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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 3, 2003
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
------------------------------- ---------------------------
(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 ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes ( x ) No ( )
As of May 31, 2003 there were 51,692,885 shares of the registrant's Common
Stock outstanding.
1
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Index Page
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PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets -
May 3, 2003 and February 1, 2003 3
Consolidated Statements of Operations -
Thirteen weeks ended May 3, 2003
and May 4, 2002 4
Consolidated Statements of
Cash Flows - Thirteen weeks ended
May 3, 2003 and May 4, 2002 5
Notes to Condensed Consolidated
Financial Statements 6-19
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 20-25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4. Controls and Procedures 26
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of
Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
CHIEF EXECUTIVE OFFICER CERTIFICATION 30
CHIEF FINANCIAL OFFICER CERTIFICATION 31
INDEX TO EXHIBITS 32
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)
May 3, 2003 Feb. 1, 2003*
- -----------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 81,189 $ 42,770
Accounts receivable, net 19,275 17,916
Merchandise inventories 521,957 488,882
Prepaid expenses 38,098 43,746
Deferred income taxes 16,170 13,723
Other 56,254 56,687
Assets held for disposal - 1,146
- -----------------------------------------------------------------------------------------------------
Total Current Assets 732,943 664,870
- -----------------------------------------------------------------------------------------------------
Property and Equipment-at cost:
Land 279,109 279,109
Buildings and improvements 937,854 936,770
Furniture, fixtures and equipment 611,956 604,531
Construction in progress 22,059 19,450
- -----------------------------------------------------------------------------------------------------
1,850,978 1,839,860
Less accumulated depreciation and amortization 772,416 751,823
- -----------------------------------------------------------------------------------------------------
Property and Equipment - Net 1,078,562 1,088,037
- -----------------------------------------------------------------------------------------------------
Other 46,187 47,003
- -----------------------------------------------------------------------------------------------------
Total Assets $1,857,692 $1,799,910
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 244,844 $ 200,053
Accrued expenses 257,367 232,255
Current maturities of long-term debt and obligations
under capital leases 151,317 101,882
- -----------------------------------------------------------------------------------------------------
Total Current Liabilities 653,528 534,190
- -----------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital leases,
less current maturities 326,158 375,577
Convertible long-term debt 150,000 150,000
Other long-term liabilities 25,427 25,156
Deferred income taxes 60,601 60,663
Deferred gain on sale leaseback 4,329 4,332
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 617,798 630,847
Accumulated other comprehensive loss (151) (151)
- -----------------------------------------------------------------------------------------------------
858,802 871,851
Less cost of shares in treasury - 10,027,422 shares
and 10,070,729 shares 161,889 162,595
Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264
- -----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 637,649 649,992
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,857,692 $1,799,910
- -----------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
* Taken from the audited financial statements at February 1, 2003.
3
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except per share amounts)
UNAUDITED
Thirteen weeks ended
------------------------------------------------
May 3, 2003 May 4, 2002
------------------- -------------------
- ---------------------------------------------------------------------------------------------------------
Merchandise Sales $ 425,515 $ 453,771
Service Revenue 103,700 105,202
- ---------------------------------------------------------------------------------------------------------
Total Revenues 529,215 558,973
- ---------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 300,349 318,763
Costs of Service Revenue 78,061 78,275
- ---------------------------------------------------------------------------------------------------------
Total Costs of Revenues 378,410 397,038
- ---------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 125,166 135,008
Gross Profit from Service Revenue 25,639 26,927
- ---------------------------------------------------------------------------------------------------------
Total Gross Profit 150,805 161,935
- ---------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 151,842 129,782
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Operating (Loss) Profit (1,037) 32,153
Non-operating Income 1,050 823
Interest Expense 10,701 11,781
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(Loss) Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle (10,688) 21,195
Income Tax (Benefit) Expense (3,955) 7,630
- ---------------------------------------------------------------------------------------------------------
(Loss) Earnings Before Cumulative Effect of Change
in Accounting Principle (6,733) 13,565
Cumulative Effect of Change in Accounting Principle (2,484) -
- ---------------------------------------------------------------------------------------------------------
Net (Loss) Earnings (9,217) 13,565
Retained Earnings, beginning of period 630,847 601,944
Cash Dividends 3,487 3,473
Dividend Reinvestment Plan 274 -
Effect of Stock Options 71 165
- ---------------------------------------------------------------------------------------------------------
Retained Earnings, end of period $ 617,798 $ 611,871
- ---------------------------------------------------------------------------------------------------------
Basic (Loss) Earnings Per Share:
Before Cumulative Effect of Change in
Accounting Principle $ (.13) $ .26
Cumulative Effect of Change in
Accounting Principle (.05) -
- ---------------------------------------------------------------------------------------------------------
Basic (Loss) Earnings Per Share $ (.18) $ .26
- ---------------------------------------------------------------------------------------------------------
Diluted (Loss) Earnings Per Share:
Before Cumulative Effect of Change in
Accounting Principle $ (.13) $ .26
Cumulative Effect of Change in
Accounting Principle (.05) -
- ---------------------------------------------------------------------------------------------------------
Diluted (Loss) Earnings Per Share $ (.18) $ .26
- ---------------------------------------------------------------------------------------------------------
Cash Dividends Per Share $ .0675 $ .0675
- ---------------------------------------------------------------------------------------------------------
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
Thirteen Weeks Ended May 3, 2003 May 4, 2002
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net (Loss) Earnings $ (9,217) $ 13,565
Adjustments to Reconcile Net (Loss) Earnings to Net Cash
Provided by Operating Activities:
Depreciation and amortization 18,716 20,383
Cumulative effect of change in accounting principle, net of tax 2,484 -
Accretion of asset disposal obligation 53 -
Deferred income taxes (2,508) 594
Deferred gain on sale leaseback (3) (26)
Loss on assets held for disposal 16 1,312
(Gain) Loss from sale of assets (725) 160
Changes in Operating Assets and Liabilities:
Decrease in accounts receivable, prepaid expenses and other 5,538 17,972
Increase in merchandise inventories (33,075) (10,193)
Increase (Decrease) in accounts payable 44,791 (3,654)
Increase in accrued expenses 21,862 5,219
Increase in other long-term liabilities 271 68
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 48,203 45,400
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (8,565) (4,706)
Proceeds from sales of assets 1,891 2,940
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (6,674) (1,766)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net borrowings (payments) under line of credit agreements 10,631 (25,620)
Payments on capital lease obligations (112) -
Reduction of long-term debt (10,503) (7,936)
Dividends paid (3,487) (3,473)
Proceeds from exercise of stock options 39 319
Proceeds from dividend reinvestment plan 322 336
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (3,110) (36,374)
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Cash 38,419 7,260
Cash and Cash Equivalents at Beginning of Period 42,770 15,981
- ---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 81,189 $ 23,241
- ---------------------------------------------------------------------------------------------------------------
