with a carrying value of $2,544,000 expected to be disposed of by
the end of the first quarter 2003. The Company will continue to monitor the
status for disposing of its owned properties and make any necessary
adjustments. An adjustment was reflected in the accrual of on-going expenses
for the increased time required to maintain these properties.
In the second quarter of 2002, the Company sold two properties for $3,281,000,
net of commission. The sale of the properties resulted in a loss of $48,000
due to higher than anticipated costs related to the sale. The charges related
to the assets held for disposal were recorded in costs of merchandise sales on
the consolidated statement of earnings.
In the first quarter of 2002, the Company sold two properties for $2,228,000,
net of commission. One of these properties, which was sold for a loss of
$641,000, was completed in a real estate transaction in which the Company was
released from the lease obligations associated with two other properties, one
of which was related to the Profit Enhancement Plan reserve. The other
property sold resulted in a gain of $31,000. Additionally, the Company
adjusted the carrying value of certain remaining assets held for disposal,
which resulted in a net decrease of $702,000. The charges related to the
assets held for disposal were recorded in costs of merchandise sales on the
consolidated statement of earnings.
In the second quarter of 2001, the Company sold one property for $1,986,000,
net of commission. The sale resulted in a gain of $91,000 which was recorded
in costs of merchandise sales.
In the first quarter of 2001, the carrying values for the buildings and land
was reduced from their original estimated value of $21,680,000 by $400,000 due
to a downward revision in the estimated value for one site. The charge related
to this reduction was recorded in costs of merchandise sales on the
consolidated statement of earnings.
7
LEASE RESERVE
As of August 3, 2002, the Company was able to sublease eight and exit
the lease of an additional six leased properties. The Company expects 7 of
remaining 13 leased properties to be subleased or otherwise disposed of by the
end of fiscal 2002 with the remaining 6 properties to be sublet by the end of
the first quarter of 2003.
In the second quarter of 2002, the Company increased the lease reserve by
$192,000. These charges were a result of a $689,000 increase due primarily to
an increase in the estimated time it will take to sublease certain properties
offset, in part, by a $497,000 decrease due primarily to an increase in the
sublease rates realized. The effect of these adjustments was recorded in costs
of merchandise sales and costs of service revenue on the consolidated
statement of earnings.
In the first quarter of 2002, the Company decreased the lease reserve by
$333,000. These changes were a result of a $597,000 decrease due primarily to
an increase in the estimated sublease rates. This decrease was offset, in
part, by a $264,000 increase due primarily to an increase in the estimated time
it will take the Company to sublease certain properties. The effect of these
adjustments was recorded in costs of merchandise sales and costs of service
revenue on the consolidated statement of earnings.
The lease reserve increased during the second quarter of 2001 by $1,812,000.
This increase was attributed to a $2,083,000 increase due primarily to a
decrease in the estimated months of sublease income coupled with higher
estimated lease costs as the Company attempts to exit leases for certain stores
early. This increase was offset, in part, by a decrease in lease expense of
$270,000 due primarily to an increase in certain estimated sublease rates. The
effect of these adjustments were recorded through costs of merchandise sales
and costs of service revenue.
The lease reserve decreased during the first quarter of 2001 by $173,000. This
reduction was primarily a result of a reduction in lease expense of $498,000
due to an increase in estimated sublease income resulting from an increase in
certain estimated rates. This reduction was offset, in part, by a $325,000
decrease in expected sublease income due to an increase in the estimated time
it may take to sublease certain properties. The effect of these adjustments
was recorded in costs of merchandise sales and costs of service revenue on the
consolidated statement of earnings.
8
ON-GOING EXPENSES
The on-going expense reserve represents exit activity costs which are not
associated with or do not benefit activities that will be continued. These
costs are necessary to maintain the remaining closed stores until sold, sublet
or otherwise disposed of. The on-going costs reserve includes general
maintenance costs such as utilities, security, telephone, real estate taxes and
personal property taxes which will be incurred until the properties are
disposed. The reserve for on-going costs will diminish as sites are sold,
sublet or otherwise disposed of and such activities are estimated to be
completed by the end of the first quarter of fiscal 2003.
In the second quarter of 2002, the Company increased the on-going expense
reserve $272,000 due to an increase in the estimated time 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 earnings.
In the first quarter of 2002, the Company increased the on-going expense
reserve $160,000 due to an increase in the estimated time 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 earnings.
In the second quarter of 2001, the on-going reserve was decreased by
approximately $579,000 due primarily to lower than anticipated utility costs to
maintain the closed stores and lower personal property taxes. This adjustment
was reversed through costs of merchandise sales and costs of service revenue.
This decrease was offset, in part, by an approximate $375,000 increase in the
reserve primarily due to an increase in the estimated time it is expected to
take to sublease or sell certain remaining properties. This adjustment was
recorded in costs of merchandise sales, costs of service revenue, and selling,
general and administrative expenses.
In the first quarter of 2001, the on-going reserve was increased by
approximately $380,000 which was due primarily to an increase in estimated time
to sublease or sell certain 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 earnings.
SEVERANCE RESERVE
In the second quarter of 2001, the Company reversed the remaining severance
reserve of $17,000 due to a lower than estimated final payment. In the first
quarter of 2001, the Company reversed the severance reserve by $52,000 due
primarily to certain employees originally expected to be receiving severance
failing to qualify to receive payments. There were no adjustments made to this
reserve in fiscal 2002.
9
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.
The expenses of this nature incurred in the second quarter of fiscal 2001
totaling $166,000 are due primarily to the removal of the remaining equipment
from the first closed distribution center. These expenses were primarily
recorded in costs of merchandise sales as incurred.
The expenses of this nature incurred in the first quarter of fiscal 2001
totaling $512,000 were due primarily to the removal of inventory and equipment
from closed distribution centers. These expenses were primarily
recorded in costs of merchandise sales as incurred.
10
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Below is a table summarizing expenses related to the Profit Enhancement Plan
for the thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001.
The details and reasons for the changes to the charge are as described above in
the respective reserve categories.
(dollar amounts
in thousands) Thirteen Thirteen Twenty-Six Twenty-Six
Income Statement Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Classification Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001
- -------------------------------------------------------------------------------
Costs of
Merchandise Sales $ 390 $ 1,060 $ 1,570 $ 1,997
Costs of
Service Revenue 119 609 68 697
Selling, General and
Administrative 3 (3) 13 38
- -------------------------------------------------------------------------------
Total Expenses $ 512 $ 1,666 $ 1,651 $ 2,732
- -------------------------------------------------------------------------------
At the end of the third quarter 2000, the Company set up a reserve liability
account which is included in accrued liabilities on the consolidated balance
sheet. This liability account tracks all accruals including remaining
rent on leases net of sublease income, severance, and on-going expenses for
the closed properties. The following chart reconciles the change in reserve
from the fiscal year ended February 2, 2002 through August 3, 2002. All
additions and adjustments were charged or credited through the appropriate line
items on the consolidated statement of earnings.
