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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 November 2, 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 November 30, 2002 there were 51,562,429 shares of the registrant's Common
Stock outstanding.
1
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Index Page
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PART I - FINANCIAL INFORMATION
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Item 1. Condensed Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets -
November 2, 2002 and February 2, 2002 3
Consolidated Statements of Earnings -
Thirteen and Thirty-nine weeks ended
November 2, 2002 and November 3, 2001 4
Consolidated Statements of
Cash Flows - Thirty-nine weeks ended
November 2, 2002 and November 3, 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
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 35
Item 4. Controls and Procedures 36
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 36
Item 2. Changes in Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of
Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
SIGNATURE PAGE 38
CHIEF EXECUTIVE OFFICER CERTIFICATION 39
CHIEF FINANCIAL OFFICER CERTIFICATION 40
INDEX TO EXHIBITS 41
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)
Nov. 2, 2002 Feb. 2, 2002*
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 26,928 $ 15,981
Accounts receivable, net.................................... 18,889 18,052
Merchandise inventories..................................... 528,445 519,473
Prepaid expenses............................................ 18,065 42,170
Deferred income taxes....................................... 19,877 15,820
Other....................................................... 36,649 52,308
Assets held for disposal.................................... 4,332 16,007
------------ ------------
Total Current Assets..................................... 653,185 679,811
Property and Equipment-at cost:
Land........................................................ 278,241 277,726
Buildings and improvements.................................. 932,359 922,065
Furniture, fixtures and equipment........................... 595,698 583,918
Construction in progress.................................... 14,573 10,741
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1,820,871 1,794,450
Less accumulated depreciation and amortization.............. 734,064 676,964
------------ ------------
Total Property and Equipment............................. 1,086,807 1,117,486
Other......................................................... 40,420 15,355
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Total Assets................................................... $1,780,412 $1,812,652
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 193,573 $ 216,085
Accrued expenses............................................ 228,941 241,273
Current maturities of long-term debt and obligations
under capital leases....................................... 99,685 124,615
------------ ------------
Total Current Liabilities................................. 522,199 581,973
Long-term debt and obligations under capital leases,
less current maturities...................................... 382,813 544,418
Convertible long-term debt.................................... 150,000 -
Deferred income taxes......................................... 66,432 64,027
Deferred gain on sale leaseback............................... 4,389 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........................................... 636,609 601,944
------------ ------------
877,764 843,099
Less cost of shares in treasury - 10,152,878 shares
and 10,284,446 shares..................................... 163,921 166,045
Less cost of shares in benefits trust - 2,195,270 shares...... 59,264 59,264
------------ ------------
Total Stockholders' Equity............................... 654,579 617,790
------------ ------------
Total Liabilities and Stockholders' Equity..................... $1,780,412 $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 Thirty-nine weeks ended
--------------------------------- ---------------------------------
Nov. 2, 2002 Nov. 3, 2001 Nov. 2, 2002 Nov. 3, 2001
-------------- -------------- -------------- --------------
Merchandise Sales.................................... $ 439,763 $ 447,536 $1,371,381 $1,353,933
Service Revenue...................................... 105,181 103,965 318,321 322,219
-------------- -------------- -------------- --------------
Total Revenues....................................... 544,944 551,501 1,689,702 1,676,152
Costs of Merchandise Sales........................... 304,063 316,551 954,815 959,342
Costs of Service Revenue............................. 77,839 78,998 238,334 240,823
-------------- -------------- -------------- --------------
Total Costs of Revenues.............................. 381,902 395,549 1,193,149 1,200,165
Gross Profit from Merchandise Sales.................. 135,700 130,985 416,566 394,591
Gross Profit from Service Revenue.................... 27,342 24,967 79,987 81,396
-------------- -------------- -------------- --------------
Total Gross Profit................................... 163,042 155,952 496,553 475,987
Selling, General and Administrative Expenses......... 127,822 128,344 390,940 388,982
-------------- -------------- -------------- --------------
Operating Profit..................................... 35,220 27,608 105,613 87,005
Non-operating Income................................. 878 1,225 2,698 2,723
Interest Expense..................................... 11,296 11,881 35,497 39,087
-------------- -------------- -------------- --------------
Earnings Before Income Taxes......................... 24,802 16,952 72,814 50,641
Income Taxes......................................... 9,177 5,936 26,941 18,233
-------------- -------------- -------------- --------------
Net Earnings Before Extraordinary Items.............. 15,625 11,016 45,873 32,408
Extraordinary Items, Net of Tax...................... (110) (994) (239) (758)
-------------- -------------- -------------- --------------
Net Earnings......................................... 15,515 10,022 45,634 31,650
Retained Earnings, Beginning of Period............... 624,894 595,323 601,944 581,668
Cash Dividends....................................... 3,479 3,468 10,427 10,394
Effect of Stock Options.............................. 204 26 353 74
Dividend Reinvestment Plan........................... 117 98 189 1,097
-------------- -------------- -------------- --------------
Retained Earnings, End of Period..................... $ 636,609 $ 601,753 $ 636,609 $ 601,753
============== ============== ============== ==============
Basic Earnings per Share:
Before Extraordinary Items......................... $ .30 $ .21 $ .89 $ .63
Extraordinary Items, Net of Tax.................... - (.02) - (.02)
-------------- ------------- -------------- --------------
Basic Earnings per Share............................. $ .30 $ .19 $ .89 $ .61
============== ============= ============== ==============
Diluted Earnings per Share:
Before Extraordinary Items......................... $ .28 $ .21 $ .84 $ .63
Extraordinary Items, Net of Tax.................... - (.02) - (.02)
-------------- ------------- -------------- --------------
Diluted Earnings per Share........................... $ .28 $ .19 $ .84 $ .61
============== ============= ============== ==============
Cash Dividends per Share............................. $ .0675 $ .0675 $ .2025 $ .2025
============== ============= ============== ==============
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
Thirty-nine weeks ended
----------------------------------
Nov. 2, 2002 Nov. 3, 2001
-------------- --------------
Cash Flows from Operating Activities:
Net earnings.................................................... $ 45,634 $ 31,650
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:
Extraordinary items, net of tax.............................. 239 758
Depreciation and amortization................................ 60,282 64,053
Deferred income taxes........................................ (1,652) 8,406
Accretion of bond discount................................... - 3,256
Loss on assets held for disposal............................. 1,590 1,650
Loss (Gain) from sale of assets.............................. 109 (1,670)
Changes in operating assets and liabilities:
Decrease in accounts receivable, prepaid expenses
and other................................................. 37,920 18,436
(Increase) Decrease in merchandise inventories................ (8,972) 12,947
(Decrease) Increase in accounts payable....................... (22,512) 41,555
Decrease in accrued expenses................................. (12,193) (354)
-------------- --------------
Net Cash Provided by Operating Activities....................... 100,445 180,687
Cash Flows from Investing Activities:
Capital expenditures............................................ (25,999) (11,895)
Proceeds from sales of assets................................... 6,317 26,021
-------------- --------------
Net Cash (Used in) Provided by Investing Activities............. (19,682) 14,126
Cash Flows from Financing Activities:
Net payments under line of credit agreements.................... (70,836) (86,910)
Repayment of life insurance policy loan......................... (20,686) -
Capital lease obligations....................................... 824 -
Reduction of long-term debt..................................... (116,523) (10,646)
Reduction of convertible debt................................... - (160,243)
Net proceeds from issuance of notes............................. 146,250 87,522
Dividends paid.................................................. (10,427) (10,394)
Proceeds from exercise of stock options......................... 578 55
Proceeds from dividend reinvestment plan........................ 1,004 1,035
-------------- --------------
Net Cash Used in Financing Activities........................... (69,816) (179,581)
-------------- --------------
Net Increase in Cash................................................. 10,947 15,232
Cash and Cash Equivalents at Beginning of Period..................... 15,981 7,995
-------------- --------------
Cash and Cash Equivalents at End of Period........................... $ 26,928 $ 23,227
============== ==============
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 sheets as of November 2, 2002, the consolidated
statements of earnings for the thirteen and thirty-nine week periods ended
November 2, 2002 and November 3, 2001 and the consolidated statements of cash
flows for the thirty-nine week periods ended November 2, 2002 and November 3,
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 November 2, 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 thirty-nine week periods ended November 2, 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 November 2, 2002 and February 2, 2002.
