10-Q 1 r1q02.txt 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 4, 2002 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ----------- ---------- Commission File No. 1-3381 ------ The Pep Boys - Manny, Moe & Jack ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-0962915 ------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer ID number) incorporation or organization) 3111 W. Allegheny Ave. Philadelphia, PA 19132 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) 215-430-9000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ( x ) No ( ) As of June 1, 2002 there were 51,488,681 shares of the registrant's Common Stock outstanding. 1 ------------------------------------------------------------------- Index Page ------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - May 4, 2002 and February 2, 2002 3 Consolidated Statements of Earnings - Thirteen weeks ended May 4, 2002 and May 5, 2001 4 Consolidated Statements of Cash Flows - Thirteen weeks ended May 4, 2002 and May 5, 2001 5 Notes to Condensed Consolidated Financial Statements 6-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-21 Item 3. Quantitative and Qualitative Disclosures 21 About Market Risk PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 22 Item 2. Changes in Securities and Use of Proceeds 22 Item 3. Defaults Upon Senior Securities 22 Item 4. Submission of Matters to a Vote of Security Holders 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURE PAGE 23 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 4, 2002 Feb. 2, 2002* ------------- ------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents................................... $ 23,241 $ 15,981 Accounts receivable, net.................................... 19,315 18,052 Merchandise inventories..................................... 529,666 519,473 Prepaid expenses............................................ 27,314 42,170 Deferred income taxes....................................... 15,510 15,820 Other....................................................... 47,304 52,308 Assets held for disposal.................................... 12,492 16,007 ------------- ------------- Total Current Assets..................................... 674,842 679,811 Property and Equipment-at cost: Land........................................................ 276,908 277,726 Buildings and improvements.................................. 923,002 922,065 Furniture, fixtures and equipment........................... 586,245 583,918 Construction in progress.................................... 11,493 10,741 ------------ ------------- 1,797,648 1,794,450 Less accumulated depreciation and amortization.............. 696,736 676,964 ------------- ------------- Total Property and Equipment............................. 1,100,912 1,117,486 Other......................................................... 15,980 15,355 ------------- ------------- Total Assets................................................... $1,791,734 $1,812,652 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................ $ 212,431 $ 216,085 Accrued expenses............................................ 246,560 241,273 Current maturities of long-term debt........................ 124,568 124,615 ------------- ------------- Total Current Liabilities................................ 583,559 581,973 Long-term debt, less current maturities....................... 510,909 544,418 Deferred income taxes......................................... 64,311 64,027 Deferred gain on sale leaseback............................... 4,418 4,444 Commitments and Contingencies Stockholders' Equity: Common Stock, par value $1 per share: Authorized 500,000,000 shares; Issued 63,910,577 shares.... 63,911 63,911 Additional paid-in capital.................................. 177,292 177,244 Retained earnings........................................... 611,871 601,944 ------------- ------------ 853,074 843,099 Less cost of shares in treasury - 10,236,626 and 10,284,446 shares..................................... 165,273 166,045 Less cost of shares in benefits trust - 2,195,270 shares...... 59,264 59,264 ------------- ------------ Total Stockholders' Equity............................... 628,537 617,790 ------------- ------------ Total Liabilities and Stockholders' Equity..................... $1,791,734 $1,812,652 ============= ============ See notes to condensed consolidated financial statements. *Taken from the audited financial statements at Feb. 2, 2002.
3 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollar amounts in thousands, except per share amounts) UNAUDITED
Thirteen weeks ended ------------------------------- May 4, 2002 May 5, 2001 -------------- ------------- Merchandise Sales.................................... $453,771 $442,994 Service Revenue...................................... 105,202 108,583 ------------- ------------- Total Revenues....................................... 558,973 551,577 Costs of Merchandise Sales........................... 318,763 316,049 Costs of Service Revenue............................. 78,275 79,797 ------------- ------------- Total Costs of Revenues.............................. 397,038 395,846 Gross Profit from Merchandise Sales.................. 135,008 126,945 Gross Profit from Service Revenue.................... 26,927 28,786 ------------- ------------- Total Gross Profit................................... 161,935 155,731 Selling, General and Administrative Expenses......... 129,782 128,498 ------------- ------------- Operating Profit..................................... 32,153 27,233 Non-operating Income................................. 823 623 Interest Expense..................................... 11,781 13,512 ------------- ------------- Earnings Before Income Taxes......................... 21,195 14,344 Income Taxes......................................... 7,630 5,236 ------------- ------------- Net Earnings......................................... 13,565 9,108 Retained Earnings, beginning of period............... 601,944 581,668 Cash Dividends....................................... 3,473 3,460 Dividend Reinvestment Plan........................... - 916 Effect of Stock options.............................. 