(Amounts in Lease Fixed On-going
thousands) Expenses Assets Severance Expenses Total
- -----------------------------------------------------------------------------------
Reserve balance at
February 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470
Addition 264 1,312 - 160 1,736
Utilization (742) (1,312) - (140) (2,194)
Adjustments (597) - - - (597)
- -----------------------------------------------------------------------------------
Reserve Balance at
May 4, 2002 $ 2,075 $ - $ - $ 1,340 $ 3,415
- -----------------------------------------------------------------------------------
Addition 689 48 - 272 1,009
Utilization (614) (48) - (514) (1,176)
Adjustments (497) - - - (497)
- -----------------------------------------------------------------------------------
Reserve Balance at
August 3, 2002 $ 1,653 $ - $ - $ 1,098 $ 2,751
- -----------------------------------------------------------------------------------
11
NOTE 4. Net Earnings Per Share
Thirteen weeks ended Twenty-six weeks ended
(in thousands, except per share data) ---------------------------------- -----------------------------------
Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001
--------------- -------------- --------------- --------------
(a) Net earnings before extraordinary item........... $ 16,683 $ 12,285 $ 30,248 $ 21,393
Adjustment for interest on convertible senior
notes, net of income tax effect................ 826 - 826 -
- -----------------------------------------------------------------------------------------------------------------------------------
(b) Adjusted net earnings before extraordinary item.. $ 17,509 $ 12,285 $ 31,074 $ 21,393
- -----------------------------------------------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during the period.............................. 51,489 51,344 51,467 51,305
Common shares assumed issued upon conversion of
convertible senior notes....................... 5,520 - 2,760 -
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price........ 1,059 689 1,111 344
- -----------------------------------------------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during the period.................. 58,068 52,033 55,338 51,649
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Before extraordinary item (a/c).................. $ .32 $ .24 $ .59 $ .42
Extraordinary item, net of tax................... - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .32 $ .24 $ .59 $ .42
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Before extraordinary item (b/d).................. $ .30 $ .24 $ .56 $ .42
Extraordinary item, net of tax................... - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .30 $ .24 $ .56 $ .42
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments for convertible securities were antidilutive during the thirteen
and twenty-six week periods ended August 4, 2001 and therefore excluded from
the calculation. Options to purchase shares of common stock which were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the shares of common stock during
the thirteen and twenty-six week periods ended August 3, 2002 and August 4,
2001 were as follows:
Thirteen weeks ended Twenty-six weeks ended
(in thousands) ---------------------------------- ----------------------------------
Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001
--------------- -------------- --------------- --------------
Common shares associated with antidilutive stock
options excluded from computation of diluted EPS ..... 4,250 3,952 4,225 3,961
--------------- -------------- --------------- --------------
12
Note 5. Debt and Financing Arrangements
On May 21, 2002, the Company issued $150,000,000 aggregate principle 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 will
be paid by the Company on June 1 and December 1 of each year, beginning
December 1, 2002.
On July 16, 2002, the Company retired $49,915,000 aggregate principle amount
of Medium-Term Notes which were redeemed at the option of the holders. The
after-tax extraordinary loss was $129,000.
In the second quarter of 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.
Note 6. Supplemental Guarantor Information - Convertible Senior Notes
On May 21, 2002, the Company issued $150,000,000 aggregate principle 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.
13
The following are consolidating balance sheets of the Company as of
August 3, 2002 and February 2, 2002 and the related consolidating statements of
earnings for the thirteen and twenty-six weeks ended August 3, 2002 and
August 4, 2001 and the condensed consolidating statements of cash flows for the
twenty-six weeks ended August 3, 2002 and August 4, 2001:
CONSOLIDATING BALANCE SHEET
(Unaudited)
Non-
Subsidiary guarantor
August 3, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 61,070 $ 11,222 $ 14,573 $ - $ 86,865
Accounts receivable, net........................ 8,308 11,817 - - 20,125
Merchandise inventories......................... 186,593 335,762 - - 522,355
Prepaid expenses................................ 21,407 6,667 8,139 (8,632) 27,581
Deferred income taxes........................... 9,025 350 5,542 - 14,917
Other........................................... 2 - 41,569 - 41,571
Assets held for disposal........................ 65 5,907 - - 5,972
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets......................... 286,470 371,725 69,823 (8,632) 719,386
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land............................................. 92,540 185,696 - - 278,236
Buildings and improvements....................... 311,278 616,072 - - 927,350
Furniture, fixtures and equipment................ 277,694 312,374 - - 590,068
Construction in progress......................... 6,565 6,255 - - 12,820
--------- ---------- -------- -------- ---------
688,077 1,120,397 - - 1,808,474
Less accumulated depreciation and amortization... 310,549 404,478 - - 715,027
--------- ---------- -------- -------- ----------
Total Property and Equipment.................. 377,528 715,919 - - 1,093,447
Investment in subsidiaries........................ 1,431,582 - 1,088,418 (2,520,000) -
Intercompany receivable........................... - 347,303 309,031 (656,334) -
Other............................................. 35,640 4,886 - - 40,526
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets................................. $ 2,131,220 $ 1,439,833 $ 1,467,272 $ (3,184,966) $ 1,853,359
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................ $ 219,883 $ 9 $ - $ - $ 219,892
Accrued expenses................................ 61,027 79,342 108,753 (8,632) 240,490
Current maturities of long-term debt and
obligations under capital leases............... 148,400 - - - 148,400
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities.................... 429,310 79,351 108,753 (8,632) 608,782
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities.................. 385,115 203 - - 385,318
Convertible long-term debt........................ 150,000 - - - 150,000
Intercompany liabilities.......................... 491,139 165,195 - (656,334) -
Deferred income taxes............................. 32,244 30,503 - - 62,747
Deferred gain on sale leaseback................... 1,299 3,100 - - 4,399
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............................... 624,894 919,621 1,158,020 (2,077,641) 624,894