NOTE 3. Profit Enhancement Plan
In the third quarter of fiscal 2000, the Company comprehensively reviewed its
field, distribution, and Store Support Center infrastructure and the
performance of each of its stores. As a result, the Company implemented a
number of changes that have improved its performance. These changes included
the closure of 38 under-performing stores and two distribution centers and
reductions in store operating hours and the Store Support Center
infrastructure.
PLAN UPDATE
The Company is progressing towards the disposal of the 38 stores (11 owned and
27 leased), two distribution centers and two development parcels that were
closed or abandoned in connection with the Profit Enhancement Plan. As of
November 2, 2002, the Company had disposed of 20 of the closed stores, the two
distribution centers and the two development parcels. In the second quarter
2002, the Company decided to lease rather than sell two of the closed stores
due to changes in the real estate market. As a result, the Company
reclassified these two owned properties as assets held for use. The Company
estimates that the remaining closed stores (three owned and 13 leased) will be
disposed of by the end of the second quarter of fiscal 2003.
6
ASSETS HELD FOR DISPOSAL
As of November 2, 2002, the assets held for disposal included the building and
land of the three remaining closed stores owned by the Company, which have a
carrying value of $4,332,000. The Company has sold eight of the 13 owned
properties originally held for sale, which included the two development
parcels. In the second quarter of fiscal 2002, the Company decided to lease
rather than sell two of the closed stores due to changes in the real estate
market. As a result, the Company reclassified these two owned properties as
assets held for use at their estimated market values of $1,688,000 and
$1,507,000. The market value of each such property was lower than cost
adjusted for depreciation.
The Company is actively marketing the remaining three closed stores and will
make adjustments to the property values in accordance with any changes in
market values. The Company has extended the estimated length of time needed to
sell such properties due to changes in the real estate market. One of these
properties, with a carrying value of $1,900,000, is expected to be disposed of
by the end of the fourth quarter of fiscal 2002 and the remaining two
properties, with a carrying value of $2,432,000, are expected to be disposed of
by the end of the first quarter of fiscal 2003. The Company will continue to
monitor the status for disposing its owned properties and make any necessary
adjustments.
In the third quarter of fiscal 2002, the Company sold one closed store for
$1,045,000, net of commission. During the quarter, the Company also adjusted
the carrying value of certain assets held for disposal, which resulted in a net
decrease of $230,000. 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 fiscal 2002, the Company sold two properties for
$3,281,000, net of commissions. The sale of the properties resulted in a loss
of $48,000 due to higher than anticipated sales' costs. 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 fiscal 2002, the Company sold two properties for
$2,228,000, net of commissions. One of these properties, which 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 third quarter of fiscal 2001, the Company sold two properties for a loss
of $782,000, which was recorded in costs of merchandise sales and selling,
general and administrative expenses on the consolidated statement of
earnings. The net proceeds from the sales of these properties totaled
approximately $2,117,000. Additionally, the Company recorded a downward
revision in the estimated values for certain properties of $436,000. This
reduction was recorded in costs of merchandise sales on the consolidated
statement of earnings.
In the second quarter of fiscal 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 on the consolidated statement of
earnings.
In the first quarter of fiscal 2001, the carrying values for the buildings and
land were reduced from their original estimated value of $21,680,000 by
$400,000 due to a reduction in the estimated value for one property. The
charge related to this reduction was recorded in costs of merchandise sales on
the consolidated statement of earnings.
7
LEASE RESERVE
As of November 2, 2002, the Company was able to sublease eight and exit the
lease of an additional six of the 27 closed stores. The Company expects four
of the remaining 13 closed stores that are leased to be subleased or otherwise
disposed of by the end of fiscal 2002 with the remaining nine closed stores to
be sublet by the end of the second quarter of fiscal 2003.
In the third quarter of fiscal 2002, the Company increased the lease reserve by
$764,000. This increase was due primarily to a decrease in the estimated
sublease rates and an increase in the time that it is expected to 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.
In the second quarter of fiscal 2002, the Company increased the lease reserve
by $192,000. These changes were a result of a $689,000 increase due primarily
to an increase in the time that it is expected to 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 fiscal 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 time that it
is expected to 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.
During the third quarter of fiscal 2001, the Company was able to sublease three
properties and exit the lease of three other properties. The transactions
resulted in a decrease in the previously recorded lease reserve due to better
than estimated results. The lease reserve decreased during the third quarter
of fiscal 2001 by $1,882,000. This change was due to a decrease of $2,184,000
resulting primarily from lower than estimated realized costs for exiting
certain leases, higher realized sublease income on leased properties and lower
realized commissions on the sublease of those properties. The decrease was
offset, in part, by an increase in the lease reserve of $302,000 due primarily
to an increase in the time it is expected 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 fiscal 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 attempted 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 effects of these adjustments were recorded in costs of
merchandise sales and costs of service revenue on the consolidated statement
of earnings.
The lease reserve decreased during the first quarter of fiscal 2001 by
$173,000. This reduction resulted primarily from a reduction in lease expense
of $498,000 due to an increase in estimated sublease income resulting from an
increase in the estimated sublease 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 the Company's continuing activities. These
costs are necessary to maintain the remaining closed stores until sold, sublet
or otherwise disposed. The on-going costs reserve includes general maintenance
costs such as utilities, security, telephone, real estate taxes and personal
property taxes that will be incurred until the properties are disposed. The
reserve for on-going costs will diminish as sites are sold, sublet or
otherwise disposed. These disposals are expected to be completed by the end of
the second quarter of fiscal 2003.
In the third quarter of fiscal 2002, the Company decreased the on-going expense
reserve by $48,000 due primarily to lower than anticipated maintenance costs on
properties to be disposed offset, in part, by an increase in the length of
time that it is expected to take to sublease, sell or otherwise dispose of the
remaining properties. This adjustment was recorded in costs of merchandise
sales, costs of service revenue, and selling, general and administrative
expenses on the consolidated statement of earnings.
In the second quarter of fiscal 2002, the Company increased the on-going
expense reserve by $272,000 due to an increase in the length of time that it is
expected to take to sublease, sell or otherwise dispose of the remaining
properties. This adjustment was recorded in costs of merchandise sales, costs
of service revenue, and selling, general and administrative expenses on the
consolidated statement of earnings.
In the first quarter of fiscal 2002, the Company increased the on-going expense
reserve by $160,000 due to an increase in the length of time that it is
expected to take to sublease, sell or otherwise dispose of the remaining
properties. This adjustment was recorded in costs of merchandise sales, costs
of service revenue, and selling, general and administrative expenses on the
consolidated statement of earnings.
In the third quarter of fiscal 2001, the on-going expense reserve decreased
slightly. This change was a result of a decrease in the reserve due to lower
than estimated security costs, offset by an increase in the reserve due to an
increase in the length of time that it is expected to take to sublease, sell,
or otherwise vacate the remaining properties.