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 May 3, 2003, the consolidated
statements of operations for the thirteen week periods ended May 3, 2003 and
May 4, 2002 and the consolidated statements of cash flows for the thirteen
week periods ended May 3, 2003 and May 4, 2002 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 May 3, 2003 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles 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 Annual Report
on Form 10-K for the fiscal year ended February 1, 2003. The results of
operations for the thirteen week period ended May 3, 2003 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. Accounting for Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans in
accordance with the recognition and measurement principles of Accounting
Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. No stock-based employee compensation cost is
reflected in net earnings, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net earnings
and earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation:
(dollar amounts in thousands,
except per share amounts)
Thirteen weeks ended May 3, 2003 May 4, 2002
- -------------------------------------------------------------------------------
Net (loss) earnings:
As reported $ (9,217) $ 13,565
Less: Total stock-based compensation
expense determined under fair
value-based method, net of tax (811) (911)
- -------------------------------------------------------------------------------
Pro forma $(10,028) $ 12,654
- -------------------------------------------------------------------------------
Net (loss) earnings per share:
Basic:
As reported $ (.18) $ .26
Pro forma $ (.19) $ .25
- -------------------------------------------------------------------------------
Diluted:
As reported $ (.18) $ .26
Pro forma $ (.19) $ .24
- -------------------------------------------------------------------------------
6
The fair value of each option granted during the periods ending May 3, 2003
and May 4, 2002 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Thirteen weeks ended May 3, 2003 May 4, 2002
- -----------------------------------------------------------------
Dividend yield 1.57% 1.44%
Expected volatility 42% 41%
Risk-free interest rate range:
high 5.3% 5.4%
low 2.0% 2.3%
Ranges of expected lives in years 4-8 4-8
- -----------------------------------------------------------------
NOTE 3. New Accounting Standards
In May 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 establishes
standards for how an issuer classifies and measures financial instruments that
are within the pronouncement's scope as a liability because it embodies an
obligation of the issuer. Provisions of this standard are consistent
with the current definition of liabilities in FASB Concepts Statement No. 6,
"Elements of Financial Statements," while other provisions revise that
definition to include certain obligations that a reporting entity can or must
settle through issuance of its own equity shares. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is in the process of analyzing the
impact of the adoption of this statement on its consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities, resulting primarily from decisions made by the FASB's
Derivatives Implementation Group following the issuance of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003 and is
effective for hedging relationships designated after June 30, 2003. The
Company is in the process of analyzing the impact of the adoption of this
statement on its consolidated financial statements.
In January 2003, the FASB issued Financial Interpretation Number (FIN) 46,
"Consolidation of Variable Interest Entities." FIN 46, an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
changes the criteria by which one company includes another entity in its
consolidated financial statements. FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of any
expected losses from the variable interest entity's activities, is entitled to
receive any expected residual returns of the variable interest entity, or both.
FIN 46 applies immediately to variable interest entities created after
January 31, 2003, and applies in the first fiscal year or interim period
beginning after June 15, 2003, for variable interest entities created prior to
February 1, 2003.
The Company will adopt FIN 46 for variable interest entities created prior to
February 1, 2003 in the third quarter of fiscal 2003. The adoption of FIN 46
will apply to the $132,000,000 of real estate leased by the Company under its
$143,000,000 operating lease facility, which would qualify as a variable
interest entity under this interpretation. If this operating lease facility
exists as of August 3, 2003, the Company would consolidate this entity and
record a liability of $132,000,000 and the corresponding assets, net of
accumulated depreciation. The Company is in the process of refinancing this
facility. This refinancing is planned for completion prior to August 3, 2003
so that it is not required to consolidate this entity under FIN 46.
7
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
As a result of rescinding FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," gains and losses from extinguishment of debt
should be classified as extraordinary items only if they meet the criteria of
APB Opinion No. 30, "Reporting the Results of Operations." This statement also
amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Additional amendments
include changes to other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. The Company has adopted the provisions of SFAS No. 145
for the thirteen weeks ended May 3, 2003 with no material effect on its
consolidated statements of operations. Reclassifications of extraordinary items
pertaining to the extinguishment of debt, if any, will be made throughout
fiscal 2003 to maintain comparability for the reported periods.
NOTE 4. 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 May 3, 2003 and February 1, 2003.
NOTE 5. Accrued Expenses
The Company's accrued expenses for the periods ending May 3, 2003 and
February 1, 2003 were as follows:
(dollar amounts in thousands) May 3, 2003 Feb. 1, 2003
- ---------------------------------------------------------------------
Medical and casualty risk
participation reserve $ 116,094 $ 124,571
Accrued compensation and
related taxes 49,561 49,923
Legal Reserves 25,746 6,054
Other 65,966 51,707
- ---------------------------------------------------------------------
Total $ 257,367 $ 232,255
- ---------------------------------------------------------------------
NOTE 6. Profit Enhancement Plan
In the third quarter of fiscal 2000, the Company comprehensively reviewed its
field, distribution and Store Support Center infrastructure and the performance
of each of its stores. As a result, the Company implemented a number of changes
that have improved its performance. These changes included the closure of 38
under-performing stores and two distribution centers and reductions in store
operating hours and the Store Support Center infrastructure.
PLAN UPDATE
The Company is progressing towards the disposal of the 38 stores (11 owned and
27 leased), two distribution centers and two development parcels that were
closed or abandoned in connection with the Profit Enhancement Plan. As of
May 3, 2003, the Company had disposed of 24 of the closed stores (8 owned and
16 leased), the two distribution centers and the two development parcels.
During fiscal 2002, the Company decided to lease rather than sell three of
the closed stores owned by the Company due to changes in the real estate
market. As a result, the Company reclassified these three properties as
assets held for use. The Company estimates that the remaining 11 closed stores
leased by the Company will be disposed of by the end of the first quarter of
fiscal 2004.
8
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Below is a table summarizing expenses related to the Profit Enhancement Plan
for the thirteen weeks ended May 3, 2003 and May 4, 2002. The reasons for
the changes to the charge are as described in the reserve reconciliation
and asset disposal section below.
(dollar amounts
in thousands) Thirteen Thirteen
Income Statement Weeks Ended Weeks Ended
Classification May 3, 2003 May 4, 2002
- --------------------------------------------------
Costs of
Merchandise Sales $ 650 $ 1,180
Costs of
Service Revenue 198 (51)
Selling, General and
Administrative 16 10
- --------------------------------------------------
Total Expenses $ 864 $ 1,139
- --------------------------------------------------
The following chart reconciles the change in reserve from the fiscal year
ended February 1, 2003 through May 3, 2003. The reserve for the closed
properties includes remaining rent on leases net of sublease income and
on-going expenses related to general maintenance costs such as utilities,
security, telephone, real estate taxes and personal property taxes. All
changes in the reserve assumptions were charged or credited through the
appropriate corresponding line items on the statement of operations.