Less:
Cost of shares in treasury...................... 164,672 - - - 164,672
Cost of shares in benefits trust................ 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity................... 642,113 1,161,481 1,358,519 (2,520,000) 642,113
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity... $ 2,131,220 $ 1,439,833 $ 1,467,272 $ (3,184,966) $ 1,853,359
- -----------------------------------------------------------------------------------------------------------------------------
14
CONSOLIDATING BALANCE SHEET
Non-
Subsidiary guarantor
February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
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........................... 8,395 483 6,942 - 15,820
Other........................................... 3 - 67,305 (15,000) 52,308
Assets held for disposal........................ 2,755 13,252 - - 16,007
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets......................... 252,153 352,499 92,409 (17,250) 679,811
- -----------------------------------------------------------------------------------------------------------------------------
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.................. 385,809 731,677 - - 1,117,486
Investment in subsidiaries........................ 1,388,724 - 1,050,494 (2,439,218) -
Intercompany receivable........................... - 575,377 301,321 (876,698) -
Other............................................. 13,355 2,000 - - 15,355
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets................................. $ 2,040,041 $ 1,661,553 $ 1,444,224 $ (3,333,166) $ 1,812,652
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................ $ 216,076 $ 9 $ - $ - $ 216,085
Accrued expenses................................ 62,402 65,636 130,485 (17,250) 241,273
Current maturities of long-term debt............ 124,615 - - - 124,615
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities.................... 403,093 65,645 130,485 (17,250) 581,973
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities........... 497,603 46,815 - - 544,418
Intercompany liabilities.......................... 488,067 388,631 - (876,698) -
Deferred income taxes............................. 32,172 31,855 - - 64,027
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
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... $ 2,040,041 $ 1,661,553 $ 1,444,224 $ (3,333,166) $ 1,812,652
- -----------------------------------------------------------------------------------------------------------------------------
15
CONSOLIDATING STATEMENT OF EARNINGS
(Unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended Aug. 3, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Merchandise Sales............................. $ 164,966 $ 312,881 $ - $ - $ 477,847
Service Revenue............................... 37,506 70,432 - - 107,938
Other Revenue................................. - - 6,409 (6,409) -
------------ ----------- ---------- --------- -----------
Total Revenues................................ 202,472 383,313 6,409 (6,409) 585,785
Costs of Merchandise Sales.................... 115,213 216,776 - - 331,989
Costs of Service Revenue...................... 27,892 54,328 - - 82,220
Costs of Other Revenue........................ - - 5,898 (5,898) -
------------ ----------- ---------- --------- -----------
Total Costs of Revenues....................... 143,105 271,104 5,898 (5,898) 414,209
Gross Profit from Merchandise Sales........... 49,753 96,105 - - 145,858
Gross Profit from Service Revenue............. 9,614 16,104 - - 25,718
Gross Profit from Other Revenue............... - - 511 (511) -
------------ ----------- ---------- --------- -----------
Total Gross Profit............................ 59,367 112,209 511 (511) 171,576
Selling, General and Administrative Expenses.. 46,661 87,114 72 (511) 133,336
------------ ----------- ---------- --------- -----------
Operating Profit.............................. 12,706 25,095 439 - 38,240
Equity in Earnings of Subsidiaries............ 22,500 - 19,454 (41,954) -
Non-operating (Expense) Income................ (4,532) 12,755 5,248 (12,474) 997
Interest Expense.............................. 17,576 7,318 - (12,474) 12,420
------------ ----------- ---------- --------- -----------
Earnings Before Income Taxes.................. 13,098 30,532 25,141 (41,954) 26,817
Income Tax (Benefit) Expense.................. (3,585) 11,563 2,156 - 10,134
------------ ----------- ---------- --------- -----------
Net Earnings Before Extraordinary Item........ 16,683 18,969 22,985 (41,954) 16,683
Extraordinary Item, Net of Tax................ (129) - - - (129)
------------ ----------- ---------- --------- -----------
Net Earnings.................................. $ 16,554 $ 18,969 $ 22,985 $(41,954) $ 16,554
============ =========== ========== ========= ===========
16
CONSOLIDATING STATEMENT OF EARNINGS
Non-
Subsidiary guarantor
Thirteen weeks ended Aug. 4, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Merchandise Sales............................. $ 158,256 $ 305,147 $ - $ - $ 463,403
Service Revenue............................... 38,593 71,078 - - 109,671
Other Revenue................................. - - 5,854 (5,854) -
------------ ---------- ----------- ---------- -----------
Total Revenues................................ 196,849 376,225 5,854 (5,854) 573,074
Costs of Merchandise Sales.................... 114,153 212,589 - - 326,742
Costs of Service Revenue...................... 28,378 53,650 - - 82,028
Costs of Other Revenue........................ - - 5,886 (5,886) -
------------ ---------- ----------- ---------- -----------
Total Costs of Revenues....................... 142,531 266,239 5,886 (5,886) 408,770
Gross Profit from Merchandise Sales........... 44,103 92,558 - - 136,661
Gross Profit from Service Revenue............. 10,215 17,428 - - 27,643
Gross Loss from Other Revenue................. - - (32) 32 -
------------ ---------- ----------- ---------- -----------
Total Gross Profit (Loss)..................... 54,318 109,986 (32) 32 164,304
Selling, General and Administrative Expenses.. 57,300 74,737 71 32 132,140
------------ ---------- ----------- ---------- -----------
Operating (Loss) Profit....................... (2,982) 35,249 (103) - 32,164
Equity in Earnings of Subsidiaries............ 26,268 - 20,880 (47,148) -
Non-operating (Expense) Income................ (4,539) 8,307 5,825 (8,718) 875
Interest Expense.............................. 14,561 7,851 - (8,718) 13,694
------------ ---------- ----------- ---------- -----------
Earnings Before Income Taxes.................. 4,186 35,705 26,602 (47,148) 19,345
Income Tax (Benefit) Expense.................. (8,099) 13,070 2,089 - 7,060
------------ ---------- ----------- ---------- -----------
Net Earnings Before Extraordinary Item........ 12,285 22,635 24,513 (47,148) 12,285
Extraordinary Item, Net of Tax................ 234 - - - 234
------------ ---------- ----------- ---------- -----------
Net Earnings.................................. $ 12,519 $ 22,635 $ 24,513 $ (47,148) $ 12,519
============ ========== =========== ========== ===========
17
CONSOLIDATING STATEMENT OF EARNINGS
(Unaudited)
Non-
Subsidiary guarantor
Twenty-six weeks ended Aug. 3, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Merchandise Sales............................. $ 323,462 $ 608,156 $ - $ - $ 931,618