In the second quarter of fiscal 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 decrease
was offset, in part, by an approximate $375,000 increase in the reserve
primarily due to an increase in the length of time that it is expected to take
to sublease or sell certain remaining properties. These adjustments were
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 fiscal 2001, the on-going reserve was increased by
approximately $380,000, which was due primarily to an increase in the length of
time that it is expected to take 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 fiscal 2001, the Company reversed the remaining
employee severance reserve of $17,000 due to a lower than estimated final
payment. In the first quarter of fiscal 2001, the Company reversed the
severance reserve by $52,000 because certain employees who originally
expected to receive severance failed 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 Company did not incur expenses of this nature in the third quarter of
fiscal 2001.
The expenses of this nature incurred in the second quarter of fiscal 2001
totaling $166,000 were due primarily to the removal of the remaining equipment
from the closed distribution centers. These expenses were primarily
recorded in costs of merchandise sales on the consolidated statement of
earnings 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 the closed distribution centers. These expenses were primarily recorded
in costs of merchandise sales on the consolidated statement of earnings as
incurred.
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Below is a table summarizing expenses related to the Profit Enhancement Plan
for the thirteen and thirty-nine weeks ended November 2, 2002 and November 3,
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 Thirty-Nine Thirty-Nine
Income Statement Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Classification Nov. 2, 2002 Nov. 3, 2001 Nov. 2, 2002 Nov. 3, 2001
- -------------------------------------------------------------------------------
Costs of
Merchandise Sales $ 710 $ (109) $ 2,280 $ 1,888
Costs of
Service Revenue 235 (597) 303 100
Selling, General and
Administrative 1 156 14 194
- -------------------------------------------------------------------------------
Total Expenses $ 946 $ (550) $ 2,597 $ 2,182
- -------------------------------------------------------------------------------
10
At the end of the third quarter of fiscal 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 November 2, 2002. All additions
and adjustments were charged or credited to 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
- -----------------------------------------------------------------------------------
Addition 781 230 - (48) 963
Utilization (772) (230) - (438) (1,440)
Adjustments (17) - - - (17)
- -----------------------------------------------------------------------------------
Reserve Balance at
November 2, 2002 $ 1,645 $ - $ - $ 612 $ 2,257
- -----------------------------------------------------------------------------------
11
NOTE 4. Net Earnings Per Share
Thirteen weeks ended Thirty-nine weeks ended
(in thousands, except per share data) ----------------------------------- ------------------------------------
Nov. 2, 2002 Nov. 3, 2001 Nov. 2, 2002 Nov. 3, 2001
--------------- --------------- --------------- ---------------
(a) Net earnings before extraordinary items.......... $ 15,625 $ 11,016 $ 45,873 $ 32,408
Adjustment for interest on convertible senior
notes, net of income tax effect................ 977 - 1,803 -
- ----------------------------------------------------------------------------------------------------------------------------------
(b) Adjusted net earnings before
extraordinary items............................ $ 16,602 $ 11,016 $ 47,676 $ 32,408
- ----------------------------------------------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during the period.............................. 51,534 51,375 51,490 51,328
Common shares assumed issued upon conversion of
convertible senior notes....................... 6,697 - 4,072 -
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price........ 853 879 1,025 523
- ----------------------------------------------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during the period.................. 59,084 52,254 56,587 51,851
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Before extraordinary items (a/c)................. $ .30 $ .21 $ .89 $ .63
Extraordinary items, net of tax.................. - (.02) - (.02)
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .30 $ .19 $ .89 $ .61
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Before extraordinary items (b/d)................. $ .28 $ .21 $ .84 $ .63
Extraordinary items, net of tax.................. - (.02) - (.02)
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .28 $ .19 $ .84 $ .61
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustments for certain convertible securities were antidilutive during the
thirteen and thirty-nine week periods ended November 3, 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 thirty-nine week periods ended
November 2, 2002 and November 3, 2001 were as follows:
Thirteen weeks ended Thirty-nine weeks ended
(in thousands) ----------------------------------- -----------------------------------
Nov. 2, 2002 Nov. 3, 2001 Nov. 2, 2002 Nov. 3, 2001
-------------- -------------- -------------- --------------
Common shares associated with antidilutive stock
options excluded from computation of diluted EPS ..... 4,749 3,941 4,567 3,944
-------------- -------------- -------------- --------------
12
NOTE 5. Debt and Financing Arrangements
On October 16, 2002, the Company retired $225,000 aggregate principal amount
of Medium-Term Notes which were redeemed at the option of the holders.
On September 19, 2002, the Company retired $42,650,000 aggregate principal
amount of Medium-Term Notes which were redeemed at the option of the holders.
The after-tax extraordinary loss was $110,000.
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.
On July 16, 2002, the Company retired $49,915,000 aggregate principal amount
of Medium-Term Notes which were redeemed at the option of the holders. The
after-tax extraordinary loss was $129,000.
On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of
4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and
jointly and severally guaranteed by the Company's wholly-owned direct and
indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California,
Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack
of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys
common stock at any time prior to their maturity unless they have been
previously repurchased or redeemed by the Company. The conversion rate is
44.6484 shares per each $1,000 principal amount of notes, equivalent to a
conversion price of approximately $22.40 per share. Interest on the notes will
be paid by the Company on June 1 and December 1 of each year, beginning
December 1, 2002.
NOTE 6. Supplemental Guarantor Information - Convertible Senior Notes
On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of
4.25% Convertible Senior Notes. The notes are jointly and severally
guaranteed by the Company's wholly-owned direct and indirect operating
subsidiaries ("subsidiary guarantors"), The Pep Boys Manny Moe & Jack of
California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys -
Manny, Moe & Jack of Puerto Rico, Inc.