(dollar amounts Lease On-going
in thousands) Expenses Expenses Total
- -------------------------------------------------------------------
Reserve balance
at Feb. 1, 2003 $ 1,092 $ 442 $ 1,534
Provision for present
value of liabilities 11 3 14
Changes in assumptions
about future sublease
income, lease termination,
closed store maintenance costs
and changes in interest rates 583 251 834
Cash payments (600) (137) (737)
- -------------------------------------------------------------------
Reserve Balance at
May 3, 2003 $ 1,086 $ 559 $ 1,645
- -------------------------------------------------------------------
ASSETS HELD FOR DISPOSAL
The Company recorded a charge to cost of merchandise sales of $16,000 and
$1,312,000 for the thirteen weeks ended May 3, 2003 and May 4, 2002,
respectively. These charges relate to the adjustment to fair value of the
assets held for disposal. As of May 3, 2003, the Company has sold or
reclassified to long-term all properties held for disposal in relation to the
Profit Enhancement Plan.
9
NOTE 7. Pension and Savings Plan
In April 2003, the Company made a settlement of approximately $12,600,000
related to the Supplemental Executive Retirement Plan obligation for the former
Chairman and CEO. This obligation resulted in an expense for settlement
accounting under SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits" of
approximately $4,900,000, during the quarter ended May 3, 2003.
NOTE 8. Other Commitments
In April 2003, the Company satisfied the commitment related to the non-renewal
of the former Chairman and CEO's employment agreement for approximately
$4,900,000.
NOTE 9. Net Earnings Per Share
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(in thousands, except per share amounts)
UNAUDITED
Thirteen weeks ended
-----------------------------------
May 3, 2003 May 4, 2002
-------------- ---------------
(a) Net (loss) earnings before cumulative effect $ (6,733) $ 13,565
of change in accounting principle
Adjustment for interest on convertible senior
notes, net of income tax effect - -
- -------------------------------------------------------------------------------------------
(b) Adjusted net (loss) earnings before cumulative
effect of change in accounting principle $ (6,733) $ 13,565
- -------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during period 51,652 51,445
Common shares assumed issued upon conversion of
convertible senior notes - -
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price - 1,163
- -------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during period 51,652 52,608
- -------------------------------------------------------------------------------------------
Basic (loss) earnings per share:
Before cumulative effect of change in
accounting principle (a/c) $ (.13) $ .26
Cumulative effect of change in
accounting principle (.05) -
- -------------------------------------------------------------------------------------------
Basic (loss) earnings per share $ (.18) $ .26
- -------------------------------------------------------------------------------------------
Diluted (loss) earnings per share:
Before cumulative effect of change in
accounting principle (b/d) $ (.13) $ .26
Cumulative effect of change in
accounting principle (.05) -
- -------------------------------------------------------------------------------------------
Diluted (loss) earnings per share $ (.18) $ .26
- -------------------------------------------------------------------------------------------
Adjustments for the convertible senior notes were anti-dilutive during the
thirteen week period ended May 3, 2003 and therefore excluded from the
computation of diluted EPS. There were no convertible securities outstanding
during the thirteen week period ended May 4, 2002. Options to purchase
5,574,960 and 3,123,420 shares of common stock were outstanding at
May 3, 2003 and May 4, 2002, respectively, but were not included in the
computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares on such dates.
10
NOTE 10. Warranty Reserve
The Company provides warranties for both its merchandise sales and service
labor. Warranties for merchandise are generally covered by its vendors, with
the Company covering any costs above the vendor's stipulated allowance. Service
labor warranties are covered in full by the Company on a limited lifetime
basis. The Company establishes its warranty reserves based on historical data
of warranty transactions.
Components of the reserve for warranty costs for the thirteen week period
ending May 3, 2003 are as follows:
(dollar amounts in thousands)
- ------------------------------------------------------------------------
Beginning balance at February 1, 2003 $ 911
Additions related to current period sales 1,877
Warranty costs incurred in current period (1,878)
Adjustments to accruals related to
prior year sales -
- ------------------------------------------------------------------------
Ending Balance at May 3, 2003 $ 910
- ------------------------------------------------------------------------
NOTE 11. Asset Retirement Obligation
The Company has adopted the provisions of SFAS No. 143, "Accounting for Asset
Retirement Obligations", in the first quarter of fiscal 2003. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. SFAS No. 143 also requires the capitalization of any
retirement obligation costs as part of the carrying amount of the long-lived
asset and the subsequent allocation of the total expense to future periods
using a systematic and rational method. Upon adoption, the Company recorded a
non-cash charge to earnings of $3,943,000 ($2,484,000, net of tax) for the
cumulative effect of this accounting change. This charge was related to
retirement obligations associated with certain equipment used in the Company's
service operation. In addition, the Company initially recognized an asset of
$2,844,000, accumulated depreciation of $2,247,000 and a liability of
$4,540,000 on its consolidated balance sheet.
11
At May 3, 2003, the Company has a liability pertaining to the asset retirement
obligation in accrued expenses on its consolidated balance sheet. The
following is a reconciliation of the beginning and ending carrying amount of
the Company's asset retirement obligation as of May 3, 2003:
(dollar amounts in thousands)
- ------------------------------------------------------------------------
Asset retirement obligation, February 1, 2003 $ -
Asset retirement obligation recognized upon adoption 4,540
Asset retirement obligation incurred during the period 115
Asset retirement obligation settled during period (47)
Accretion expense 53
- ------------------------------------------------------------------------
Asset retirement obligation, May 3, 2003 $ 4,661
- ------------------------------------------------------------------------
Had the Company adopted the provisions of SFAS No. 143 prior to
February 2, 2003, the amount of the asset retirement obligations on a
pro forma basis would have been as follows:
(dollar amounts in thousands)
- -----------------------------------------------------------------
Asset retirement obligation, February 2, 2002 $4,156
Asset retirement obligation, February 1, 2003 $4,540
- -----------------------------------------------------------------
12
The following table summarizes the pro forma net earnings and earning per share
for the thirteen week period ending May 4, 2002 had the Company adopted the
provisions of SFAS No. 143 prior to February 2, 2003:
(dollar amounts in thousands,
except per share amounts)
Thirteen weeks ended May 4, 2002
- -------------------------------------------------------------
Net Earnings:
As reported $ 13,565
Pro forma $ 13,494
- -------------------------------------------------------------
Net earnings per share:
Basic:
As reported $ .26
Pro forma $ .26
Diluted:
As reported $ .26
Pro forma $ .26
- -------------------------------------------------------------
NOTE 12. Debt and Financing Arrangements
On May 15, 2003, upon maturity, the Company retired $75,000,000 aggregate
principal amount of 6.625% notes.