Service Revenue............................... 74,871 138,269 - - 213,140
Other Revenue................................. - - 12,668 (12,668) -
------------ ---------- ---------- --------- -----------
Total Revenues................................ 398,333 746,425 12,668 (12,668) 1,144,758
Costs of Merchandise Sales.................... 226,724 424,028 - - 650,752
Costs of Service Revenue...................... 55,228 105,267 - - 160,495
Costs of Other Revenue........................ - - 12,187 (12,187) -
------------ ---------- ---------- --------- -----------
Total Costs of Revenues....................... 281,952 529,295 12,187 (12,187) 811,247
Gross Profit from Merchandise Sales........... 96,738 184,128 - - 280,866
Gross Profit from Service Revenue............. 19,643 33,002 - - 52,645
Gross Profit from Other Revenue............... - - 481 (481) -
------------ ---------- ---------- --------- -----------
Total Gross Profit............................ 116,381 217,130 481 (481) 333,511
Selling, General and Administrative Expenses.. 92,657 170,791 151 (481) 263,118
------------ ---------- ---------- --------- -----------
Operating Profit.............................. 23,724 46,339 330 - 70,393
Equity in Earnings of Subsidiaries............ 42,859 - 37,923 (80,782) -
Non-operating (Expense) Income................ (9,053) 24,101 10,554 (23,782) 1,820
Interest Expense.............................. 34,689 13,294 - (23,782) 24,201
------------ ---------- ---------- --------- -----------
Earnings Before Income Taxes.................. 22,841 57,146 48,807 (80,782) 48,012
Income Tax (Benefit) Expense.................. (7,407) 21,144 4,027 - 17,764
------------ ---------- ---------- --------- -----------
Net Earnings Before Extraordinary Item........ 30,248 36,002 44,780 (80,782) 30,248
Extraordinary Item, Net of Tax................ (129) - - - (129)
------------ ---------- ---------- --------- -----------
Net Earnings.................................. $ 30,119 $ 36,002 $ 44,780 $(80,782) $ 30,119
============ ========== ========== ========= ===========
18
CONSOLIDATING STATEMENT OF EARNINGS
Non-
Subsidiary guarantor
Twenty-six weeks ended Aug. 4, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Merchandise Sales............................. $ 311,729 $ 594,668 $ - $ - $ 906,397
Service Revenue............................... 77,533 140,721 - - 218,254
Other Revenue................................. - - 11,442 (11,442) -
------------ ---------- ---------- --------- ----------
Total Revenues................................ 389,262 735,389 11,442 (11,442) 1,124,651
Costs of Merchandise Sales.................... 224,627 418,164 - - 642,791
Costs of Service Revenue...................... 56,698 105,127 - - 161,825
Costs of Other Revenue........................ - - 11,503 (11,503) -
------------ ---------- ---------- ---------- ----------
Total Costs of Revenues....................... 281,325 523,291 11,503 (11,503) 804,616
Gross Profit from Merchandise Sales........... 87,102 176,504 - - 263,606
Gross Profit from Service Revenue............. 20,835 35,594 - - 56,429
Gross Loss from Other Revenue................. - - (61) 61 -
------------ ---------- ---------- ---------- ----------
Total Gross Profit (Loss)..................... 107,937 212,098 (61) 61 320,035
Selling, General and Administrative Expenses.. 119,023 141,407 147 61 260,638
------------ ---------- ---------- ---------- ----------
Operating (Loss) Profit....................... (11,086) 70,691 (208) - 59,397
Equity in Earnings of Subsidiaries............ 55,323 44,971 (100,294) -
Non-operating (Expense) Income................ (9,102) 21,971 12,016 (23,387) 1,498
Interest Expense.............................. 33,307 17,286 - (23,387) 27,206
------------ ---------- ---------- ---------- ----------
Earnings Before Income Taxes.................. 1,828 75,376 56,779 (100,294) 33,689
Income Tax (Benefit) Expense.................. (19,565) 27,551 4,310 - 12,296
------------ ---------- ---------- ---------- ----------
Net Earnings Before Extraordinary Item........ 21,393 47,825 52,469 (100,294) 21,393
Extraordinary Item, Net of Tax................ 234 - - - 234
------------ ---------- ---------- ---------- ----------
Net Earnings.................................. $ 21,627 $ 47,825 $ 52,469 $(100,294) $ 21,627
============ ========== ========== ========== ==========
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Non-
Subsidiary guarantor
Twenty-six weeks ended Aug. 3, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Operating Activities:
Net Earnings............................... $ 30,119 $ 36,002 $ 44,780 $ (80,782) $ 30,119
Adjustments to Reconcile Net
Earnings to Net Cash Provided
By Operating Activities:
Non-cash operating activities........... (25,625) 23,148 (36,524) 80,782 41,781
Change in operating assets and
liabilities............................ 21,573 (12,757) 13,715 - 22,531
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 26,067 46,393 21,971 - 94,431
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net Cash Used in
Investing Activities................. (6,709) (1,291) - - (8,000)
Cash Flows from Financing Activities:
Net Cash Provided by (Used in)
Financing Activities................. 36,916 (44,754) (7,709) - (15,547)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash............................ 56,274 348 14,262 - 70,884
Cash and Cash Equivalents at Beginning of Period 4,796 10,874 311 - 15,981
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period...... $ 61,070 $ 11,222 $ 14,573 $ - $ 86,865
- -----------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Non-
Subsidiary guarantor
Twenty-six weeks ended Aug. 4, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Operating Activities:
Net Earnings............................... $ 21,627 $ 47,825 $ 52,469 $(100,294) $ 21,627
Adjustments to Reconcile Net
Earnings to Net Cash Provided
By Operating Activities:
Non-cash operating activities........... (34,339) 23,131 (44,971) 100,294 44,115
Change in operating assets and
liabilities............................ 29,766 42,156 3,079 - 75,001
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 17,054 113,112 10,577 - 140,743
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net Cash Provided by
Investing Activities................. 1,504 14,633 - - 16,137
Cash Flows from Financing Activities:
Net Cash Provided by (Used in)
Financing Activities................. 70,014 (120,856) (10,722) - (61,564)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash................. 88,572 6,889 (145) - 95,316
Cash and Cash Equivalents at Beginning of Period 482 7,038 475 - 7,995
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period...... $ 89,054 $ 13,927 $ 330 $ - $103,311
- -----------------------------------------------------------------------------------------------------------------------------
20
Note 7. New Accounting Standards
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue No. 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
and measured initially at fair value only when the liability is incurred.
SFAS No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002. The Company is in the process of analyzing
the impact of the adoption of this statement on its consolidated financial
statements.