13
The following are consolidating balance sheets of the Company as of
November 2, 2002 and February 2, 2002 and the related consolidating statements
of earnings for the thirteen and thirty-nine weeks ended November 2, 2002 and
November 3, 2001 and the condensed consolidating statements of cash flows for
the thirty-nine weeks ended November 2, 2002 and November 3, 2001:
CONSOLIDATING BALANCE SHEET
(Unaudited)
Non-
Subsidiary guarantor
November 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 16,371 $ 10,197 $ 360 $ - $ 26,928
Accounts receivable, net........................ 7,465 11,424 - - 18,889
Merchandise inventories......................... 187,663 340,782 - - 528,445
Prepaid expenses................................ 18,289 6,047 3,302 (9,573) 18,065
Deferred income taxes........................... 9,566 2,359 7,952 - 19,877
Other........................................... 2 - 36,647 - 36,649
Assets held for disposal........................ - 4,332 - - 4,332
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets......................... 239,356 375,141 48,261 (9,573) 653,185
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land............................................. 92,540 185,701 - - 278,241
Buildings and improvements....................... 312,802 619,557 - - 932,359
Furniture, fixtures and equipment................ 281,190 314,508 - - 595,698
Construction in progress......................... 9,805 4,768 - - 14,573
--------- ---------- -------- -------- ---------
696,337 1,124,534 - - 1,820,871
Less accumulated depreciation and amortization... 318,974 415,090 - - 734,064
--------- ---------- -------- -------- ----------
Total Property and Equipment.................. 377,363 709,444 - - 1,086,807
Investment in subsidiaries........................ 1,454,276 - 1,107,943 (2,562,219) -
Intercompany receivables.......................... - 361,520 322,481 (684,001) -
Other............................................. 35,480 4,940 - - 40,420
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets................................. $ 2,106,475 $ 1,451,045 $ 1,478,685 $ (3,255,793) $ 1,780,412
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................ $ 193,564 $ 9 $ - $ - $ 193,573
Accrued expenses................................ 71,215 69,808 97,491 (9,573) 228,941
Current maturities of long-term debt and
obligations under capital leases............... 99,685 - - - 99,685
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities.................... 364,464 69,817 97,491 (9,573) 522,199
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities.................. 382,809 4 - - 382,813
Convertible long-term debt........................ 150,000 - - - 150,000
Intercompany liabilities.......................... 519,316 164,685 - (684,001) -
Deferred income taxes............................. 34,008 32,424 - - 66,432
Deferred gain on sale leaseback................... 1,299 3,090 - - 4,389
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............................... 636,609 939,165 1,180,695 (2,119,860) 636,609
Less:
Cost of shares in treasury...................... 163,921 - - - 163,921
Cost of shares in benefits trust................ 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity................... 654,579 1,181,025 1,381,194 (2,562,219) 654,579
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity... $ 2,106,475 $ 1,451,045 $ 1,478,685 $ (3,255,793) $ 1,780,412
- -----------------------------------------------------------------------------------------------------------------------------
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 receivables.......................... - 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 Nov. 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Merchandise Sales............................. $ 150,857 $ 288,906 $ - $ - $ 439,763
Service Revenue............................... 36,533 68,648 - - 105,181
Other Revenue................................. - - 6,730 (6,730) -
------------ ------------ ------------ ------------- -------------
Total Revenues................................ 187,390 357,554 6,730 (6,730) 544,944
Costs of Merchandise Sales.................... 105,936 198,127 - - 304,063
Costs of Service Revenue...................... 25,933 51,906 - - 77,839
Costs of Other Revenue........................ - - 6,825 (6,825) -
------------ ------------ ------------ ------------- -------------
Total Costs of Revenues....................... 131,869 250,033 6,825 (6,825) 381,902
Gross Profit from Merchandise Sales........... 44,921 90,779 - - 135,700
Gross Profit from Service Revenue............. 10,600 16,742 - - 27,342
Gross Loss from Other Revenue................. - - (95) 95 -
------------ ------------ ------------ ------------- -------------
Total Gross Profit (Loss)..................... 55,521 107,521 (95) 95 163,042
Selling, General and Administrative Expenses.. 44,977 82,670 80 95 127,822
------------ ------------ ------------ ------------- -------------
Operating Profit (Loss)....................... 10,544 24,851 (175) - 35,220
Equity in Earnings of Subsidiaries............ 22,693 - 19,526 (42,219) -
Non-operating (Expense) Income................ (4,242) 12,398 5,174 (12,452) 878
Interest Expense.............................. 17,521 6,227 - (12,452) 11,296
------------ ------------ ------------ ------------- -------------
Earnings Before Income Taxes.................. 11,474 31,022 24,525 (42,219) 24,802
Income Tax (Benefit) Expense.................. (4,151) 11,478 1,850 - 9,177
------------ ------------ ------------ ------------- -------------
Net Earnings Before Extraordinary Items....... 15,625 19,544 22,675 (42,219) 15,625
Extraordinary Items, Net of Tax............... (110) - - - (110)
------------ ------------ ------------ ------------- -------------
Net Earnings.................................. $ 15,515 $ 19,544 $ 22,675 $ (42,219) $ 15,515
============ ============ ============ ============= =============
16
CONSOLIDATING STATEMENT OF EARNINGS
Non-
Subsidiary guarantor
Thirteen weeks ended Nov. 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Merchandise Sales............................. $ 154,016 $ 293,520 $ - $ - $ 447,536
Service Revenue............................... 36,674 67,291 - - 103,965
Other Revenue................................. - - 5,451 (5,451) -
------------ ------------ ------------ ------------- -------------
Total Revenues................................ 190,690 360,811 5,451 (5,451) 551,501
Costs of Merchandise Sales.................... 109,028 207,523 - - 316,551
Costs of Service Revenue...................... 27,785 51,213 - - 78,998
Costs of Other Revenue........................ - - 6,040 (6,040) -
------------ ------------ ------------ ------------- -------------
Total Costs of Revenues....................... 136,813 258,736 6,040 (6,040) 395,549
Gross Profit from Merchandise Sales........... 44,988 85,997 - - 130,985
Gross Profit from Service Revenue............. 8,889 16,078 - - 24,967
Gross Loss from Other Revenue................. - - (589) 589 -
------------ ------------ ------------ ------------- -------------
Total Gross Profit (Loss)..................... 53,877 102,075 (589) 589 155,952
Selling, General and Administrative Expenses.. 15,285 112,397 73 589 128,344
------------ ------------ ------------ ------------- -------------
Operating Profit (Loss)....................... 38,592 (10,322) (662) - 27,608
Equity in Earnings of Subsidiaries............ 15,686 - 23,814 (39,500) -
Non-operating (Expense) Income................ (3,701) 36,490 5,560 (37,124) 1,225
Interest Expense.............................. 42,016 6,989 - (37,124) 11,881
------------ ------------ ------------ ------------- -------------
Earnings Before Income Taxes.................. 8,561 19,179 28,712 (39,500) 16,952
Income Tax (Benefit) Expense.................. (2,455) 6,687 1,704 - 5,936
------------ ------------ ------------ ------------- -------------
Net Earnings Before Extraordinary Items....... 11,016 12,492 27,008 (39,500) 11,016
Extraordinary Items, Net of Tax............... (994) - - - (994)
------------ ------------ ------------ ------------- -------------
Net Earnings.................................. $ 10,022 $ 12,492 $ 27,008 $ (39,500) $ 10,022
============ ============ ============ ============= =============
17
CONSOLIDATING STATEMENT OF EARNINGS
(Unaudited)
Non-
Subsidiary guarantor
Thirty-nine weeks ended Nov. 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Merchandise Sales............................. $ 474,319 $ 897,062 $ - $ - $ 1,371,381
Service Revenue............................... 111,404 206,917 - - 318,321
Other Revenue................................. - - 19,398 (19,398) -
------------ ------------ ------------ ------------- -------------
Total Revenues................................ 585,723 1,103,979 19,398 (19,398) 1,689,702
Costs of Merchandise Sales.................... 332,660 622,155 - - 954,815
Costs of Service Revenue...................... 81,161 157,173 - - 238,334
Costs of Other Revenue........................ - - 19,012 (19,012) -
------------ ------------ ------------ ------------- -------------
Total Costs of Revenues....................... 413,821 779,328 19,012 (19,012) 1,193,149
Gross Profit from Merchandise Sales........... 141,659 274,907 - - 416,566
Gross Profit from Service Revenue............. 30,243 49,744 - - 79,987
Gross Profit from Other Revenue............... - - 386 (386) -
------------ ------------ ------------ ------------- -------------
Total Gross Profit............................ 171,902 324,651 386 (386) 496,553
Selling, General and Administrative Expenses.. 137,634 253,461 231 (386) 390,940
------------ ------------ ------------ ------------- -------------
Operating Profit.............................. 34,268 71,190 155 - 105,613
Equity in Earnings of Subsidiaries............ 65,552 - 57,449 (123,001) -
Non-operating (Expense) Income................ (13,295) 36,499 15,728 (36,234) 2,698
Interest Expense.............................. 52,210 19,521 - (36,234) 35,497
------------ ------------ ------------ ------------- -------------
Earnings Before Income Taxes.................. 34,315 88,168 73,332 (123,001) 72,814
Income Tax (Benefit) Expense.................. (11,558) 32,622 5,877 - 26,941