165 - ------------- ------------- Retained Earnings, end of period..................... $611,871 $586,400 ============= ============= Basic Earnings per Share............................. $ .26 $ .18 ============= ============= Diluted Earnings per Share........................... $ .26 $ .18 ============= ============= 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 4, 2002 May 5, 2001 -------------- -------------- Cash Flows from Operating Activities: Net earnings.................................................... $ 13,565 $ 9,108 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and amortization................................ 20,383 22,022 Deferred income taxes........................................ 594 - Accretion of bond discount................................... - 1,573 Loss on assets held for disposal............................. 1,312 400 Loss (gain) from sale of assets.............................. 134 (834) Changes in operating assets and liabilities: Decrease in accounts receivable, prepaid expenses and other................................................. 17,972 5,872 (Increase) decrease in merchandise inventories............... (10,193) 12,483 (Decrease) increase in accounts payable...................... (3,654) 13,460 Increase in accrued expenses................................. 5,287 10,615 ------------- ------------- Net Cash Provided by Operating Activities....................... 45,400 74,699 Cash Flows from Investing Activities: Capital expenditures............................................ (4,706) (3,931) Proceeds from sales of assets................................... 2,940 2,856 ------------- ------------- Net Cash Used in Investing Activities........................... (1,766) (1,075) Cash Flows from Financing Activities: Net payments under line of credit agreements.................... (25,620) (57,737) Reduction of long-term debt..................................... (7,936) - Dividends paid.................................................. (3,473) (3,460) Proceeds from exercise of stock options......................... 319 - Proceeds from dividend reinvestment plan........................ 336 357 ------------- ------------- Net Cash Used in Financing Activities........................... (36,374) (60,840) ------------- ------------- Net Increase in Cash................................................. 7,260 12,784 Cash and Cash Equivalents at Beginning of Period..................... 15,981 7,995 ------------- ------------- Cash and Cash Equivalents at End of Period........................... $ 23,241 $ 20,779 ============= ============= See notes to condensed consolidated financial statements.
5 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Condensed Consolidated Financial Statements The consolidated balance sheet as of May 4, 2002, the consolidated statements of earnings for the thirteen week periods ended May 4, 2002 and May 5, 2001 and the consolidated statements of cash flows for the thirteen week periods ended May 4, 2002 and May 5, 2001 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at May 4, 2002 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 February 2, 2002 annual report to shareholders. The results of operations for the thirteen week period ended May 4, 2002 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation. NOTE 2. Merchandise Inventories Merchandise inventories are valued at the lower of cost (last-in, first-out) or market. If the first-in, first-out method of valuing inventories had been used by the Company, inventories would have been approximately the same at both May 4, 2002 and February 2, 2002. NOTE 3. Profit Enhancement Plan In the third quarter 2000, the Company performed a comprehensive review of its field, distribution, and Store Support Center infrastructure as well as the performance of each store. As a result of this review, the Company implemented a number of changes that it believes will improve its performance. These changes included the closure of 38 under-performing stores and two distribution centers, a decrease of store operating hours and a reduction in the Store Support Center infrastructure. PLAN UPDATE The Profit Enhancement Plan has been progressing closely to the schedule originally estimated by the Company. Each of the 38 stores and one of the distribution centers identified for closure were closed on or before October 28, 2000. The second distribution center was closed on November 30, 2000. All employees were notified of their separation on or before October 28, 2000. The assets held for disposal were reclassed and depreciation was stopped on October 28, 2000 which was concurrent with the announcement of the Profit Enhancement Plan and the closure of the stores. The Company is progressing towards the disposal of the 38 stores, 11 of which were owned and 27 were leased by the Company, two distribution centers and two development parcels owned by the Company which were closed or abandoned in connection with the Profit Enhancement Plan. As of May 4, 2002, the Company had successfully disposed of 13 of the closed stores, the two distribution centers and one of the development parcels. The Company estimates the remaining closed or abandoned properties will be disposed of by the end of fiscal 2002. 6 ASSETS HELD FOR DISPOSAL The assets held for disposal included the building and land of the remaining closed stores owned by the Company, additional development parcels, and equipment from the remaining closed stores. The Company was able to sell five of the 13 owned properties. The carrying value of the remaining building, land and equipment was $12,492,000 as of May 4, 2002. In the first quarter 2002, the Company sold two properties for proceeds of $2,228,000. One of these properties, which was sold for a loss of $641,000, was done in a three property deal in which the Company was released from the lease obligations of two other properties, one of which was related to the Profit Enhancement Plan reserve. The other property sold generated a gain of $31,000. Additionally, the Company adjusted the carrying value of certain remaining assets held for disposal, which resulted in a net decrease of $702,000. The charges related to the assets held for disposal were recorded in costs of merchandise sales on the consolidated statement of earnings. In the first quarter of 2001, the carrying values for the buildings and land was reduced from their original estimated value of $21,680,000 by $400,000 due to a downward revision in the estimated value for one site. The charge related to this reduction was recorded in costs of merchandise sales on the consolidated statement of earnings. The Company is actively marketing the remaining eight