In the first quarter of fiscal 2003, the Company reclassified $32,000,000
aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity
date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65%
Medium-Term Notes with a stated maturity date of March 3, 2004 to current
liabilities on the consolidated balance sheet.
13
NOTE 13. 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 and fully
and unconditionally guaranteed by the Company's wholly-owned direct and
indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny
Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and
Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc.
The following are consolidating balance sheets of the Company as of
May 3, 2003 and February 1, 2003 and the related consolidating statements
of operations and consolidating statements of cash flows for the thirteen
weeks ended May 3, 2003 and May 4, 2002:
CONSOLIDATING BALANCE SHEET
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 59,499 $ 10,102 $ 11,588 $ - $ 81,189
Accounts receivable, net 7,680 11,595 - - 19,275
Merchandise inventories 192,147 329,810 - - 521,957
Prepaid expenses 30,414 7,540 12,844 (12,700) 38,098
Deferred income taxes 7,325 277 8,568 - 16,170
Other 2,108 3,473 50,673 - 56,254
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 299,173 362,797 83,673 (12,700) 732,943
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 92,540 186,569 - - 279,109
Buildings and improvements 314,520 623,334 - - 937,854
Furniture, fixtures and equipment 290,563 321,393 - - 611,956
Construction in progress 19,219 2,840 - - 22,059
- -----------------------------------------------------------------------------------------------------------------------------
716,842 1,134,136 - - 1,850,978
Less accumulated depreciation and amortization 335,656 436,760 - - 772,416
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - Net 381,186 697,376 - - 1,078,562
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,456,527 - 1,123,423 (2,579,950) -
Intercompany receivable - 661,044 325,143 (986,187) -
Other 41,090 5,097 - - 46,187
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,177,976 $ 1,726,314 $ 1,532,239 $ (3,578,837) $ 1,857,692
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 244,835 $ 9 $ - $ - $ 244,844
Accrued expenses 61,312 77,420 131,335 (12,700) 257,367
Current maturities of long-term debt and
obligations under capital leases 151,317 - - - 151,317
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 457,464 77,429 131,335 (12,700) 653,528
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 319,123 7,035 - - 326,158
Convertible long-term debt 150,000 - - - 150,000
Other long-term liabilities 5,936 19,491 - - 25,427
Intercompany liabilities 573,172 413,015 - (986,187) -
Deferred income taxes 33,322 27,279 - - 60,601
Deferred gain on sale leaseback 1,310 3,019 - - 4,329
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 617,798 937,186 1,200,405 (2,137,591) 617,798
Accumulated other comprehensive loss (151) - - - (151)
- -----------------------------------------------------------------------------------------------------------------------------
858,802 1,179,046 1,400,904 (2,579,950) 858,802
Less:
Cost of shares in treasury 161,889 - - - 161,889
Cost of shares in benefits trust 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 637,649 1,179,046 1,400,904 (2,579,950) 637,649
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,177,976 $ 1,726,314 $ 1,532,239 $ (3,578,837) $ 1,857,692
- -----------------------------------------------------------------------------------------------------------------------------
14
CONSOLIDATING BALANCE SHEET
(dollar amounts in thousands)
Non-
Subsidiary guarantor
February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 32,654 $ 9,714 $ 402 $ - $ 42,770
Accounts receivable, net 8,122 9,794 - - 17,916
Merchandise inventories 166,166 322,716 - - 488,882
Prepaid expenses 29,176 16,308 17,637 (19,375) 43,746
Deferred income taxes 6,812 (819) 7,730 - 13,723
Other 107 - 56,580 - 56,687
Assets held for disposal - 1,146 - - 1,146
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 243,037 358,859 82,349 (19,375) 664,870
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 92,540 186,569 - - 279,109
Buildings and improvements 313,927 622,843 - - 936,770
Furniture, fixtures and equipment 286,922 317,609 - - 604,531
Construction in progress 14,764 4,686 - - 19,450
- -----------------------------------------------------------------------------------------------------------------------------
708,153 1,131,707 - - 1,839,860
Less accumulated depreciation and amortization 326,820 425,003 - - 751,823
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - Net 381,333 706,704 - - 1,088,037
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,455,877 - 1,121,299 (2,577,176) -
Intercompany receivable - 631,438 335,640 (967,078) -
Other 41,972 5,031 - - 47,003
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,122,219 $ 1,702,032 $ 1,539,288 $ (3,563,629) $ 1,799,910
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 200,044 $ 9 $ - $ - $ 200,053
Accrued expenses 59,625 48,567 143,438 (19,375) 232,255
Current maturities of long-term debt and
obligations under capital leases 101,882 - - - 101,882
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 361,551 48,576 143,438 (19,375) 534,190
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 375,216 361 - - 375,577
Convertible long-term debt 150,000 - - - 150,000
Other long-term liabilities 5,955 19,201 - - 25,156
Intercompany liabilities 544,877 422,201 - (967,078) -
Deferred income taxes 33,322 27,341 - - 60,663
Deferred gain on sale leaseback 1,306 3,026 - - 4,332
Stockholders' Equity:
Common stock 63,911 1,501 101 (1,602) 63,911
Additional paid-in capital 177,244 240,359 200,398 (440,757) 177,244
Retained earnings 630,847 939,466 1,195,351 (2,134,817) 630,847
Accumulated other comprehensive loss (151) - - - (151)
- -----------------------------------------------------------------------------------------------------------------------------
871,851 1,181,326 1,395,850 (2,577,176) 871,851
Less:
Cost of shares in treasury 162,595 - - - 162,595
Cost of shares in benefits trust 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 649,992 1,181,326 1,395,850 (2,577,176) 649,992
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,122,219 $ 1,702,032 $ 1,539,288 $ (3,563,629) $ 1,799,910
- -----------------------------------------------------------------------------------------------------------------------------
15
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 146,400 $ 279,115 $ - $ - $ 425,515
Service Revenue 36,382 67,318 - - 103,700
Other Revenue - - 6,675 (6,675) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 182,782 346,433 6,675 (6,675) 529,215
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 103,215 197,134 - - 300,349
Costs of Service Revenue 26,779 51,282 - - 78,061
Costs of Other Revenue - - 7,205 (7,205) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 129,994 248,416 7,205 (7,205) 378,410
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 43,185 81,981 - - 125,166
Gross Profit from Service Revenue 9,603 16,036 - - 25,639
Gross Loss from Other Revenue - - (530) 530 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 52,788 98,017 (530) 530 150,805
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 44,950 106,284 78 530 151,842
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 7,838 (8,267) (608) - (1,037)
Equity in Earnings of Subsidiaries 650 - 2,124 (2,774) -
Non-operating (Expense) Income (4,096) 12,032 5,258 (12,144) 1,050