------------ ------------ ------------ ------------- -------------
Net Earnings Before Extraordinary Items....... 45,873 55,546 67,455 (123,001) 45,873
Extraordinary Items, Net of Tax............... (239) - - - (239)
------------ ------------ ------------ ------------- -------------
Net Earnings.................................. $ 45,634 $ 55,546 $ 67,455 $ (123,001) $ 45,634
============ ============ ============ ============= =============
18
CONSOLIDATING STATEMENT OF EARNINGS
Non-
Subsidiary guarantor
Thirty-nine weeks ended Nov. 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Merchandise Sales............................. $ 465,745 $ 888,188 $ - $ - $ 1,353,933
Service Revenue............................... 114,207 208,012 - - 322,219
Other Revenue................................. - - 16,893 (16,893) -
------------ ------------ ------------ ------------- -------------
Total Revenues................................ 579,952 1,096,200 16,893 (16,893) 1,676,152
Costs of Merchandise Sales.................... 333,655 625,687 - - 959,342
Costs of Service Revenue...................... 84,483 156,340 - - 240,823
Costs of Other Revenue........................ - - 17,543 (17,543) -
------------ ------------ ------------ ------------- -------------
Total Costs of Revenues....................... 418,138 782,027 17,543 (17,543) 1,200,165
Gross Profit from Merchandise Sales........... 132,090 262,501 - - 394,591
Gross Profit from Service Revenue............. 29,724 51,672 - - 81,396
Gross Loss from Other Revenue................. - - (650) 650 -
------------ ------------ ------------ ------------- -------------
Total Gross Profit (Loss)..................... 161,814 314,173 (650) 650 475,987
Selling, General and Administrative Expenses.. 134,308 253,804 220 650 388,982
------------ ------------ ------------ ------------- -------------
Operating Profit (Loss)....................... 27,506 60,369 (870) - 87,005
Equity in Earnings of Subsidiaries............ 71,009 - 68,785 (139,794) -
Non-operating (Expense) Income................ (12,803) 58,461 17,576 (60,511) 2,723
Interest Expense.............................. 75,323 24,275 - (60,511) 39,087
------------ ------------ ------------ ------------- -------------
Earnings Before Income Taxes.................. 10,389 94,555 85,491 (139,794) 50,641
Income Tax (Benefit) Expense.................. (22,019) 34,238 6,014 - 18,233
------------ ------------ ------------ ------------- -------------
Net Earnings Before Extraordinary Items....... 32,408 60,317 79,477 (139,794) 32,408
Extraordinary Items, Net of Tax............... (758) - - - (758)
------------ ------------ ------------ ------------- -------------
Net Earnings.................................. $ 31,650 $ 60,317 $ 79,477 $ (139,794) $ 31,650
============ ============ ============ ============= =============
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Unaudited)
Non-
Subsidiary guarantor
Thirty-nine weeks ended Nov. 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Operating Activities:
Net Earnings............................... $ 45,634 $ 55,546 $ 67,455 $ (123,001) $ 45,634
Adjustments to Reconcile Net
Earnings to Net Cash Provided
By Operating Activities:
Non-cash operating activities........... (38,746) 34,771 (58,458) 123,001 60,568
Change in operating assets and
liabilities............................ 8,383 (26,352) 12,212 - (5,757)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 15,271 63,965 21,209 - 100,445
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net Cash Used in
Investing Activities................. (14,718) (4,964) - - (19,682)
Cash Flows from Financing Activities:
Net Cash Provided by (Used in)
Financing Activities................. 11,022 (59,678) (21,160) - (69,816)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash................. 11,575 (677) 49 - 10,947
Cash and Cash Equivalents at Beginning of Period 4,796 10,874 311 - 15,981
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period...... $ 16,371 $ 10,197 $ 360 $ - $ 26,928
- -----------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Non-
Subsidiary guarantor
Thirty-nine weeks ended Nov. 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Operating Activities:
Net Earnings............................... $ 31,650 $ 60,317 $ 79,477 $ (139,794) $ 31,650
Adjustments to Reconcile Net
Earnings to Net Cash Provided
By Operating Activities:
Non-cash operating activities........... (35,472) 39,485 (67,354) 139,794 76,453
Change in operating assets and
liabilities............................ 43,831 34,463 (5,710) - 72,584
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 40,009 134,265 6,413 - 180,687
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net Cash (Used in) Provided by
Investing Activities................. (292) 14,418 - - 14,126
Cash Flows from Financing Activities:
Net Cash Used in
Financing Activities................. (29,149) (143,878) (6,554) - (179,581)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash................. 10,568 4,805 (141) - 15,232
Cash and Cash Equivalents at Beginning of Period 482 7,038 475 - 7,995
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period...... $ 11,050 $ 11,843 $ 334 $ - $ 23,227
- -----------------------------------------------------------------------------------------------------------------------------
20
NOTE 7. New Accounting Standards
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on EITF 02-16, "Accounting by a Reseller for Cash Consideration Received from
a Vendor." This pronouncement addresses the accounting issues pertaining to
cash consideration received by a reseller from a vendor. This consensus
should be applied in financial statements for periods beginning after
December 15, 2002. The Company is in the process of analyzing the impact of
the adoption of this consensus on its consolidated financial statements.
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
when the liability is incurred instead of at the date an entity commits to an
exit plan. SFAS No. 146 will be effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not expect adopting
this statement will have a material impact on its financial position or the
results of operations.
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." As a
result of rescinding FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations." This
statement also amends FASB Statement No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.
Additional amendments include changes to other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The Company will adopt
the provisions of SFAS No. 145 during the first quarter of fiscal 2003. For
the thirteen and thirty-nine week periods ended November 2, 2002, the Company
recorded extraordinary losses on the extinguishment of debt, net of tax, of
$110,000 and $239,000, respectively. Accordingly, reclassifications of these
losses to earnings before extraordinary items will be made throughout fiscal
2003 to maintain comparability for the reported periods.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after
June 15, 2002. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
NOTE 8. Contingencies
On October 28, 2002, the United States District Court for the Eastern District
of New York ordered a stipulation of dismissal with prejudice of all claims
asserted by the plaintiffs against the Company in the action entitled
"Coalition for a Level Playing Field, L.L.C., et al v. AutoZone, Inc., et al."
After vigorously defending this action, the Company, in recognition of the
costs and burdens of further litigation, agreed to a settlement of the action,
although it continues to deny liability on all claims asserted therein. The
payment to be made by the Company in connection with the settlement is not
material to the Company's financial position or the results of its operations.
The Company's California subsidiary is a defendant in a consolidated action
entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack" that is pending in
the California Superior Court in Orange County. Plaintiffs are former and
current store management employees who claim that they were improperly
classified as exempt from the overtime provisions of California law and seek to
be compensated for all overtime hours worked. Plaintiffs filed a Motion to
certify the case as a class action to represent all persons employed in
California as salaried store managers, assistant store managers, service
managers and assistant service managers since March 29, 1996. On October 25,
2002, plaintiffs' Motion to certify the case as a class action was granted.
The Company sought expedited relief from the Court of Appeals to vacate the
class certification order, which was denied. On December 1, 2002 the Company
appealed that denial by filing a Petition for Review and Request for Immediate
Stay to the California Supreme Court. No trial date has been set for the
underlying case. The Company intends to vigorously defend this action and
believes that it is not material to the Company's financial position. An
adverse outcome in this action, however, may have a material adverse effect on
the Company's results of operations for the year in which a judgment, if any,
is rendered.
21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES - November 2, 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 nine months of 2002, the Company invested
$25,999,000 in property and equipment. The Company's net inventory (net
inventory includes the change in inventory less the change in accounts payable)
increased $31,484,000. Working capital increased from $97,838,000 at
February 2, 2002 to $130,986,000 at November 2, 2002. At November 2, 2002, the
Company had stockholders' equity of $654,579,000 and long-term debt of
$532,813,000. The Company's long-term debt was 45% of its total capitalization
at November 2, 2002 and 47% at February 2, 2002. As of November 2, 2002, the
Company had an available line of credit totaling $174,789,000.
The Company has opened two new Supercenters, completing its planned openings
for the current fiscal year. Management estimates the costs of expected
capital expenditures relating to the Company's existing stores, warehouses and
offices for the remainder of fiscal 2002 will be approximately $17,000,000.