owned properties and has made adjustments to property values in accordance with the change in market values. As a result, the Company has extended the original estimated time needed for selling the owned properties. It is expected that four of these properties with a carrying value of $6,272,000 will be disposed of by the second quarter 2002, with three properties with a carrying value of $4,236,000 expected to be disposed of by the end of the third quarter 2002 and one property with a carrying value of $1,447,000 expected to be disposed of early in the fourth quarter. The Company will continue to monitor the status for disposing of its owned properties and make any necessary adjustments. An adjustment was reflected in on-going expenses for the increased time required to maintain these properties. LEASE RESERVE As of May 4, 2002, the Company was able to sublease three and exit the lease of an additional six leased properties. The Company expects the remaining 18 leased properties to be subleased or otherwise disposed of by the end of fiscal 2002. In the first quarter of 2002, the Company decreased the lease reserve $333,000. These changes were a result of a $597,000 decrease due primarily to an increase in the estimated sublease rates. This decrease was offset, in part, by a $264,000 increase due primarily to an increase in the estimated time it will take the Company to sublease certain properties. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. The lease reserve decreased during the first quarter of 2001 by $173,000. This reduction was primarily a result of a reduction in lease expense of $498,000 due to an increase in estimated sublease income resulting from an increase in certain estimated rates. This reduction was offset, in part, by a $325,000 decrease in expected sublease income due to an increase in the estimated time it may take to sublease certain properties. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. 7 ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit activities that will be continued. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed of. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed of and such activities are estimated to be completed by the end of fiscal 2002. In the first quarter of 2002, the Company increased the on-going expense reserve $160,000 due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. In the first quarter of 2001, the on-going reserve was increased by approximately $380,000 which was due primarily to an increase in estimated time to sublease or sell certain properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. SEVERANCE RESERVE In the first quarter of 2001, the Company reversed the severance reserve by $52,000 due primarily to certain employees originally expected to be receiving severance failing to qualify to receive payments. There were no adjustments made to this reserve in fiscal 2002. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. The expenses of this nature incurred in the first quarter of fiscal 2001 totaling $512,000 were due primarily to the removal of inventory and equipment from closed distribution centers. These expenses were primarily recorded in costs of merchandise sales as incurred. There were no expenses of this nature incurred in fiscal 2002. PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Below is a table summarizing expenses related to the Profit Enhancement Plan for the thirteen weeks ended May 4, 2002 and May 5, 2001. The details and reasons for the changes to the charge are as described above in the respective reserve categories.
(dollar amounts in thousands) Thirteen Thirteen Income Statement Weeks Ended Weeks Ended Classification May 4, 2002 May 5, 2001 -------------------------------------------------- Costs of Merchandise Sales $ 1,180 $ 937 Costs of Service Revenue (51) 89 Selling, General and Administrative 10 41 -------------------------------------------------- Total Expenses $ 1,139 $1,067 --------------------------------------------------
8 At the end of the third quarter 2000, the Company set up a reserve liability account which is included in accrued liabilities on the consolidated balance sheet. This liability account tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve from the fiscal year ended February 2, 2002 through May 4, 2002. All additions and adjustments were charged or credited through the appropriate line items on the statement of earnings.
(Amounts in Lease Fixed On-going thousands) Expenses Assets Severance Expenses Total ----------------------------------------------------------------------------------- Reserve balance at Feb. 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470 Addition 264 1,312 - 160 1,736 Utilization (742) (1,312) - (140) (2,194) Adjustments (597) - - - (597) ----------------------------------------------------------------------------------- Reserve Balance at May 4, 2002 $ 2,075 $ - $ - $ 1,340 $ 3,415 -----------------------------------------------------------------------------------
NOTE 4. Net Earnings Per Share
Thirteen weeks ended (in thousands, except per share data) ---------------------------------- May 4, 2002 May 5, 2001 -------------- -------------- (a) Net earnings .................................... $13,565 $ 9,108 Adjustment for interest on zero coupon convertible subordinated notes, net of income tax effect... - - ------------------------------------------------------------------------------------------- (b) Adjusted net earnings............................ $13,565 $ 9,108 ------------------------------------------------------------------------------------------- (c) Average number of common shares outstanding during the period.............................. 51,445 51,266 Common shares assumed issued upon conversion of zero coupon convertible subordinated 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 the period.................. 52,608 51,266 ------------------------------------------------------------------------------------------- Basic Earnings per Share (a/c) $ .26 $ .18 ------------------------------------------------------------------------------------------- Diluted Earnings per Share (b/d) $ .26 $ .18 -------------------------------------------------------------------------------------------