Interest Expense 17,978 4,867 - (12,144) 10,701
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle (13,586) (1,102) 6,774 (2,774) (10,688)
Income Tax (Benefit) Expense (5,268) (408) 1,721 - (3,955)
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings Before Cumulative Effect of
Change in Accounting Principle (8,318) (694) 5,053 (2,774) (6,733)
Cumulative Effect of Change in
Accounting Principle (899) (1,585) - - (2,484)
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings $ (9,217) $ (2,279) $ 5,053 $ (2,774) $ (9,217)
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited) Non-
Subsidiary guarantor
Thirteen weeks ended May 4, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 158,496 $ 295,275 $ - $ - $ 453,771
Service Revenue 37,365 67,837 - - 105,202
Other Revenue - - 6,259 (6,259) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 195,861 363,112 6,259 (6,259) 558,973
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 111,511 207,252 - - 318,763
Costs of Service Revenue 27,336 50,939 - - 78,275
Costs of Other Revenue - - 6,289 (6,289) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 138,847 258,191 6,289 (6,289) 397,038
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 46,985 88,023 - - 135,008
Gross Profit from Service Revenue 10,029 16,898 - - 26,927
Gross Loss from Other Revenue - - (30) 30 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 57,014 104,921 (30) 30 161,935
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 45,996 83,677 79 30 129,782
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 11,018 21,244 (109) - 32,153
Equity in Earnings of Subsidiaries 20,359 - 18,469 (38,828) -
Non-operating (Expense) Income (4,521) 11,346 5,306 (11,308) 823
Interest Expense 17,113 5,976 - (11,308) 11,781
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 9,743 26,614 23,666 (38,828) 21,195
Income Tax (Benefit) Expense (3,822) 9,581 1,871 - 7,630
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings 13,565 17,033 21,795 (38,828) 13,565
- -----------------------------------------------------------------------------------------------------------------------------
16
CONSOLIDATING STATEMENT OF CASH FLOWS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net (Loss) Earnings $ (9,217) $ (2,279) $ 5,053 $ (2,774) $ (9,217)
Adjustments to Reconcile Net (Loss)
Earnings to Net Cash Provided
By Operating Activities:
Depreciation and amortization 7,748 10,968 - - 18,716
Cumulative effect of change in
accounting principle, net of tax 899 1,585 - - 2,484
Accretion of asset disposal obligation 13 40 - - 53
Deferred income taxes (513) (1,158) (837) - (2,508)
Deferred loss (gain) on sale leaseback 4 (7) - - (3)
Equity in earnings of subsidiaries (650) - (2,124) 2,774 -
Loss on assets held for disposal - 16 - - 16
(Gain) Loss from sale of assets (731) 6 - - (725)
Change in current assets and liabilities:
(Increase) Decrease in accounts
receivable, prepaid expenses and other (1,915) 3,428 10,700 (6,675) 5,538
Increase in merchandise inventories (25,981) (7,094) - - (33,075)
Increase in accounts payable 44,791 - - - 44,791
Increase (Decrease) in accrued expenses 663 26,627 (12,103) 6,675 21,862
(Decrease) Increase in other
long-term liabilities (19) 290 - - 271
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 15,092 32,422 689 - 48,203
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (7,508) (1,057) - - (8,565)
Proceeds from sales of assets 750 1,141 - - 1,891
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (6,758) 84 - - (6,674)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net borrowings under line of credit
agreements 3,957 6,674 - - 10,631
Payments on capital lease obligations (112) - - - (112)
Reduction of long-term debt (10,503) - - - (10,503)
Intercompany loan 28,295 (38,792) 10,497 - -
Dividends paid (3,487) - - - (3,487)
Proceeds from exercise of stock options 39 - - - 39
Proceeds from dividend reinvestment plan 322 - - - 322
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 18,511 (32,118) 10,497 - (3,110)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 26,845 388 11,186 - 38,419
Cash and Cash Equivalents at Beginning of Period 32,654 9,714 402 - 42,770
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 59,499 $ 10,102 $ 11,588 $ - $ 81,189
- -----------------------------------------------------------------------------------------------------------------------------
17
CONSOLIDATING STATEMENT OF CASH FLOWS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended May 4, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Earnings $ 13,565 $ 17,033 $ 21,795 $ (38,828) $ 13,565
Adjustments to Reconcile Net
Earnings to Net Cash Provided
By Operating Activities:
Depreciation and amortization 8,932 11,451 - - 20,383
Deferred income taxes 232 362 - - 594
Deferred gain on sale leaseback (9) (17) - - (26)
Equity in earnings of subsidiaries (20,359) - (18,469) 38,828 -
(Gain) Loss on assets held for disposal (12) 1,324 - - 1,312
Loss from sale of assets 128 32 - - 160
Change in current assets and liabilities:
Decrease (Increase) in accounts
receivable, prepaid expenses and other 32,281 (34,404) 24,854 (4,759) 17,972
(Increase) Decrease in merchandise
inventories (18,097) 7,904 - - (10,193)
Decrease in accounts payable (3,654) - - - (3,654)
(Decrease) Increase in accrued expenses (1,927) 12,297 (9,910) 4,759 5,219
(Decrease) Increase in other
long-term liabilities (564) 632 - - 68
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,516 16,614 18,270 - 45,400
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (2,682) (2,024) - - (4,706)
Proceeds from sales of assets 1,926 1,014 - - 2,940
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (756) (1,010) - - (1,766)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net payments under line of credit
agreements (7,487) (18,133) - - (25,620)
Reduction of long-term debt (7,936) - - - (7,936)
Intercompany loan 15,142 3,065 (18,207) - -
Dividends paid (3,473) - - - (3,473)
Proceeds from exercise of stock options 319 - - - 319
Proceeds from dividend reinvestment plan 336 - - - 336
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (3,099) (15,068) (18,207) - (36,374)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 6,661 536 63 - 7,260
Cash and Cash Equivalents at Beginning of Period 4,796 10,874 311 - 15,981
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of period $ 11,457 $ 11,410 $ 374 $ - $ 23,241
- -----------------------------------------------------------------------------------------------------------------------------
18
NOTE 14. Contingencies
The Company's California subsidiary is a defendant in a consolidated action
entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack" that is currently
pending in the California Superior Court in Orange County. The two consolidated
actions were originally filed on March 29, 2000 and July 25, 2000. Plaintiffs
are former and current store management employees who claim that they were
improperly classified as exempt from the overtime provisions of California law
and seek to be compensated for all overtime hours worked. Plaintiffs' motion to
certify the case as a class action to represent all persons employed in
California since March 29, 1996 as salaried store managers, assistant store
managers, service managers and assistant service managers was previously
granted by the trial court. The Company's appeals of that decision through the
California Supreme Court were unsuccessful. The Company is now preparing to
move the trial court for reconsideration of its decision to certify the class.