In May 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
No. 145 rescinds FASB Statements No. 4 and No. 64, which pertained to issues
related to the extinguishment of debt. SFAS No. 145 also rescinds FASB
Statement No. 44, which established accounting requirements for motor carriers,
and amends FASB Statement No. 13, "Accounting for Leases," to enable certain
capital lease modifications to be accounted for by lessees as sale-leaseback
transactions. SFAS No. 145 will be effective for fiscal years beginning after
May 15, 2002. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after
June 15, 2002. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES - August 3, 2002
- ------------------------------------------------
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. During the first six months of 2002, the Company invested
$13,252,000 in property and equipment. The Company's net inventory (net
inventory includes the change in inventory less the change in accounts payable)
decreased $925,000. Working capital increased from $97,838,000 at February 2,
2002 to $110,604,000 at August 3, 2002. At August 3, 2002, the Company had
stockholders' equity of $642,113,000 and long-term debt of $535,318,000. The
Company's long-term debt was 46% of its total capitalization at August 3, 2002
and 47% at February 2, 2002. As of August 3, 2002, the Company had an
available line of credit totaling $173,878,000.
The Company plans to open one new Supercenter during the balance of the current
fiscal year. Management estimates the costs of opening the Supercenter and the
expected capital expenditures relating to existing stores, warehouses and
offices for the remainder of fiscal 2002, will be approximately $29,748,000.
The Company anticipates that its net cash provided by operating activities and
its existing line of credit will exceed its principal cash requirements for
capital expenditures and net inventory in fiscal 2002.
In the second quarter of 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.
On July 16, 2002, the Company retired $49,915,000 aggregate principle amount
of Medium-Term Notes which 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.
On May 21, 2002, the Company issued $150,000,000 aggregate principle 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 will
be paid by the Company on June 1 and December 1 of each year, beginning
December 1, 2002. The proceeds from the sale of the notes are being used to
retire debt.
In the third quarter of 2001, the Company reclassified the remaining
$43,005,000 aggregate principle amount of the $49,000,000 Medium-Term Notes
originally issued to current liabilities on the consolidated balance sheet.
These Medium- Term Notes are redeemable at the option of the holders on
September 19, 2002. The Company intends to repurchase any of these notes so
redeemed with the proceeds from the sale of the 4.25% Senior Convertible Notes.
PROFIT ENHANCEMENT PLAN
- -----------------------
In the third quarter 2000, the Company performed a comprehensive
review of its field, distribution, and Store Support Center infrastructure as
well as the performance of each store. As a result of this review, the Company
implemented a number of changes that have improved its performance. These
changes included the closure of 38 under-performing stores and two distribution
centers, a reduction in store operating hours and the Store Support Center
infrastructure.
22
PLAN UPDATE
The Company is progressing towards the disposal of the 38 stores, 11 which
were owned and 27 which were leased by the Company, two distribution centers
and two development parcels owned by the Company which were closed or abandoned
in connection with the Profit Enhancement Plan. As of August 3, 2002, the
Company had successfully disposed of 19 of the closed stores, the two
distribution centers and the two development parcels. Additionally, in the
second quarter 2002, due to changes in the real estate market affecting two of
its owned properties which were to be disposed of, the Company has opted to
lease rather than sell such stores. As a result, the Company has reclassified
two of its owned properties as assets held for use. The Company estimates the
remaining closed properties will be disposed of by the end of the first quarter
of fiscal 2003.
ASSETS HELD FOR DISPOSAL
As of August 3, 2002, the assets held for disposal included the building, land
and equipment of the remaining closed stores owned by the Company which have a
carrying value of $5,972,000. The Company has sold five of the 11 owned
properties originally held for sale, and the two development parcels.
In the second quarter 2002, due to changes in the real estate market affecting
two of its owned properties, the Company has opted to lease rather than sell
such stores. As a result, the Company has reclassified two of its owned
properties to assets held for use and began to depreciate them at the estimated
market value, which is lower than cost adjusted for depreciation.
The Company is actively marketing the remaining four owned properties and will
make adjustments to the property values in accordance with the change in market
values. As a result of the review of the market, the Company has extended the
original estimated time needed for selling the owned properties. It is
expected that two of these properties with a carrying value of $2,945,000 will
be disposed of by the end of the third quarter 2002, with the remaining two
properties with a carrying value of $2,544,000 expected to be disposed of by
the end of the first quarter 2003. The Company will continue to monitor the
status for disposing of its owned properties and make any necessary
adjustments. An adjustment was reflected in the accrual of on-going expenses
for the increased time required to maintain these properties.
In the second quarter of 2002, the Company sold two properties for $3,281,000,
net of commission. The sale of the properties resulted in a loss of $48,000
due to higher than anticipated costs related to the sale. The charges related
to the assets held for disposal were recorded in costs of merchandise sales on
the consolidated statement of earnings.
In the first quarter of 2002, the Company sold two properties for $2,228,000,
net of commission. One of these properties, which was sold for a loss of
$641,000, was completed in a real estate transaction in which the Company was
released from the lease obligations associated with two other properties, one
of which was related to the Profit Enhancement Plan reserve. The other
property sold resulted in a gain of $31,000. Additionally, the Company
adjusted the carrying value of certain remaining assets held for disposal,
which resulted in a net decrease of $702,000. The charges related to the
assets held for disposal were recorded in costs of merchandise sales on the
consolidated statement of earnings.
In the second quarter of 2001, the Company sold one property for $1,986,000,
net of commission. The sale resulted in a gain of $91,000 which was recorded
in costs of merchandise sales.
In the first quarter of 2001, the carrying values for the buildings and land
was reduced from their original estimated value of $21,680,000 by $400,000 due
to a downward revision in the estimated value for one site. The charge related
to this reduction was recorded in costs of merchandise sales on the
consolidated statement of earnings.
23
LEASE RESERVE
As of August 3, 2002, the Company was able to sublease eight and exit
the lease of an additional six leased properties. The Company expects 7 of
remaining 13 leased properties to be subleased or otherwise disposed of by the
end of fiscal 2002 with the remaining 6 properties to be sublet by the end of
the first quarter of 2003.
In the second quarter of 2002, the Company increased the lease reserve by
$192,000. These charges were a result of a $689,000 increase due primarily to
an increase in the estimated time it will take to sublease certain properties
offset, in part, by a $497,000 decrease due primarily to an increase in the
sublease rates realized. The effect of these adjustments was recorded in costs
of merchandise sales and costs of service revenue on the consolidated
statement of earnings.