Adjustments for convertible securities were antidilutive during the thirteen week period ended May 5, 2001 and therefore excluded from the computation of diluted EPS. There were no convertible securities outstanding during the first quarter ended May 4, 2002. Options to purchase 3,123,420 and 6,570,557 shares of common stock were outstanding at May 4, 2002 and May 5, 2001, 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. 9 Note 5. New Accounting Standards In May 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds FASB Statements No. 4 and No. 64, which pertained to issues related to the extinguishment of debt. SFAS No. 145 also rescinds FASB Statement No. 44, which established accounting requirements for motor carriers, and amends FASB Statement No. 13, "Accounting for Leases," to enable certain capital lease modifications to be accounted for by lessees as sale-leaseback transactions. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. Note 6. Supplemental Guarantor Information- Convertible Senior Notes In May 2002, the Company sold 4.25% Convertible Senior Notes for $150,000,000. The notes are fully and unconditionally, and jointly and severally, guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny Moe & Jack of California, Pep Boys-Manny, Moe & Jack of Delaware, Inc. and Pep Boys- Manny, Moe & Jack of Puerto Rico, Inc. 10 The following are consolidating condensed balance sheets of the Company as of May 4, 2002 and February 2, 2002 and the related condensed consolidating statements of earnings and cash flows for the three months ended May 4, 2002 and May 5, 2001:
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited) Non- Subsidiary guarantor May 4, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) ASSETS Current Assets: Cash and cash equivalents....................... $ 11,457 $ 11,410 $ 374 $ - $ 23,241 Accounts receivable............................. 7,873 11,442 - - 19,315 Merchandise inventories......................... 194,793 334,873 - - 529,666 Prepaid expenses................................ 18,791 8,014 13,000 (12,491) 27,314 Deferred income taxes........................... 8,265 303 6,942 - 15,510 Other........................................... 2 - 47,302 - 47,304 Assets held for disposal........................ 1,533 10,959 - - 12,492 ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets..................... 242,714 377,001 67,618 (12,491) 674,842 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land............................................. 91,843 185,065 - - 276,908 Buildings and improvements....................... 308,843 614,159 - - 923,002 Furniture, fixtures and equipment................ 274,903 311,342 - - 586,245 Construction in progress......................... 5,656 5,837 - - 11,493 --------- ---------- -------- -------- --------- 681,245 1,116,403 - - 1,797,648 Less accumulated depreciation and amortization... 302,506 394,230 - - 696,736 --------- ---------- -------- -------- ---------- Total Property and Equipment.................. 378,739 722,173 - - 1,100,912 Investment in subsidiaries........................ 1,387,475 - 1,068,963 (2,456,438) - Intercompany receivable........................... - 354,026 297,922 (651,948) - Other............................................. 13,919 2,061 - - 15,980 ----------------------------------------------------------------------------------------------------------------------------- Total Assets............................. $ 2,022,847 $1,455,261 $1,434,503 $(3,120,877) $1,791,734 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................ $ 212,422 $ 9 $ - $ - $ 212,431 Accrued expenses................................ 81,519 78,563 120,576 (34,098) 246,560 Current maturities of convertible debt.......... - - - - - Current maturities of long-term debt............ 124,568 - - - 124,568 ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities................ 418,509 78,572 120,576 (34,098) 583,559 ----------------------------------------------------------------------------------------------------------------------------- Long-term debt, less current maturities........... 482,227 28,682 - - 510,909 Intercompany liabilities.......................... 481,602 170,346 - (651,948) - Deferred income taxes............................. 32,273 32,038 - - 64,311 Deferred gain on sale leaseback................... 1,307 3,111 - - 4,418 Stockholders' Equity: Common stock.................................... 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital...................... 177,291 240,359 200,399 (440,757) 177,292 Retained earnings............................... 590,264 900,652 1,113,427 (1,992,472) 611,871 Less: Cost of shares in treasury...................... 165,273 - - - 165,273 Cost of shares in benefits trust................ 59,264 - - - 59,264 ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity............... 606,929 1,142,512 1,313,927 (2,434,831) 628,537 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,022,847 $1,455,261 $1,434,503 $(3,120,877) $1,791,734 -----------------------------------------------------------------------------------------------------------------------------
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CONDENSED CONSOLIDATING BALANCE SHEET Non- Subsidiary guarantor February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) ASSETS Current Assets: Cash and cash equivalents....................... $ 4,796 $ 10,874 $ 311 $ - $ 15,981 Accounts receivable............................. 17,124 928 - - 18,052 Merchandise inventories......................... 176,696 342,777 - - 519,473 Prepaid expenses................................ 42,384 (15,815) 17,851 (2,250) 42,170 Deferred income taxes........................... 8,395 483 6,942 - 15,820 Other........................................... 3 - 67,305 (15,000) 52,308 Assets held for disposal........................ 2,755 13,252 - - 16,007 ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets..................... 252,153 352,499 92,409 (17,250) 679,811 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land............................................. 92,661 185,065 - - 277,726 Buildings and improvements....................... 308,444 613,621 - - 922,065 Furniture, fixtures and equipment................ 273,028 310,890 - - 583,918 Construction in progress......................... 5,380 5,361 - - 10,741 ----------- ---------- -------- -------- ----------- 679,513 1,114,937 - - 1,794,450 Less accumulated depreciation and amortization... 293,704 383,260 - - 676,964 ----------- ---------- -------- -------- ----------- Total Property and Equipment.................. 