The Company anticipates that its net cash provided by operating activities and
its existing line of credit will exceed its principal cash requirements for
capital expenditures and net inventory in fiscal 2002.
On October 16, 2002, the Company retired $225,000 aggregate principal 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.
On September 19, 2002, the Company retired $42,650,000 aggregate principal
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 $110,000.
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. 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 principal 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 principal amount of
4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and
jointly and severally guaranteed by the Company's wholly-owned direct and
indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California,
Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack
of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys
common stock at any time prior to their maturity unless they have been
previously repurchased or redeemed by the Company. The conversion rate is
44.6484 shares per each $1,000 principal amount of notes, equivalent to a
conversion price of approximately $22.40 per share. Interest on the notes 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.
22
PROFIT ENHANCEMENT PLAN
- -----------------------
In the third quarter of fiscal 2000, the Company comprehensively reviewed its
field, distribution, and Store Support Center infrastructure and the
performance of each of its stores. As a result, the Company implemented a
number of changes that have improved its performance. These changes included
the closure of 38 under-performing stores and two distribution centers and
reductions in store operating hours and the Store Support Center
infrastructure.
PLAN UPDATE
The Company is progressing towards the disposal of the 38 stores (11 owned and
27 leased), two distribution centers and two development parcels that were
closed or abandoned in connection with the Profit Enhancement Plan. As of
November 2, 2002, the Company had disposed of 20 of the closed stores, the two
distribution centers and the two development parcels. In the second quarter
2002, the Company decided to lease rather than sell two of the closed stores
due to changes in the real estate market. As a result, the Company
reclassified these two owned properties as assets held for use. The Company
estimates that the remaining closed stores (three owned and 13 leased) will be
disposed of by the end of the second quarter of fiscal 2003.
ASSETS HELD FOR DISPOSAL
As of November 2, 2002, the assets held for disposal included the building and
land of the three remaining closed stores owned by the Company, which have a
carrying value of $4,332,000. The Company has sold eight of the 13 owned
properties originally held for sale, which included the two development
parcels. In the second quarter of fiscal 2002, the Company decided to lease
rather than sell two of the closed stores due to changes in the real estate
market. As a result, the Company reclassified these two owned properties as
assets held for use at their estimated market values of $1,688,000 and
$1,507,000. The market value of each such property was lower than cost
adjusted for depreciation.
The Company is actively marketing the remaining three closed stores and will
make adjustments to the property values in accordance with any changes in
market values. The Company has extended the estimated length of time needed to
sell such properties due to changes in the real estate market. One of these
properties, with a carrying value of $1,900,000, is expected to be disposed of
by the end of the fourth quarter of fiscal 2002 and the remaining two
properties, with a carrying value of $2,432,000, are expected to be disposed of
by the end of the first quarter of fiscal 2003. The Company will continue to
monitor the status for disposing its owned properties and make any necessary
adjustments.
In the third quarter of fiscal 2002, the Company sold one closed store for
$1,045,000, net of commission. During the quarter, the Company also adjusted
the carrying value of certain assets held for disposal, which resulted in a net
decrease of $230,000. 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 fiscal 2002, the Company sold two properties for
$3,281,000, net of commissions. The sale of the properties resulted in a loss
of $48,000 due to higher than anticipated sales' costs. The charges related to
the assets held for disposal were recorded in costs of merchandise sales on the
consolidated statement of earnings.
23
In the first quarter of fiscal 2002, the Company sold two properties for
$2,228,000, net of commissions. One of these properties, which 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 third quarter of fiscal 2001, the Company sold two properties for a loss
of $782,000, which was recorded in costs of merchandise sales and selling,
general and administrative expenses on the consolidated statement of
earnings. The net proceeds from the sales of these properties totaled
approximately $2,117,000. Additionally, the Company recorded a downward
revision in the estimated values for certain properties of $436,000. This
reduction was recorded in costs of merchandise sales on the consolidated
statement of earnings.
In the second quarter of fiscal 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 on the consolidated statement of
earnings.
In the first quarter of fiscal 2001, the carrying values for the buildings and
land were reduced from their original estimated value of $21,680,000 by
$400,000 due to a reduction in the estimated value for one property. The
charge related to this reduction was recorded in costs of merchandise sales on
the consolidated statement of earnings.
LEASE RESERVE
As of November 2, 2002, the Company was able to sublease eight and exit the
lease of an additional six of the 27 closed stores. The Company expects four
of the remaining 13 closed stores that are leased to be subleased or otherwise
disposed of by the end of fiscal 2002 with the remaining nine closed stores to
be sublet by the end of the second quarter of fiscal 2003.
In the third quarter of fiscal 2002, the Company increased the lease reserve by
$764,000. This increase was due primarily to a decrease in the estimated
sublease rates and an increase in the time that it is expected to 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.
In the second quarter of fiscal 2002, the Company increased the lease reserve
by $192,000. These changes were a result of a $689,000 increase due primarily
to an increase in the time that it is expected to 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.
24
In the first quarter of fiscal 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 time that it
is expected to 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.
During the third quarter of fiscal 2001, the Company was able to sublease three
properties and exit the lease of three other properties. The transactions
resulted in a decrease in the previously recorded lease reserve due to better
than estimated results. The lease reserve decreased during the third quarter
of fiscal 2001 by $1,882,000. This change was due to a decrease of $2,184,000
resulting primarily from lower than estimated realized costs for exiting
certain leases, higher realized sublease income on leased properties and lower
realized commissions on the sublease of those properties. The decrease was
offset, in part, by an increase in the lease reserve of $302,000 due primarily
to an increase in the time it is expected 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 fiscal 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 attempted 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 effects of these adjustments were recorded in costs of
merchandise sales and costs of service revenue on the consolidated statement
of earnings.
The lease reserve decreased during the first quarter of fiscal 2001 by
$173,000. This reduction resulted primarily from a reduction in lease expense
of $498,000 due to an increase in estimated sublease income resulting from an
increase in the estimated sublease 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.
ON-GOING EXPENSES
The on-going expense reserve represents exit activity costs which are not
associated with or do not benefit the Company's continuing activities. These
costs are necessary to maintain the remaining closed stores until sold, sublet
or otherwise disposed. The on-going costs reserve includes general maintenance
costs such as utilities, security, telephone, real estate taxes and personal
property taxes that will be incurred until the properties are disposed. The
reserve for on-going costs will diminish as sites are sold, sublet or
otherwise disposed. These disposals are expected to be completed by the end of
the second quarter of fiscal 2003.
In the third quarter of fiscal 2002, the Company decreased the on-going expense
reserve by $48,000 due primarily to lower than anticipated maintenance costs on
properties to be disposed offset, in part, by an increase in the length of
time that it is expected to take to sublease, sell or otherwise dispose of the
remaining properties. This adjustment was recorded in costs of merchandise
sales, costs of service revenue, and selling, general and administrative
expenses on the consolidated statement of earnings.
In the second quarter of fiscal 2002, the Company increased the on-going
expense reserve by $272,000 due to an increase in the length of time that it is
expected to take to sublease, sell or otherwise dispose of the remaining
properties. This adjustment was recorded in costs of merchandise sales, costs
of service revenue, and selling, general and administrative expenses on the
consolidated statement of earnings.
25
In the first quarter of fiscal 2002, the Company increased the on-going expense
reserve by $160,000 due to an increase in the length of time that it is
expected to take to sublease, sell or otherwise dispose of the remaining
properties. This adjustment was recorded in costs of merchandise sales, costs
of service revenue, and selling, general and administrative expenses on the
consolidated statement of earnings.