In the first quarter of 2002, the Company decreased the lease reserve by
$333,000. These changes were a result of a $597,000 decrease due primarily to
an increase in the estimated sublease rates. This decrease was offset, in
part, by a $264,000 increase due primarily to an increase in the estimated time
it will take the Company to sublease certain properties. The effect of these
adjustments was recorded in costs of merchandise sales and costs of service
revenue on the consolidated statement of earnings.
The lease reserve increased during the second quarter of 2001 by $1,812,000.
This increase was attributed to a $2,083,000 increase due primarily to a
decrease in the estimated months of sublease income coupled with higher
estimated lease costs as the Company attempts to exit leases for certain stores
early. This increase was offset, in part, by a decrease in lease expense of
$270,000 due primarily to an increase in certain estimated sublease rates. The
effect of these adjustments were recorded through costs of merchandise sales
and costs of service revenue.
The lease reserve decreased during the first quarter of 2001 by $173,000. This
reduction was primarily a result of a reduction in lease expense of $498,000
due to an increase in estimated sublease income resulting from an increase in
certain estimated rates. This reduction was offset, in part, by a $325,000
decrease in expected sublease income due to an increase in the estimated time
it may take to sublease certain properties. The effect of these adjustments
was recorded in costs of merchandise sales and costs of service revenue on the
consolidated statement of earnings.
24
ON-GOING EXPENSES
The on-going expense reserve represents exit activity costs which are not
associated with or do not benefit activities that will be continued. These
costs are necessary to maintain the remaining closed stores until sold, sublet
or otherwise disposed of. The on-going costs reserve includes general
maintenance costs such as utilities, security, telephone, real estate taxes and
personal property taxes which will be incurred until the properties are
disposed. The reserve for on-going costs will diminish as sites are sold,
sublet or otherwise disposed of and such activities are estimated to be
completed by the end of the first quarter of fiscal 2003.
In the second quarter of 2002, the Company increased the on-going expense
reserve $272,000 due to an increase in the estimated time 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 earnings.
In the first quarter of 2002, the Company increased the on-going expense
reserve $160,000 due to an increase in the estimated time 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 earnings.
In the second quarter of 2001, the on-going reserve was decreased by
approximately $579,000 due primarily to lower than anticipated utility costs to
maintain the closed stores and lower personal property taxes. This adjustment
was reversed through costs of merchandise sales and costs of service revenue.
This decrease was offset, in part, by an approximate $375,000 increase in the
reserve primarily due to an increase in the estimated time it is expected to
take to sublease or sell certain remaining properties. This adjustment was
recorded in costs of merchandise sales, costs of service revenue, and selling,
general and administrative expenses.
In the first quarter of 2001, the on-going reserve was increased by
approximately $380,000 which was due primarily to an increase in estimated time
to sublease or sell certain 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 earnings.
SEVERANCE RESERVE
In the second quarter of 2001, the Company reversed the remaining severance
reserve of $17,000 due to a lower than estimated final payment. In the first
quarter of 2001, the Company reversed the severance reserve by $52,000 due
primarily to certain employees originally expected to be receiving severance
failing to qualify to receive payments. There were no adjustments made to this
reserve in fiscal 2002.
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.
The expenses of this nature incurred in the second quarter of fiscal 2001
totaling $166,000 are due primarily to the removal of the remaining equipment
from the first closed distribution center. These expenses were primarily
recorded in costs of merchandise sales as incurred.
The expenses of this nature incurred in the first quarter of fiscal 2001
totaling $512,000 were due primarily to the removal of inventory and equipment
from closed distribution centers. These expenses were primarily
recorded in costs of merchandise sales as incurred.
25
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Below is a table summarizing expenses related to the Profit Enhancement Plan
for the thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001.
The details and reasons for the changes to the charge are as described above in
the respective reserve categories.
(dollar amounts
in thousands) Thirteen Thirteen Twenty-Six Twenty-Six
Income Statement Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Classification Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001
- -------------------------------------------------------------------------------
Costs of
Merchandise Sales $ 390 $ 1,060 $ 1,570 $ 1,997
Costs of
Service Revenue 119 609 68 697
Selling, General and
Administrative 3 (3) 13 38
- -------------------------------------------------------------------------------
Total Expenses $ 512 $ 1,666 $ 1,651 $ 2,732
- -------------------------------------------------------------------------------
At the end of the third quarter 2000, the Company set up a reserve liability
account which is included in accrued liabilities on the consolidated balance
sheet. This liability account tracks all accruals including remaining
rent on leases net of sublease income, severance, and on-going expenses for
the closed properties. The following chart reconciles the change in reserve
from the fiscal year ended February 2, 2002 through August 3, 2002. All
additions and adjustments were charged or credited through the appropriate line
items on the consolidated statement of earnings.
(Amounts in Lease Fixed On-going
thousands) Expenses Assets Severance Expenses Total
- -----------------------------------------------------------------------------------
Reserve balance at
February 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470
Addition 264 1,312 - 160 1,736
Utilization (742) (1,312) - (140) (2,194)
Adjustments (597) - - - (597)
- -----------------------------------------------------------------------------------
Reserve Balance at
May 4, 2002 $ 2,075 $ - $ - $ 1,340 $ 3,415
- -----------------------------------------------------------------------------------
Addition 689 48 - 272 1,009
Utilization (614) (48) - (514) (1,176)
Adjustments (497) - - - (497)
- -----------------------------------------------------------------------------------
Reserve Balance at
August 3, 2002 $ 1,653 $ - $ - $ 1,098 $ 2,751
- -----------------------------------------------------------------------------------
26
Results of Operations -
The following table presents for the periods indicated certain items in the
consolidated statements of earnings as a percentage of total revenues (except
as otherwise provided) and the percentage change in dollar amounts of such
items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change
- ------------------------------------------------------ ---------------------------------- -----------------
Thirteen weeks ended Aug. 3, 2002 Aug. 4, 2001 Fiscal 2002 vs.
(Fiscal 2002) (Fiscal 2001) Fiscal 2001
- ------------------------------------------------------ -------------- -------------- -----------------
Merchandise Sales..................................... 81.6% 80.9% 3.1%
Service Revenue (1)................................... 18.4 19.1 (1.6)
------ ------ ------
Total Revenues........................................ 100.0 100.0 2.2
Costs of Merchandise Sales (2)........................ 69.5 (3) 70.5 (3) 1.6
Costs of Service Revenue (2).......................... 76.2 (3) 74.8 (3) 0.2
------ ------ ------
Total Costs of Revenues............................... 70.7 71.3 1.3
Gross Profit from Merchandise Sales................... 30.5 (3) 29.5 (3) 6.7
Gross Profit from Service Revenue..................... 23.8 (3) 25.2 (3) (7.0)
------ ------ ------
Total Gross Profit.................................... 29.3 28.7 4.4
Selling, General and Administrative Expenses.......... 22.8 23.1 0.9
------ ------ ------
Operating Profit...................................... 6.5 5.6 18.9
Non-operating Income.................................. 0.2 0.2 13.9
Interest Expense...................................... 2.1 2.4 (9.3)
------ ------ ------
Earnings Before Income Taxes.......................... 4.6 3.4 38.6
Income Taxes.......................................... 37.8 (4) 36.5 (4) 43.5
------ ------ ------
Net Earnings Before Extraordinary Item................ 2.8 2.2 35.8
Extraordinary Item, Net of Tax........................ - - (155.1)
------ ------ ------
Net Earnings.......................................... 2.8 2.2 32.2
====== ====== ======
(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 before income taxes.