385,809 731,677 - - 1,117,486 Investment in subsidiaries........................ 1,367,117 - 1,050,494 (2,417,611) - Intercompany receivable........................... - 575,377 279,714 (855,091) - Other............................................. 13,355 2,000 - - 15,355 ----------------------------------------------------------------------------------------------------------------------------- Total Assets............................. $ 2,018,434 $1,661,553 $1,422,617 $(3,289,952) $1,812,652 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................ $ 216,076 $ 9 $ - $ - $ 216,085 Accrued expenses................................ 84,009 65,636 130,485 (38,857) 241,273 Current maturities of convertible debt.......... - - - - - Current maturities of long-term debt............ 124,615 - - - 124,615 ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities................ 424,700 65,645 130,485 (38,857) 581,973 ----------------------------------------------------------------------------------------------------------------------------- Long-term debt, less current maturities........... 497,603 46,815 - - 544,418 Intercompany liabilities.......................... 466,460 388,631 - (855,091) - Deferred income taxes............................. 32,172 31,855 - - 64,027 Deferred gain on sale leaseback................... 1,316 3,128 - - 4,444 Stockholders' Equity: Common stock.................................... 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital...................... 177,244 240,359 200,398 (440,757) 177,244 Retained earnings............................... 580,337 883,619 1,091,633 (1,953,645) 601,944 Less: Cost of shares in treasury...................... 166,045 - - - 166,045 Cost of shares in benefits trust................ 59,264 - - - 59,264 ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity............... 596,183 1,125,479 1,292,132 (2,396,004) $ 617,790 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,018,434 $1,661,553 $1,422,617 $(3,289,952) $1,812,652 -----------------------------------------------------------------------------------------------------------------------------
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CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (Unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 4, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) 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) profit 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 Non-operating (expense) income................ (4,521) 11,346 5,306 (11,308) 823 Interest expense.............................. 17,113 5,976 - (11,308) 11,781 ------------ ----------- --------- --------- ---------- (Loss) Earnings before income taxes........... (10,616) 26,614 5,197 - 21,195 Income tax (benefit) expense.................. (3,822) 9,581 1,871 - 7,630 ------------ ---------- ---------- --------- ---------- Net (loss) earnings........................... $ (6,794) $ 17,033 $ 3,326 $ - $ 13,565 ============ ========== ========== ========= ==========
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS Non- Subsidiary guarantor Thirteen weeks ended May 5, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated ---------------------------------------------------------------------------------------------------------------------------- (in thousands) Merchandise sales............................. $ 153,473 $ 289,521 $ - $ - $ 442,994 Service revenue............................... 38,940 69,643 - - 108,583 Other revenue................................. - - 5,588 (5,588) - ------------ --------- ---------- ---------- ---------- Total revenues................................ 192,413 359,164 5,588 (5,588) 551,577 Costs of merchandise sales.................... 110,474 205,575 - - 316,049 Costs of service revenue...................... 28,320 51,477 - - 79,797 Costs of other revenue........................ - - 5,617 (5,617) - ------------ --------- ---------- ---------- ---------- Total costs of revenues....................... 138,794 257,052 5,617 (5,617) 395,846 Gross profit from merchandise sales........... 42,999 83,946 - - 126,945 Gross profit from service revenue............. 10,620 18,166 - - 28,786 Gross (loss) profit from other revenue........ - - (29) 29 - ------------ --------- ---------- ---------- ---------- Total gross profit (loss)..................... 53,619 102,112 (29) 29 155,731 Selling, general and administrative expenses.. 61,723 66,670 76 29 128,498 ------------ --------- ---------- ---------- ---------- Operating (loss) profit....................... (8,104) 35,442 (105) - 27,233 Non-operating (expense) income................ (4,563) 13,664 6,191 (14,669) 623 Interest expense.............................. 18,746 9,435 - (14,669) 13,512 ------------ --------- ---------- ---------- ---------- Loss (Earnings) before income taxes............ (31,413) 39,671 6,086 - 14,344 Income tax (benefit) expense................... (11,465) 14,480 2,221 - 5,236 ------------ --------- ---------- ---------- ---------- Net (loss) earnings............................ $ (19,948) $ 25,191 $ 3,865 $ - $ 9,108 ============ ========= ========== ========== ==========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 4, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Cash Flows from Operating Activities: Net (Loss) Earnings........................ $ (6,794) $17,033 $ 3,326 $ - $13,565 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Non-cash operating activities........... 9,271 13,152 - - 22,423 Change in current assets and liabilities............................ 8,039 (13,571) 14,944 - 9,412 ------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 10,516 16,614 18,270 - 45,400 ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities: Net Cash Used in Investing Activities (756) (1,010) - - (1,766) Cash Flows from Financing Activities: 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 ------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Non- Subsidiary guarantor Thirteen weeks ended May 5, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Cash Flows from Operating Activities: Net Earnings............................... $ (19,948) $ 25,191 $ 3,865 $ - $ 9,108 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Non-cash operating activities........... 11,047 12,114 - - 23,161 Change in current assets and liabilities............................ 6,531 36,210 (311) - 42,430 ---------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities (2,370) 73,515 3,554 - 74,699 ---------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Net Cash Used in Investing Activities (1,297) 222 - - (1,075) Cash Flows from Financing Activities: Net Cash Used in Financing Activities 10,798 (67,947) (3,691) - (60,840) ---------------------------------------------------------------------------------------------------------------------------- Net Increase in Cash............................ 7,131 5,790 (137) - 12,784 Cash and Cash Equivalents at Beginning of Period 482 7,038 475 - 7,995 ---------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period...... $ 7,613 $ 12,828 $ 338 $ - $20,779 ----------------------------------------------------------------------------------------------------------------------------