No trial date has been set for the underlying case. The Company is currently
engaged in settlement negotiations to resolve this action. If such negotiations
are unsuccessful, the Company intends to continue to vigorously defend this
action. While the Company believes that this action is not material to its
financial position, an adverse outcome exceeding the amount accrued therefore
may have a material adverse effect on the Company's results of operations for
the year in which this action is ultimately resolved.
An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys
Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was
previously instituted against the Company in the Court of First Instance of
Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was
subsequently removed to, and is currently pending in, the United States
District Court for the District of Puerto Rico. Plaintiffs are distributors
of a product that claims to improve gas mileage. The plaintiffs allege that
the Company entered into an agreement with them to act as the exclusive
retailer of the product in Puerto Rico that was breached when the Company
determined to stop selling the product. The Company became aware of a Federal
Trade Commission investigation regarding the accuracy of advertising claims
concerning the product's effectiveness. The plaintiffs further allege that
they were negotiating with the manufacturer of the product to obtain the
exclusive distribution rights throughout the United States and that those
negotiations failed. Plaintiffs are seeking damages including payment for the
product that they allege Pep Boys ordered and expenses and loss of sales in
Puerto Rico and the United States resulting from the alleged breach. The
Company believes that the claims are without merit and continues to vigorously
defend this action.
The Company is also party to various other actions and claims, including
purported class actions, arising in the normal course of business.
The Company believes that amounts accrued for awards or assessments in
connection with the foregoing matters are adequate and, except as provided
above, that the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.
NOTE 15. Subsequent Event
On June 3, 2003, the Company completed an interest rate swap for a notional
amount of $130,000,000. This swap will be effective on July 15, 2003. The
Company has designated the swap as a cash flow hedge of the Company's real
estate operating lease facility, which has lease payments with an effective
rate of LIBOR plus 1.85%. The effect of this interest rate swap transaction is
to convert the variable LIBOR portion of these lease payments to a fixed rate
of 2.90%. The swap agreement will terminate on July 1, 2008. Terms of the
agreement call for payments to be made to the counterparty on a monthly basis
commencing on August 1, 2003 through to and including the termination date.
19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES - May 3, 2003
- ------------------------------------------------
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 thirteen weeks of fiscal 2003, the Company
invested $8,565,000 in property and equipment. The Company's net inventory
(net inventory includes the change in inventory less the change in accounts
payable) decreased $11,716,000. Working Capital decreased from $130,680,000 at
February 1, 2003 to $79,415,000 at May 3, 2003. At May 3, 2003, the Company
had stockholders' equity of $637,649,000 and long-term debt, net of current
maturities, of $476,158,000. The Company's long-term debt was 43% of its total
capitalization at May 3, 2003 and 45% at February 1, 2003. As of May 3, 2003,
the Company had an available line of credit totaling $167,994,000.
The Company does not plan to open any new stores during the balance of the
current fiscal year. Management estimates capital expenditures relating to
existing stores, warehouses and offices during the remainder of fiscal 2003
will be approximately $46,435,000. The Company anticipates that its net cash
provided by operating activities and its existing line of credit will exceed
its principal cash requirements for capital expenditures and net inventory in
fiscal 2003.
On May 15, 2003, upon maturity, the Company retired $75,000,000 aggregate
principal amount of 6.625% notes, with cash.
In the first quarter of fiscal 2003, the Company reclassified $32,000,000
aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity
date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65%
Medium-Term Notes with a stated maturity date of March 3, 2004 to current
liabilities on the consolidated balance sheet. The Company anticipates
being able to repurchase these notes with cash from operations and its existing
line of credit.
In April 2003, the Company made a settlement of approximately $12,600,000
related to the Supplemental Executive Retirement Plan obligation for the former
Chairman and CEO with cash. This obligation resulted in an expense for
settlement accounting under Statement of Financial Accounting Standards
(SFAS) No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits" of approximately
$4,900,000, during the quarter ended May 3, 2003.
In April 2003, the Company satisfied the commitment related to the non-renewal
of the former Chairman and CEO's employment agreement for approximately
$4,900,000. The Company satisfied this commitment with cash.
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
May 3, 2003, the Company had disposed of 24 of the closed stores (8 owned and
16 leased), the two distribution centers and the two development parcels.
During fiscal 2002, the Company decided to lease rather than sell three of
the closed stores owned by the Company due to changes in the real estate
market. As a result, the Company reclassified these three properties as
assets held for use. The Company estimates that the remaining 11 closed stores
leased by the Company will be disposed of by the end of the first quarter of
fiscal 2004.
20
PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY
Below is a table summarizing expenses related to the Profit Enhancement Plan
for the thirteen weeks ended May 3, 2003 and May 4, 2002. The reasons for
the changes to the charge are as described in the reserve reconciliation
and asset disposal section below.
(dollar amounts
in thousands) Thirteen Thirteen
Income Statement Weeks Ended Weeks Ended
Classification May 3, 2003 May 4, 2002
- --------------------------------------------------
Costs of
Merchandise Sales $ 650 $ 1,180
Costs of
Service Revenue 198 (51)
Selling, General and
Administrative 16 10
- --------------------------------------------------
Total Expenses $ 864 $ 1,139
- --------------------------------------------------
The following chart reconciles the change in reserve from the fiscal year
ended February 1, 2003 through May 3, 2003. The reserve for the closed
properties includes remaining rent on leases net of sublease income and
on-going expenses related to general maintenance costs such as utilities,
security, telephone, real estate taxes and personal property taxes. All
changes in the reserve assumptions were charged or credited through the
appropriate corresponding line items on the statement of operations.