27
Thirteen Weeks Ended August 3, 2002 vs. Thirteen Weeks Ended August 4, 2001
- ---------------------------------------------------------------------------
Total revenues for the second quarter increased 2.2% as the total number of
stores in operation remained the same in 2002 and 2001. Comparable store
revenues increased 2.0% (revenues generated by stores in operation during the
same period). Comparable merchandise sales increased 2.9%, while comparable
store service revenue decreased 1.6%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 30.5% in 2002 from 29.5% in 2001. This increase, as a percentage of
merchandise sales, was due primarily to higher merchandise margins and
decreases in store occupancy costs and warehousing costs, as a percentage of
merchandise sales. In addition, gross profit from merchandise sales increased
as the Company recorded lower pretax charges related to the Profit Enhancement
Plan of $390,000 in 2002 versus $1,060,000 in 2001. The improved merchandise
margins, as a percentage of merchandise sales, 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. The decrease in
store occupancy costs was due to lower depreciation expense and the loss on a
sale leaseback transaction of certain assets in 2001 which resulted in a
favorable comparison for 2002. The lower warehousing costs, as a percentage of
merchandise sales, were due to continued improvements in efficiencies related
to the supply chain.
Gross profit from service revenue decreased, as a percentage of service
revenue, to 23.8% in 2002 from 25.2% in 2001. This decrease, as a percentage
of service revenue, was due primarily to increases in service payroll and
service employee benefits, as a percentage of service revenue. The decrease
in gross profit from service revenue, as a percentage of service revenue, was
offset by lower pretax charge related to the Profit Enhancement Plan of
$119,000 in 2002 versus $609,000 in 2001. The increase in service payroll, as
a percentage of service revenue, was due to lower than anticipated service
revenues in 2002.
Selling, general and administrative expenses decreased, as a percentage
of total revenues, to 22.8% in 2002 from 23.1% in 2001. This decrease, as a
percentage of total revenues, was due primarily to lower store expenses, as a
percentage of total revenues. The decrease in store expenses, as a percentage
of total revenues, was due primarily to decreases in store payroll expense, as
a percentage of total revenues.
Interest expense decreased $1,274,000 or 9.3% 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 decreases in selling, general and administrative
expenses and interest expense, both as a percentage of total revenues, offset,
in part, by a decrease in gross profit from service revenue, as a percentage
of service revenue. In addition, net earnings was increased due to lower
charges related to the Profit Enhancement Plan of $323,000 in 2002 in
comparison to $1,058,000 in 2001. These increases were offset, in part, by
an increase in the Company's 2002 tax rate.
28
Results of Operations -
The following table presents for the periods indicated certain items in the
consolidated statements of earnings as a percentage of total revenues (except
as otherwise provided) and the percentage change in dollar amounts of such items
compared to the indicated prior period.
Percentage of Total Revenues Percentage Change
- ------------------------------------------------------ ---------------------------------- -----------------
Twenty-six weeks ended Aug. 3, 2002 Aug. 4, 2001 Fiscal 2002 vs.
(Fiscal 2002) (Fiscal 2001) Fiscal 2001
- ------------------------------------------------------ -------------- -------------- -----------------
Merchandise Sales..................................... 81.4% 80.6% 2.8%
Service Revenue (1)................................... 18.6 19.4 (2.3)
------ ------ ------
Total Revenues........................................ 100.0 100.0 1.8
Costs of Merchandise Sales (2)........................ 69.9 (3) 70.9 (3) 1.2
Costs of Service Revenue (2).......................... 75.3 (3) 74.1 (3) (0.8)
------ ------ ------
Total Costs of Revenues............................... 70.9 71.5 0.8
Gross Profit from Merchandise Sales................... 30.1 (3) 29.1 (3) 6.6
Gross Profit from Service Revenue..................... 24.7 (3) 25.9 (3) (6.7)
------ ------ ------
Total Gross Profit.................................... 29.1 28.5 4.2
Selling, General and Administrative Expenses.......... 23.0 23.2 1.0
------ ------ ------
Operating Profit...................................... 6.1 5.3 18.5
Non-operating Income.................................. 0.2 0.1 21.5
Interest Expense...................................... 2.1 2.4 (11.1)
------ ------ ------
Earnings Before Income Taxes.......................... 4.2 3.0 42.5
Income Taxes.......................................... 37.0 (4) 36.5 (4) 44.5
------ ------ ------
Net Earnings Before Extraordinary Item................ 2.6 1.9 41.4
Extraordinary Item, Net of Tax........................ - - (155.1)
------ ------ ------
Net Earnings.......................................... 2.6 1.9 39.3
====== ====== ======
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed parts or
materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include service
center payroll and related employee benefits and service center occupancy costs.
Occupancy costs include utilities, rents, real estate and property taxes, repairs
and maintenance and depreciation and amortization expenses.
(3) As a percentage of related sales or revenue, as applicable.
(4) As a percentage of earnings before income taxes.
29
Twenty-six Weeks Ended August 3, 2002 vs. Twenty-six Weeks Ended August 4, 2001
- -------------------------------------------------------------------------------
Total revenues for the first six months increased 1.8% as the total number of
stores in operation remained the same in 2002 and 2001. Comparable store
revenues increased 1.7% (revenues generated by stores in operation during the
same period). Comparable store merchandise sales increased 2.7%, while
comparable store service revenue decreased 2.4%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 30.1% in 2001 from 29.1% in 2000. This increase, as a percentage of
merchandise sales, was due primarily to higher merchandise margins and
decreases in store occupancy costs and warehousing costs, as a percentage of
merchandise sales. In addition, gross profit from merchandise sales increased
as the Company recorded lower pretax charges related to the Profit Enhancement
Plan of $1,570,000 in 2002 versus $1,997,000 in 2001. The improved merchandise
margins, as a percentage of merchandise sales, 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. The decrease in
store occupancy costs, as a percentage of merchandise sales, was a result of
lower utilities costs, especially in California, which experienced an energy
shortage in 2001 and lower rent expense due to decreases on variable rate
leases. The lower warehousing costs, as a percentage of merchandise sales,
were due to continued improvements in efficiencies related to the supply chain.