14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES - May 4, 2002 ------------------------------------------------ The Company's cash requirements arise principally from the capital expenditures related to existing stores, offices and warehouses, the need to finance the acquisition, construction and equipping of new stores and to purchase inventory. During the first quarter of 2002, the Company invested $4,706,000 in property and equipment. The Company's net inventory (net inventory includes the change in inventory less the change in accounts payable) increased $13,847,000. Working capital decreased from $97,838,000 at February 2, 2002 to $91,283,000 at May 4, 2002. At May 4, 2002, the Company had stockholders' equity of $628,537,000 and long-term debt of $510,909,000. The Company's long-term debt was 45% of its total capitalization at May 4, 2002 and 47% at February 2, 2002. As of May 4, 2002, the Company had an available line of credit totaling $137,286,000. The Company plans to open two new Supercenters during the balance of the current fiscal year. Management estimates the costs of opening the two Supercenters, coupled with capital expenditures relating to existing stores, warehouses and offices during fiscal 2002, will be approximately $38,294,000. The Company anticipates that its net cash provided by operating activities and its existing line of credit will exceed its principal cash requirements for capital expenditures and net inventory in fiscal 2002. In the third quarter of 2001, the Company reclassed the $50,000,000 Medium-Term Note and the remaining $43,005,000 of the $49,000,000 Medium-Term Note to current liabilities on the consolidated balance sheet. These Medium-Term Notes are redeemable at the option of the holder on July 16, 2002 and September 19, 2002, respectively. The Company anticipates being able to repurchase these notes with the proceeds from its $150,000,000 senior convertible notes financing, which was completed in May 2002. PROFIT ENHANCEMENT PLAN ----------------------- In the third quarter 2000, the Company performed a comprehensive review of its field, distribution, and Store Support Center infrastructure as well as the performance of each store. As a result of this review, the Company implemented a number of changes that it believes will improve its performance. These changes included the closure of 38 under-performing stores and two distribution centers, a decrease of store operating hours and a reduction in the Store Support Center infrastructure. 15 PLAN UPDATE The Profit Enhancement Plan has been progressing closely to the schedule originally estimated by the Company. Each of the 38 stores and one of the distribution centers identified for closure were closed on or before October 28, 2000. The second distribution center was closed on November 30, 2000. All employees were notified of their separation on or before October 28, 2000. The assets held for disposal were reclassed and depreciation was stopped on October 28, 2000 which was concurrent with the announcement of the Profit Enhancement Plan and the closure of the stores. The Company is progressing towards the disposal of the 38 stores, 11 of which were owned and 27 were leased by the Company, two distribution centers and two development parcels owned by the Company which were closed or abandoned in connection with the Profit Enhancement Plan. As of May 4, 2002, the Company had successfully disposed of 13 of the closed stores, the two distribution centers and one of the development parcels. The Company estimates the remaining closed or abandoned properties will be disposed of by the end of fiscal 2002. ASSETS HELD FOR DISPOSAL The assets held for disposal included the building and land of the remaining closed stores owned by the Company, additional development parcels, and equipment from the remaining closed stores. The Company was able to sell five of the 13 owned properties. The carrying value of the remaining building, land and equipment was $12,492,000 as of May 4, 2002. In the first quarter 2002, the Company sold two properties for proceeds of $2,228,000. One of these properties, which was sold for a loss of $641,000, was done in a three property deal in which the Company was released from the lease obligations of two other properties, one of which was related to the Profit Enhancement Plan reserve. The other property sold was sold for a gain of $31,000. Additionally, the Company adjusted the carrying value of certain remaining assets held for disposal, which resulted in a net decrease of $702,000. The charges related to the assets held for disposal were recorded in costs of merchandise sales on the consolidated statement of earnings. In the first quarter of 2001, the carrying values for the buildings and land was reduced from their original estimated value of $21,680,000 by $400,000 due to a downward revision in the estimated value for one site. The charge related to this reduction was recorded in costs of merchandise sales on the consolidated statement of earnings. The Company is actively marketing the remaining eight owned properties and has made adjustments to property values in accordance with the change in market values. As a result, the Company has extended the original estimated time needed for selling the owned properties. It is expected that four of these properties with a carrying value of $6,272,000 will be disposed of by the second quarter 2002, with three properties with a carrying value of $4,236,000 expected to be disposed of by the end of the third quarter 2002 and one property with a carrying value of $1,447,000 expected to be disposed of early in the fourth quarter. The Company will continue to monitor the status for disposing of its owned properties and make any necessary adjustments. An adjustment was reflected in on-going expenses for the increased time required to maintain these properties. 