(dollar amounts Lease On-going
in thousands) Expenses Expenses Total
- -------------------------------------------------------------------
Reserve balance
at Feb. 1, 2003 $ 1,092 $ 442 $ 1,534
Provision for Present
value of liabilities 11 3 14
Changes in assumptions
about future sublease
income, lease termination,
closed store maintenance costs
and changes in interest rates 583 251 834
Cash payments (600) (137) (737)
- -------------------------------------------------------------------
Reserve Balance at
May 3, 2003 $ 1,086 $ 559 $ 1,645
- -------------------------------------------------------------------
ASSETS HELD FOR DISPOSAL
The Company recorded a charge to cost of merchandise sales of $16,000 and
$1,312,000 for the thirteen weeks ended May 3, 2003 and May 4, 2002,
respectively. These charges relate to the adjustment to fair value of the
assets held for disposal. As of May 3, 2003, the Company has sold or
reclassified to long-term all properties held for disposal in relation to
the Profit Enhancement Plan.
21
Results of Operations -
The following table presents for the periods indicated certain items in the
consolidated statements of operations as a percentage of total revenues (except
as otherwise provided) and the percentage change in dollar amounts of such
items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change
- ----------------------------------------------------------------------------------------------------------------
May 3, 2003 May 4, 2002 Fiscal 2003 vs.
Thirteen weeks ended (Fiscal 2003) (Fiscal 2002) Fiscal 2002
- ----------------------------------------------------------------------------------------------------------------
Merchandise Sales 80.4% 81.2% (6.2)%
Service Revenue (1) 19.6 18.8 (1.4)
- ----------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 (5.3)
- ----------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales (2) 70.6 (3) 70.2 (3) (5.8)
Costs of Service Revenue (2) 75.3 (3) 74.4 (3) (0.3)
- ----------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 71.5 71.0 (4.7)
- ----------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 29.4 (3) 29.8 (3) (7.3)
Gross Profit from Service Revenue 24.7 (3) 25.6 (3) (4.8)
- ----------------------------------------------------------------------------------------------------------------
Total Gross Profit 28.5 29.0 (6.9)
- ----------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 28.7 23.2 17.0
- ----------------------------------------------------------------------------------------------------------------
Operating (Loss) Profit (0.2) 5.8 (103.2)
Non-operating Income 0.2 0.1 27.6
Interest Expense 2.0 2.1 (9.2)
- ----------------------------------------------------------------------------------------------------------------
(Loss) Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle (2.0) 3.8 (150.4)
Income Tax (Benefit) Expense 37.0 (4) 36.0 (4) (151.8)
- ----------------------------------------------------------------------------------------------------------------
(Loss) Earnings Before Cumulative Effect of Change
in Accounting Principle (1.3) 2.4 (149.6)
Cumulative Effect of Change in Accounting Principle (0.4) 0.0 N/A
- ----------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings (1.7) 2.4 (168.0)
- ----------------------------------------------------------------------------------------------------------------
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed parts or
materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include
service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
(3) As a percentage of related sales or revenue, as applicable.
(4) As a percentage of earnings before income taxes.
22
Thirteen Weeks Ended May 3, 2003 vs. Thirteen Weeks Ended May 4, 2002
- ------------------------------------------------------------------------
Total revenues for the first thirteen weeks decreased 5.3%. This decrease was
due primarily to a decrease in comparable store revenues (revenues generated by
stores in operation during the same period) of 5.4%, offset slightly by an
increase in the number of stores in operation in fiscal 2003 versus fiscal
2002. Comparable store merchandise sales decreased 6.3%, while comparable
store service revenue decreased 1.6%.
Gross profit from merchandise sales decreased, as a percentage of merchandise
sales, to 29.4% in fiscal 2003 from 29.8% in fiscal 2002. This decrease, as a
percentage of merchandise sales, was due primarily to an increase in store
occupancy costs and warehousing costs, as a percentage of merchandise sales,
offset, in part, by a charge related to the Profit Enhancement Plan of $650,000
in fiscal 2003 versus $1,180,000 in fiscal 2002 and higher merchandise margins,
as a percentage of merchandise sales. The increase in store occupancy costs was
a result of higher utilities and building maintenance expenses incurred as a
result of severe winter weather. The increase in warehousing costs, as a
percentage of merchandise sales, was a result of the merchandise sales decrease
offsetting the current year decrease in warehousing costs. The improved
merchandise margins were a result of a combination of an improvement in the
mix of sales, selectively higher retail pricing, lower product acquisition
costs and improved inventory controls.
Selling, general and administrative expenses increased, as a percentage of
total revenues, to 28.7% in fiscal 2003 from 23.2% in fiscal 2002. This was a
17% or $22,060,000 increase over the prior year quarter. This increase, as a
percentage of total revenues, was due primarily to an increase in general
office costs and employee benefits, as a percentage of total revenues. The
increase in general office costs was due primarily to an increase in the
Company's legal reserves of approximately $20,000,000 for on-going litigation.
The increase in employee benefits was due primarily to the settlement of a
retirement plan obligation.
Interest expense decreased 9.2% due primarily to lower debt levels coupled with
lower average interest rates.
Net earnings decreased, as a percentage of total revenues, due primarily to
a decrease in gross profit from merchandise sales, as a percentage of
merchandise sales, coupled with an increase in selling, general and
administrative expenses, as a percentage of total revenues, and a net charge of
$2,484,000 for the cumulative effect of a change in accounting principle for
the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations."
These decreases were offset, in part, by a decrease in interest expense.
NEW ACCOUNTING STANDARDS
- ------------------------
In May 2003, the Financial Accounting Standards Board (FASB) issued
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 establishes
standards for how an issuer classifies and measures financial instruments that
are within the pronouncement's scope as a liability because it embodies an
obligation of the issuer. Provisions of this standard are consistent
with the current definition of liabilities in FASB Concepts Statement No. 6,
"Elements of Financial Statements," while other provisions revise that
definition to include certain obligations that a reporting entity can or must
settle through issuance of its own equity shares. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is in the process of analyzing the
impact of the adoption of this statement on its consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities, resulting primarily from decisions made by the FASB's
Derivatives Implementation Group following the issuance of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003 and is
effective for hedging relationships designated after June 30, 2003. The
Company is in the process of analyzing the impact of the adoption of this
statement on its consolidated financial statements.
23
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46, an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," changes the criteria by which one company
includes another entity in its consolidated financial statements. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of any expected losses from the variable
interest entity's activities, is entitled to receive any expected residual
returns of the variable interest entity, or both. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and applies in the
first fiscal year or interim period beginning after June 15, 2003, for variable
interest entities created prior to February 1, 2003.