In the third quarter of fiscal 2001, the on-going expense reserve decreased
slightly. This change was a result of a decrease in the reserve due to lower
than estimated security costs, offset by an increase in the reserve due to an
increase in the length of time that it is expected to take to sublease, sell,
or otherwise vacate the remaining properties.
In the second quarter of fiscal 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 decrease
was offset, in part, by an approximate $375,000 increase in the reserve
primarily due to an increase in the length of time that it is expected to take
to sublease or sell certain remaining properties. These adjustments were
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 fiscal 2001, the on-going reserve was increased by
approximately $380,000, which was due primarily to an increase in the length of
time that it is expected to take 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 fiscal 2001, the Company reversed the remaining
employee severance reserve of $17,000 due to a lower than estimated final
payment. In the first quarter of fiscal 2001, the Company reversed the
severance reserve by $52,000 because certain employees who originally
expected to receive severance failed to qualify to receive payments. There
were no adjustments made to this reserve in fiscal 2002.
26
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 Company did not incur expenses of this nature in the third quarter of
fiscal 2001.
The expenses of this nature incurred in the second quarter of fiscal 2001
totaling $166,000 were due primarily to the removal of the remaining equipment
from the closed distribution centers. These expenses were primarily
recorded in costs of merchandise sales on the consolidated statement of
earnings 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 the closed distribution centers. These expenses were primarily recorded
in costs of merchandise sales on the consolidated statement of earnings as
incurred.
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Below is a table summarizing expenses related to the Profit Enhancement Plan
for the thirteen and thirty-nine weeks ended November 2, 2002 and November 3,
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 Thirty-Nine Thirty-Nine
Income Statement Weeks Ended Weeks Ended Weeks Ended Weeks Ended
Classification Nov. 2, 2002 Nov. 3, 2001 Nov. 2, 2002 Nov. 3, 2001
- -------------------------------------------------------------------------------
Costs of
Merchandise Sales $ 710 $ (109) $ 2,280 $ 1,888
Costs of
Service Revenue 235 (597) 303 100
Selling, General and
Administrative 1 156 14 194
- -------------------------------------------------------------------------------
Total Expenses $ 946 $ (550) $ 2,597 $ 2,182
- -------------------------------------------------------------------------------
27
At the end of the third quarter of fiscal 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 November 2, 2002. All additions
and adjustments were charged or credited to 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
- -----------------------------------------------------------------------------------
Addition 781 230 - (48) 963
Utilization (772) (230) - (438) (1,440)
Adjustments (17) - - - (17)
- -----------------------------------------------------------------------------------
Reserve Balance at
November 2, 2002 $ 1,645 $ - $ - $ 612 $ 2,257
- -----------------------------------------------------------------------------------
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
- ------------------------------------------------------ ---------------------------------- -----------------
Thirteen weeks ended Nov. 2, 2002 Nov. 3, 2001 Fiscal 2002 vs.
(Fiscal 2002) (Fiscal 2001) Fiscal 2001
- ------------------------------------------------------ -------------- -------------- -----------------
Merchandise Sales..................................... 80.7% 81.1% (1.7)%
Service Revenue (1)................................... 19.3 18.9 1.2
------ ------ ------
Total Revenues........................................ 100.0 100.0 (1.2)
Costs of Merchandise Sales (2)........................ 69.1 (3) 70.7 (3) (4.0)
Costs of Service Revenue (2).......................... 74.0 (3) 76.0 (3) (1.5)
------ ------ ------
Total Costs of Revenues............................... 70.1 71.7 (3.5)
Gross Profit from Merchandise Sales................... 30.9 (3) 29.3 (3) 3.6
Gross Profit from Service Revenue..................... 26.0 (3) 24.0 (3) 9.5
------ ------ ------
Total Gross Profit.................................... 29.9 28.3 4.6
Selling, General and Administrative Expenses.......... 23.4 23.3 (0.4)
------ ------ ------
Operating Profit...................................... 6.5 5.0 27.6
Non-operating Income.................................. 0.2 0.3 (28.3)
Interest Expense...................................... 2.1 2.2 (4.9)
------ ------ ------
Earnings Before Income Taxes.......................... 4.6 3.1 46.3
Income Taxes.......................................... 37.0 (4) 34.9 (4) 54.6
------ ------ ------
Net Earnings Before Extraordinary Items............... 2.9 2.0 41.8
Extraordinary Items, Net of Tax....................... - (0.2) (88.9)
------ ------ ------
Net Earnings.......................................... 2.9 1.8 54.8
====== ====== ======
(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
Thirteen Weeks Ended November 2, 2002 vs. Thirteen Weeks Ended November 3, 2001
- -------------------------------------------------------------------------------
Total revenues for the third quarter decreased 1.2%. This decrease was due
primarily to a decrease in comparable store revenues of 1.3% (revenues
generated by stores in operation during the same period), offset slightly by
an increase in the number of stores in operation in 2002 versus 2001.
Comparable store service revenue increased 1.0% while comparable merchandise
sales decreased 1.9%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 30.9% in 2002 from 29.3% in 2001. This increase was due primarily to
higher merchandise margins, as a percentage of merchandise sales offset, in
part, by a charge related to the Profit Enhancement Plan of $710,000 in
2002 versus a reduction of $109,000 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.
Gross profit from service revenue increased, as a percentage of service
revenue, to 26.0% in 2002 from 24.0% in 2001. This increase was due primarily
to a decrease in service payroll, as a percentage of service revenue.
Selling, general and administrative expenses increased, as a percentage
of total revenues, to 23.4% in 2002 from 23.3% in 2001. This increase was due
primarily to $2,150,000 or 103% higher media expense offset, in part, by lower
store expenses, as a percentage of total revenues. The increase in media
expense was a result of the testing various new media plans. The decrease in
store expense was due primarily to a decrease in store payroll expense, as a
percentage of total revenues.
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, an increase in gross profit from service revenue, as a
percentage of service revenue offset, in part, by an increase in selling,
general and administrative expenses, as a percentage of total revenues, and
a net charge of $596,000 related to the Profit Enhancement Plan in 2002
versus a net reduction of $358,000 in 2001.
30
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
- ------------------------------------------------------ ---------------------------------- -----------------
Thirty-nine weeks ended Nov. 2, 2002 Nov. 3, 2001 Fiscal 2002 vs.
(Fiscal 2002) (Fiscal 2001) Fiscal 2001
- ------------------------------------------------------ -------------- -------------- -----------------
Merchandise Sales..................................... 81.2% 80.8% 1.3%
Service Revenue (1)................................... 18.8 19.2 (1.2)
------ ------ ------
Total Revenues........................................ 100.0 100.0 0.8
Costs of Merchandise Sales (2)........................ 69.6 (3) 70.9 (3) (0.5)
Costs of Service Revenue (2).......................... 74.9 (3) 74.7 (3) (1.0)
------ ------ ------
Total Costs of Revenues............................... 70.6 71.6 (0.6)
Gross Profit from Merchandise Sales................... 30.4 (3) 29.1 (3) 5.6
Gross Profit from Service Revenue..................... 25.1 (3) 25.3 (3) (1.8)
------ ------ ------
Total Gross Profit.................................... 29.4 28.4 4.3
Selling, General and Administrative Expenses.......... 23.1 23.2 0.5
------ ------ ------
Operating Profit...................................... 6.3 5.2 21.4
Non-operating Income.................................. 0.1 0.2 (0.9)
Interest Expense...................................... 2.1 2.3 (9.2)
------ ------ ------
Earnings Before Income Taxes.......................... 4.3 3.1 43.8
Income Taxes.......................................... 37.0 (4) 36.0 (4) 47.8
------ ------ ------
Net Earnings Before Extraordinary Items............... 2.7 1.9 41.6
Extraordinary Items, Net of Tax....................... - - (68.5)
------ ------ ------
Net Earnings.......................................... 2.7 1.9 44.2
====== ====== ======
(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.