16 LEASE RESERVE As of May 4, 2002, the Company was able to sublease three and exit the lease of an additional six leased properties. The Company expects the remaining 18 leased properties to be subleased or otherwise disposed of by the end of fiscal 2002. In the first quarter of 2002, the Company decreased the lease reserve $333,000. These changes were a result of a $597,000 decrease due primarily to an increase in the estimated sublease rates. This decrease was offset, in part, by a $264,000 increase due primarily to an increase in the estimated time it will take the Company to sublease certain properties. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. The lease reserve decreased during the first quarter of 2001 by $173,000. This reduction was primarily a result of a reduction in lease expense of $498,000 due to an increase in estimated sublease income resulting from an increase in certain estimated rates. This reduction was offset, in part, by a $325,000 decrease in expected sublease income due to an increase in the estimated time it may take to sublease certain properties. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit activities that will be continued. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed of. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed of and such activities are estimated to be completed by the end of fiscal 2002. In the first quarter of 2002, the Company increased the on-going expense reserve $160,000 due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. In the first quarter of 2001, the on-going reserve was increased by approximately $380,000 which was due primarily to an increase in estimated time to sublease or sell certain properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. 17 SEVERANCE RESERVE In the first quarter of 2001, the Company reversed the severance reserve by $52,000 due primarily to certain employees originally expected to be receiving severance failing to qualify to receive payments. There were no adjustments made to this reserve in fiscal 2002. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. The expenses of this nature incurred in the first quarter of fiscal 2001 totaling $512,000 were due primarily to the removal of inventory and equipment from closed distribution centers. These expenses were primarily recorded in costs of merchandise sales as incurred. There were no expenses of this nature incurred in fiscal 2002. PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Below is a table summarizing expenses related to the Profit Enhancement Plan for the thirteen weeks ended May 4, 2002 and May 5, 2001. The details and reasons for the changes to the charge are as described above in the respective reserve categories.
(dollar amounts in thousands) Thirteen Thirteen Income Statement Weeks Ended Weeks Ended Classification May 4, 2002 May 5, 2001 -------------------------------------------------- Costs of Merchandise Sales $ 1,180 $ 937 Costs of Service Revenue (51) 89 Selling, General and Administrative 10 41 -------------------------------------------------- Total Expenses $ 1,139 $1,067 --------------------------------------------------
At the end of the third quarter 2000, the Company set up a reserve liability account which is included in accrued liabilities on the consolidated balance sheet. This liability account tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve from the fiscal year ended February 2, 2002 through May 4, 2002. All additions and adjustments were charged or credited through the appropriate line items on the statement of earnings.
(Amounts in Lease Fixed On-going thousands) Expenses Assets Severance Expenses Total ----------------------------------------------------------------------------------- Reserve balance at Feb. 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470 Addition 264 1,312 - 160 1,736 Utilization (742) (1,312) - (140) (2,194) Adjustments (597) - - - (597) ----------------------------------------------------------------------------------- Reserve Balance at May 4, 2002 $ 2,075 $ - $ - $ 1,340 $ 3,415 -----------------------------------------------------------------------------------
18 Results of Operations - The following table presents for the periods indicated certain items in the consolidated statements of earnings as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change ------------------------------------------------------ ---------------------------------- ----------------- Thirteen weeks ended May 4, 2002 May 5, 2001 Fiscal 2002 vs. (Fiscal 2002) (Fiscal 2001) Fiscal 2001 ------------------------------------------------------ -------------- -------------- ----------------- Merchandise Sales..................................... 81.2% 80.3% 2.4 % Service Revenue (1)................................... 18.8 19.7 (3.1) ------ ------ ------- Total Revenues........................................ 100.0 100.0 1.3 Costs of Merchandise Sales (2)........................ 70.2 (3) 71.3 (3) .9 Costs of Service Revenue (2).......................... 74.4 (3) 73.5 (3) (1.9) ------ ------ ------- Total Costs of Revenues............................... 71.0 71.8 .3 Gross Profit from Merchandise Sales................... 29.8 (3) 28.7 (3) 6.4 Gross Profit from Service Revenue..................... 25.6 (3) 26.5 (3) (6.5) ------ ------ ------- Total Gross Profit.................................... 29.0 28.2 4.0 Selling, General and Administrative Expenses.......... 23.2 23.3 1.0 ------ ------ ------- Operating Profit...................................... 5.8 4.9 18.1 Non-operating Income.................................. .1 .1 32.1 Interest Expense...................................... 2.1 2.4 (12.8) ------ ------ ------- Earnings Before Income Taxes.......................... 3.8 2.6 47.8 Income Taxes.......................................... 36.0 (4) 36.5 (4) 45.7 ------ ------ ------- Net Earnings ......................................... 2.4 1.7 48.9 ====== ====== ======= (1) Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. (2) Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. (3) As a percentage of related sales or revenue, as applicable. (4) As a percentage of earnings before income taxes.