The Company will adopt FIN 46 for variable interest entities created prior to
February 1, 2003 in the third quarter of fiscal 2003. The adoption of FIN 46
will apply to the $132,000,000 of real estate leased by the Company under its
$143,000,000 operating lease facility, which would qualify as a variable
interest entity under this interpretation. If this operating lease facility
exists as of August 3, 2003, the Company would consolidate this entity and
record a liability of $132,000,000 and the corresponding assets, net of
accumulated depreciation. The Company is in the process of refinancing this
facility. This refinancing is planned for completion prior to August 3, 2003
so that it is not required to consolidate this entity under FIN 46.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
As a result of rescinding FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," gains and losses from extinguishment of debt
should be classified as extraordinary items only if they meet the criteria of
APB Opinion No. 30, "Reporting the Results of Operations." This statement also
amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Additional amendments
include changes to other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. The Company has adopted the provisions of SFAS No. 145
for the thirteen weeks ended May 3, 2003 with no material effect on its
consolidated statements of operations. Reclassifications of extraordinary items
pertaining to the extinguishment of debt, if any, will be made throughout
fiscal 2003 to maintain comparability for the reported periods.
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 1, 2003, which disclosures are hereby incorporated by reference.
24
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements contained herein constitute "forward-looking statements"
within the meaning of The Private Securities Litigation Reform Act of 1995.
The words "guidance," "expect," "anticipate," "estimates," "forecasts" and
similar expressions are intended to identify such forward-looking statements.
Forward-looking statements include management's expectations regarding future
financial performance, automotive aftermarket trends, levels of competition,
business development activities, future capital expenditures, financing sources
and availability and the effects of regulation and litigation. Although the
Company believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, it can give no assurance that
its expectations will be achieved. The Company's actual results may differ
materially from the results discussed in the forward-looking statements due to
factors beyond the control of the Company, including the strength of the
national and regional economies, retail and commercial consumers' ability to
spend, the health of the various sectors of the automotive aftermarket, the
weather in geographical regions with a high concentration of the Company's
stores, competitive pricing, the location and number of competitors' stores,
product and labor costs and the additional factors described in the Company's
filings with the Securities and Exchange Commission (SEC). The Company assumes
no obligation to update or supplement forward-looking statements that become
untrue because of subsequent events.
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 agreement and senior 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
May 3, 2003, the Company had outstanding borrowings of $43,266,000 under these
credit facilities.
On June 3, 2003, the Company completed an interest rate swap for a notional
amount of $130,000,000. This swap will be effective on July 15, 2003. The
Company has designated the swap as a cash flow hedge of the Company's real
estate operating lease facility, which has lease payments with an effective
rate of LIBOR plus 1.85%. The effect of this interest rate swap transaction is
to convert the variable LIBOR portion of these lease payments to a fixed rate
of 2.90%. The swap agreement will terminate on July 1, 2008. Terms of the
agreement call for payments to be made to the counter-party on a monthly basis
commencing on August 1, 2003 through to and including the termination date.
Except as noted above, there have been no material changes to the market risk
disclosures as reported in the Company's Form 10-K for the fiscal year ended
February 1, 2003.
25
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under 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.
26
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
The Company's California subsidiary is a defendant in a consolidated
action entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack"
that is currently pending in the California Superior Court in Orange
County. The two consolidated actions were originally filed on
March 29, 2000 and July 25, 2000. Plaintiffs are former and current
store management employees who claim that they were improperly
classified as exempt from the overtime provisions of California law
and seek to be compensated for all overtime hours worked. Plaintiffs'
motion to certify the case as a class action to represent all persons
employed in California since March 29, 1996 as salaried store
managers, assistant store managers, service managers and assistant
service managers was previously granted by the trial court. The
Company's appeals of that decision through the California Supreme
Court were unsuccessful. The Company is now preparing to move the
trial court for reconsideration of its decision to certify the class.
No trial date has been set for the underlying case. The Company is
currently engaged in settlement negotiations to resolve this action.
If such negotiations are unsuccessful, the Company intends to
continue to vigorously defend this action. While the Company believes
that this action is not material to its financial position, an
adverse outcome exceeding the amount accrued therefore may have a
material adverse effect on the Company's results of operations for
the year in which this action is ultimately resolved.
An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v.
Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc.
d/b/a Pep Boys" was previously instituted against the Company in the
Court of First Instance of Puerto Rico, Bayamon Superior Division on
March 15, 2002. The action was subsequently removed to, and is
currently pending in, the United States District Court for the
District of Puerto Rico. Plaintiffs are distributors of a product
that claims to improve gas mileage. The plaintiffs allege that the
Company entered into an agreement with them to act as the exclusive
retailer of the product in Puerto Rico that was breached when the
Company determined to stop selling the product. The Company became
aware of a Federal Trade Commission investigation regarding the
accuracy of advertising claims concerning the product's
effectiveness. The plaintiffs further allege that they were
negotiating with the manufacturer of the product to obtain the
exclusive distribution rights throughout the United States and that
those negotiations failed. Plaintiffs are seeking damages including
payment for the product that they allege Pep Boys ordered and
expenses and loss of sales in Puerto Rico and the United States
resulting from the alleged breach. The Company believes that the
claims are without merit and continues to vigorously defend this
action.
The Company is also party to various other actions and claims,
including purported class actions, arising in the normal course of
business.
The Company believes that amounts accrued for awards or assessments
in connection with the foregoing matters are adequate and, except as
provided above, that the ultimate resolution of these matters will
not have a material adverse effect on the Company's financial
position or results of operations.
27
Item 2. Changes in Securities and Use of Proceeds
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
(10.1)* Employment agreement between Lawrence N. Stevenson
and the Company dated as of April 28, 2003
(99.1) Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(99.2) Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The Company filed a Form 8-K on March 26, 2003 announcing its
Board of Directors' authorization of a share repurchase program
for the purchase of up to $25 million of its outstanding common
stock. An exhibit containing the Company's press release
announcing the repurchase was attached.
The Company filed a Form 8-K on April 29, 2003, as amended by a
Form 8-K/A filed on April 30, 2003, announcing the appointment
of Lawrence N. Stevenson as its new Chief Executive Officer. An
exhibit containing the Company's press release announcing the
appointment was attached.
* Management contract or compensatory plan or arrangement.
28
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: June 16, 2003 By: /s/ George Babich, Jr.
----------------------- --------------------------
George Babich, Jr.
President &
Chief Financial Officer
29
CHIEF EXECUTIVE OFFICER CERTIFICATION
- -------------------------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Lawrence N. Stevenson, 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: June 16, 2003 /s/ Lawrence N. Stevenson
-------------------- -------------------------
Lawrence N. Stevenson
Chief Executive Officer
30
CHIEF FINANCIAL OFFICER CERTIFICATION
- -------------------------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, George Babich, Jr., certify that:
1. I have reviewed this 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: June 16, 2003 /s/ George Babich, Jr.
-------------------- -----------------------
George Babich, Jr.
President and Chief
Financial Officer
31
INDEX TO EXHIBITS
- -----------------
(10.1) Employment agreement between Lawrence N. Stevenson
and the Company dated as of April 28, 2003.
(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
32