Gross profit from service revenue decreased, as a percentage of service
revenue, to 24.7% in 2002 from 25.9% in 2001. This decrease, as a percentage
of service revenue, was due primarily to increases in service payroll and
service employee benefits, as a percentage of service revenue. The decrease
in gross profit from service revenue was offset, in part, by lower pretax
charges related to the Profit Enhancement Plan of $68,000 in 2002 in comparison
to $697,000 in 2001. The increase in service payroll and service employee
benefits, as a percentage of service revenue, was due to lower than anticipated
service revenues in 2002.
Selling, general and administrative expenses decreased, as a percentage of
total revenues, to 23.0% in 2002 from 23.2% in 2001. This decrease, as a
percentage of total revenues, was due primarily to $1,480,000 or 22% lower
net media expense and a decrease in store expenses, as a percentage of total
revenues. The decrease in net media, as a percentage of total revenues, was
due to 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 $3,005,000 or 11.1% due primarily to lower debt
levels coupled with lower average interest rates on the Company's borrowings.
Net earnings increased, as a percentage of total revenues, due primarily to
an increase in gross profit from merchandise sales, as a percentage of
merchandise sales and decreases in interest expense and selling, general and
administrative expenses, both as a percentage of total revenues offset, in
part, by a decrease in gross profit from service revenue, as a percentage of
service revenue. In addition, net earnings was increased due to lower charges
related to the Profit Enhancement Plan of $1,040,000 in 2002 in comparison
to $1,735,000 in 2001. These increases were offset, in part, by an increase
in the Company's 2002 tax rate.
30
NEW ACCOUNTING STANDARDS
- ------------------------
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue No. 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
and measured initially at fair value only when the liability is incurred.
SFAS No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002. The Company is in the process of analyzing
the impact of the adoption of this statement on its consolidated financial
statements.
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." SFAS No. 145 rescinds FASB Statements No. 4 and No. 64, which
pertained to issues related to the extinguishment of debt. SFAS No. 145 also
rescinds FASB Statement No. 44, which established accounting requirements for
motor carriers, and amends FASB Statement No. 13, "Accounting for Leases," to
enable certain capital lease modifications to be accounted for by lessees as
sale-leaseback transactions. SFAS No. 145 will be effective for fiscal years
beginning after May 15, 2002. The Company is in the process of analyzing the
impact of the adoption of this statement on its consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after
June 15, 2002. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
31
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. For a detailed
discussion of significant accounting policies that may involve a higher degree
of judgment or complexity, refer to "-Critical Accounting Policies and
Estimates" as reported in the Company's Form 10-K for the year ended
February 2, 2002, which disclosures are hereby incorporated by reference.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements made herein, including those discussing management's
expectations for future periods, are forward-looking and involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements due to factors beyond the
control of the Company, including the strength of the national and regional
economies and retail and commercial consumers' ability to spend, the health of
the various sectors of the market that the Company serves, the weather in
geographical regions with a high concentration of the Company's stores,
competitive pricing, location and number of competitors' stores and product and
labor costs. Further factors that might cause such a difference include, but
are not limited to, the factors described in the Company's filings with the
Securities and Exchange Commission.
32
Item 3. 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 agreements and Secured Credit Facility;
changes in the lenders' prime rate or London Interbank Offered Rate (LIBOR)
could affect the rates at which the Company could borrow funds thereunder. At
August 3, 2002 the Company had $56,179,000 of outstanding borrowings under
these credit facilities. There have been no material changes to the
"-Quantitative and Qualitative Disclosures About Market Risk" as reported in
the Company's Form 10-K for the fiscal year ended February 2, 2002, which
disclosures are hereby incorporated by reference.
33
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
No new reportable proceedings were filed, or material developments
in previously reported proceedings occurred, during the fiscal
quarter ended August 3, 2002.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders was held on May 29, 2002. The
shareholders approved the election of directors shown below.
Directors Elected at Annual Meeting of Shareholders
---------------------------------------------------
Name Votes For Votes Withheld
---- --------- --------------
Lester Rosenfeld 48,457,668 4,593,694
Benjamin Strauss 48,468,689 4,582,674
Bernard J. Korman 48,467,082 4,584,282
Mitchell G. Leibovitz 48,455,605 4,595,758
J. Richard Leaman, Jr. 48,466,402 4,584,961
Malcolmn D. Pryor 48,473,246 4,578,117
Peter A. Bassi 48,474,385 4,576,978
Jane Scaccetti 48,481,401 4,569,962
John T. Sweetwood 48,467,873 4,583,490
William Leonard 48,467,873 4,583,490
..................................................................
The shareholders also approved the proposal to increase the number
of shares of common stock available for awards under the 1999
Stock Incentive Plan by 2,500,000 shares with 45,180,605
affirmative votes, 7,465,047 negative votes and 405,701
abstentions.
..................................................................
The shareholders also approved the appointment of the independent
auditors Deloitte & Touche LLP with 52,171,129 affirmative votes,
715,877 negative votes and 164,352 abstentions.
..................................................................
34
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(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
(b) Reports on Form 8-K.
The Company filed an 8-K on May 15, 2002 announcing its
results of operations for the first quarter ended May 4, 2002.
An Exhibit containing the press release dated May 15, 2002 was
attached.
35
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEP BOYS - MANNY, MOE & JACK
--------------------------------
(Registrant)
Date: September 17, 2002 By: /s/ George Babich, Jr.
-------------------- --------------------------
George Babich, Jr.
President &
Chief Financial Officer
36
CERTIFICATIONS
- --------------
I, Mitchell G. Leibovitz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pep Boys - Manny,
Moe & Jack;
2. Based on my knowledge, this quarterly 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; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.
Date: September 17, 2002 /s/ Mitchell G. Leibovitz
-------------------- -------------------------
Mitchell G. Leibovitz
Chairman of the Board and
Chief Executive Officer
I, George Babich, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Pep Boys - Manny,
Moe & Jack;
2. Based on my knowledge, this quarterly 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; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.
Date: September 17, 2002 /s/ George Babich, Jr.
-------------------- -----------------------
George Babich, Jr.
President and Chief
Financial Officer
37
INDEX TO EXHIBITS
- -----------------
(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
38