19 Thirteen Weeks Ended May 4, 2002 vs. Thirteen Weeks Ended May 5, 2001 ------------------------------------------------------------------------ Total revenues for the first quarter increased 1.3% as the total number of stores remained the same in 2002 and 2001. Comparable store revenues increased 1.3% (revenues generated by stores in operation during the same period). Comparable merchandise sales increased 2.4%, while comparable store service revenue decreased 3.2%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 29.8% in 2002 from 28.7% in 2001. This increase, as a percentage of merchandise sales, was due primarily to higher merchandise margins coupled with a decreases in warehousing costs and store occupancy costs, as a percentage of merchandise sales. The higher merchandise margins, as a percentage of merchandise sales, were due to lower acquisition costs and improved inventory controls, as a percentage of merchandise sales. The lower warehousing costs, as a percentage of merchandise sales, was due to continued improvements in efficiencies related to the supply chain initiative implemented in late fiscal 2000. The decrease in store occupancy costs was a result of lower utilities expenses especially in California, which experienced an energy shortage in 2001 and lower rent expense due to decreases on variable rate leases. Gross profit from service revenue decreased, as a percentage of service revenue, to 25.6% in 2002 from 26.5% in 2001. This decrease, as a percentage of service revenue, was due primarily to an increase in service payroll, as a percentage of service revenue. The increase in service payroll, as a percentage of service revenue, was due to lower than anticipated service revenues in 2002. Selling, general and administrative expenses remained constant, as a percentage of total revenues, due to $1,184,000 or 43% lower media expense offset by higher general office costs in 2002 compared to 2001. The decrease in media was due to timing of the Company's shift in advertising from a national strategy to a local strategy, which included more radio and newspaper circulars and less national television causing lower production expense in 2002 compared to 2001. The increase in general office costs was due to an increase in payroll related to performance based incentive programs. Interest expense decreased $1,731,000 or 12.8% due primarily to lower debt levels coupled with lower average interest rates on the Company's borrowings. Net earnings increased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales, as a percentage of merchandise sales and lower interest expense, as a percentage of total revenues offset, in part, by a decrease in gross profit from service revenue, as a percentage of service revenue. NEW ACCOUNTING STANDARDS ------------------------ In May 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds FASB Statements No. 4 and No. 64, which pertained to issues related to the extinguishment of debt. SFAS No. 145 also rescinds FASB Statement No. 44, which established accounting requirements for motor carriers, and amends FASB Statement No. 13, "Accounting for Leases," to enable certain capital lease modifications to be accounted for by lessees as sale-leaseback transactions. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. 20 FORWARD-LOOKING STATEMENTS -------------------------- Certain statements made herein, including those discussing management's expectations for future periods, are forward-looking and involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond the control of the Company, including the strength of the national and regional economies and retail and commercial consumers' ability to spend, the health of the various sectors of the market that the Company serves, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, location and number of competitors' stores and product and labor costs. Further factors that might cause such a difference include, but are not limited to, the factors described in the Company's filings with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreements and Secured Credit Facility; changes in the lenders' prime rate or London Interbank Offered Rate (LIBOR) could affect the rates at which the Company could borrow funds thereunder. At May 4, 2002 the Company had $108,972,000 of outstanding borrowings under these credit facilities. 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 2, 2002. 21 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings During the first quarter of fiscal 2002, 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 instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division. 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 an FTC 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 intends to vigorously defend this action. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement Re: Computation of Earnings Per Share (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the quarter for which this report is filed. 22 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 18, 2002 By: /s/ George Babich, Jr. ----------------------- -------------------------- George Babich, Jr. President & Chief Financial Officer 23 INDEX TO EXHIBITS ----------------- (11) Computations of Earnings Per Share 24