31
Thirty-nine Weeks Ended Nov. 2, 2002 vs. Thirty-nine Weeks Ended Nov. 3, 2001
- -------------------------------------------------------------------------------
Total revenues for the first nine months increased 0.8%. This increase was due
primarily to an increase in comparable store revenues of 0.7% (revenues
generated by stores in operation during the same period) coupled with an
increase in the number of stores in operation in 2002 versus 2001. Comparable
store merchandise sales increased 1.2% while comparable store service revenue
decreased 1.3%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 30.4% in 2002 from 29.1% in 2001. This increase was due primarily to
higher merchandise margins and a decrease in warehousing costs, as a percentage
of merchandise sales. The improved merchandise margins were a result of a
combination of an improvement in the mix of sales, selectively higher retail
pricing, lower product acquisition costs and improved inventory controls. The
lower warehousing costs, as a percentage of merchandise sales, were due to
continued improvements in efficiencies related to the supply chain.
Interest expense decreased $3,590,000 or 9.2% due primarily to lower debt
levels coupled with lower average interest rates on the Company's borrowings.
Net earnings increased, as a percentage of total revenues, due primarily to
an increase in gross profit from merchandise sales, as a percentage of
merchandise sales, and a decrease in interest expense, offset slightly, by a
net charge of $1,636,000 related to the Profit Enhancement Plan in 2002 versus
a net charge of $1,396,000 in 2001.
32
NEW ACCOUNTING STANDARDS
- ------------------------
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on EITF 02-16, "Accounting by a Reseller for Cash Consideration Received from
a Vendor." This pronouncement addresses the accounting issues pertaining to
cash consideration received by a reseller from a vendor. This consensus
should be applied in financial statements for periods beginning after
December 15, 2002. The Company is in the process of analyzing the impact of
the adoption of this consensus on its consolidated financial statements.
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
when the liability is incurred instead of at the date an entity commits to an
exit plan. SFAS No. 146 will be effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not expect adopting
this statement will have a material impact on its financial position or the
results of operations.
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." As a
result of rescinding FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", gains and losses from extinguishment of debt should be
classified as extraordinary items only if they meet the criteria of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations." This
statement also amends FASB Statement No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.
Additional amendments include changes to other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The Company will adopt
the provisions of SFAS No. 145 during the first quarter of fiscal 2003. For
the thirteen and thirty-nine week periods ended November 2, 2002, the Company
recorded extraordinary losses on the extinguishment of debt, net of tax, of
$110,000 and $239,000, respectively. Accordingly, reclassifications of these
losses to earnings before extraordinary items will be made throughout fiscal
2003 to maintain comparability for the reported periods.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting standards for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for fiscal years beginning after
June 15, 2002. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
33
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.
34
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
November 2, 2002 the Company had $48,006,000 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.
35
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under Securities and Exchange Commission (SEC) rules, the Company is required
to maintain disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Within the 90-day period prior to the filing date of
this report, the Company carried out an evaluation of the effectiveness of
the design and operation of its disclosure controls and procedures. The
Company's management, including the chief executive officer and chief
financial officer, supervised and participated in the evaluation. Based on
this evaluation, the chief executive officer and the chief financial officer
concluded that the Company's disclosure controls and procedures were effective
as of the evaluation date.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
On October 28, 2002, the United States District Court for the Eastern
District of New York ordered a stipulation of dismissal with
prejudice of all claims asserted by the plaintiffs against the
Company in the action entitled "Coalition for a Level Playing Field,
L.L.C., et al v. AutoZone, Inc., et al." After vigorously defending
this action, the Company, in recognition of the costs and burdens of
further litigation, agreed to a settlement of the action, although it
continues to deny liability on all claims asserted therein. The
payment to be made by the Company in connection with the settlement
is not material to the Company's financial position or the results of
its operations.
The Company's California subsidiary is a defendant in a consolidated
action entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack"
that is pending in the California Superior Court in Orange County.
Plaintiffs are former and current store management employees who
claim that they were improperly classified as exempt from the
overtime provisions of California law and seek to be compensated for
all overtime hours worked. Plaintiffs filed a Motion to certify the
case as a class action to represent all persons employed in
California as salaried store managers, assistant store managers,
service managers and assistant service managers since March 29, 1996.
On October 25, 2002, plaintiffs' Motion to certify the case as a
class action was granted. The Company sought expedited relief
from the Court of Appeals to vacate the class certification order,
which was denied. On December 1, 2002 the Company appealed that
denial by filing a Petition for Review and Request for Immediate Stay
to the California Supreme Court. No trial date has been set for the
underlying case. The Company intends to vigorously defend this
action and believes that it is not material to the Company's
financial position. An adverse outcome in this action, however,
may have a material adverse effect on the Company's results of
operations for the year in which a judgment, if any, is rendered.
36
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(4.1) Indenture, dated May 21, 2002, by and among The
Pep Boys - Manny, Moe & Jack, as Issuer, 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. as Guarantors,
and Wachovia Bank, National Association, as
Trustee - Incorporated by reference from the
Registration Statement on Form S-3
(File No. 333-98255).
(10.1)* Amendment and restatement as of September 3, 2002 to
the Pep Boys Savings Plan
(10.2) Amendment and restatement as of September 3, 2002 to
the Pep Boys Savings Plan - Puerto Rico
(10.3)* Amendment Number One to The Pep Boys - Manny, Moe &
Jack 1999 Stock Incentive Plan
(10.4) Amendment No. 3 to Loan and Security Agreement dated
September 22, 2002 between the Company and Congress
Financial Corporation
(99.1) Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(99.2) Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed an 8-K on August 14, 2002 disclosing the
Company's submission of the Statements Under Oath of Principal
Executive Officer and Principal Financial Officer Regarding
Facts and Circumstances Relating to Exchange Act Filings to the
Securities and Exchange Commission (SEC), in accordance with
the SEC's June 27, 2002 order. Exhibits containing both
Statements were attached.
The Company filed an 8-K on August 16, 2002 disclosing the
Company reissued its consolidated financial statements to add
"Note 12-Supplemental Guarantor Information-Convertible Senior
Notes" in accordance with the Company's issue of $150,000,000,
4.25% Convertible Senior Notes due June 1, 2007. Exhibits
containing the consent of the Company's independent auditors
and its consolidated balance sheets as of February 2, 2002 and
February 3, 2001 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended February 2, 2002 and notes
thereto were attached.
37
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: December 17, 2002 By: /s/ George Babich, Jr.
-------------------- --------------------------
George Babich, Jr.
President &
Chief Financial Officer
38
CHIEF EXECUTIVE OFFICER CERTIFICATION
- -------------------------------------
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 17, 2002 /s/ Mitchell G. Leibovitz
-------------------- -------------------------
Mitchell G. Leibovitz
Chairman of the Board and
Chief Executive Officer
39
CHIEF FINANCIAL OFFICER CERTIFICATION
- -------------------------------------
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 17, 2002 /s/ George Babich, Jr.
-------------------- -----------------------
George Babich, Jr.
President and Chief
Financial Officer
40
INDEX TO EXHIBITS
- -----------------
(10.1) Amendment and restatement as of September 3, 2002 to
the Pep Boys Savings Plan
(10.2) Amendment and restatement as of September 3, 2002 to
the Pep Boys Savings Plan - Puerto Rico
(10.3) Amendment Number One to The Pep Boys - Manny, Moe &
Jack 1999 Stock Incentive Plan
(10.4) Amendment No. 3 to Loan and Security Agreement dated
September 22, 2002 between the Company and Congress
Financial Corporation
(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
41