10-Q 1 r2q02.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 August 3, 2002 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ----------- ---------- 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 August 31, 2002 there were 51,534,944 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 - August 3, 2002 and February 2, 2002 3 Consolidated Statements of Earnings - Thirteen and Twenty-six weeks ended August 3, 2002 and August 4, 2001 4 Consolidated Statements of Cash Flows - Twenty-six weeks ended August 3, 2002 and August 4, 2001 5 Notes to Condensed Consolidated Financial Statements 6-21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22-32 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 34 Item 2. Changes in Securities and Use of Proceeds 34 Item 3. Defaults Upon Senior Securities 34 Item 4. Submission of Matters to a Vote of Security Holders 34 Item 5. Other Information 35 Item 6. Exhibits and Reports on Form 8-K 35 SIGNATURE PAGE 36 CERTIFICATIONS 37 INDEX TO EXHIBITS 38 2 PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited) THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands, except per share amounts)
Aug. 3, 2002 Feb. 2, 2002* ------------ ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents................................... $ 86,865 $ 15,981 Accounts receivable, net.................................... 20,125 18,052 Merchandise inventories..................................... 522,355 519,473 Prepaid expenses............................................ 27,581 42,170 Deferred income taxes....................................... 14,917 15,820 Other....................................................... 41,571 52,308 Assets held for disposal.................................... 5,972 16,007 ------------ ------------ Total Current Assets..................................... 719,386 679,811 Property and Equipment-at cost: Land........................................................ 278,236 277,726 Buildings and improvements.................................. 927,350 922,065 Furniture, fixtures and equipment........................... 590,068 583,918 Construction in progress.................................... 12,820 10,741 ----------- ------------ 1,808,474 1,794,450 Less accumulated depreciation and amortization.............. 715,027 676,964 ------------ ------------ Total Property and Equipment............................. 1,093,447 1,117,486 Other......................................................... 40,526 15,355 ------------ ------------ Total Assets................................................... $1,853,359 $1,812,652 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................ $ 219,892 $ 216,085 Accrued expenses............................................ 240,490 241,273 Current maturities of long-term debt and obligations under capital leases....................................... 148,400 124,615 ------------ ------------ Total Current Liabilities................................. 608,782 581,973 Long-term debt and obligations under capital leases, less current maturities...................................... 385,318 544,418 Convertible long-term debt, less current maturities........... 150,000 - Deferred income taxes......................................... 62,747 64,027 Deferred gain on sale leaseback............................... 4,399 4,444 Commitments and Contingencies Stockholders' Equity: Common Stock, par value $1 per share: Authorized 500,000,000 shares; Issued 63,910,577 shares.... 63,911 63,911 Additional paid-in capital.................................. 177,244 177,244 Retained earnings........................................... 624,894 601,944 ------------ ------------ 866,049 843,099 Less cost of shares in treasury - 10,199,363 shares and 10,284,446 shares..................................... 164,672 166,045 Less cost of shares in benefits trust - 2,195,270 shares...... 59,264 59,264 ------------ ------------ Total Stockholders' Equity............................... 642,113 617,790 ------------ ------------ Total Liabilities and Stockholders' Equity..................... $1,853,359 $1,812,652 ============ ============ See notes to condensed consolidated financial statements. *Taken from the audited financial statements at Feb. 2, 2002.
3 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollar amounts in thousands, except per share amounts) UNAUDITED
Thirteen weeks ended Twenty-six weeks ended --------------------------------- --------------------------------- Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001 -------------- -------------- -------------- -------------- Merchandise Sales.................................... $ 477,847 $ 463,403 $ 931,618 $ 906,397 Service Revenue...................................... 107,938 109,671 213,140 218,254 -------------- -------------- -------------- -------------- Total Revenues....................................... 585,785 573,074 1,144,758 1,124,651 Costs of Merchandise Sales........................... 331,989 326,742 650,752 642,791 Costs of Service Revenue............................. 82,220 82,028 160,495 161,825 -------------- -------------- -------------- -------------- Total Costs of Revenues.............................. 414,209 408,770 811,247 804,616 Gross Profit from Merchandise Sales.................. 145,858 136,661 280,866 263,606 Gross Profit from Service Revenue.................... 25,718 27,643 52,645 56,429 -------------- -------------- -------------- -------------- Total Gross Profit................................... 171,576 164,304 333,511 320,035 Selling, General and Administrative Expenses......... 133,336 132,140 263,118 260,638 -------------- -------------- -------------- -------------- Operating Profit..................................... 38,240 32,164 70,393 59,397 Non-operating Income................................. 997 875 1,820 1,498 Interest Expense..................................... 12,420 13,694 24,201 27,206 -------------- -------------- -------------- -------------- Earnings Before Income Taxes......................... 26,817 19,345 48,012 33,689 Income Taxes......................................... 10,134 7,060 17,764 12,296 -------------- -------------- -------------- -------------- Net Earnings Before Extraordinary Item............... 16,683 12,285 30,248 21,393 Extraordinary Item, Net of Tax....................... (129) 234 (129) 234 -------------- -------------- -------------- -------------- Net Earnings......................................... 16,554 12,519 30,119 21,627 Retained Earnings, Beginning of Period............... 611,871 586,400 601,944 581,668 Cash Dividends....................................... 3,475 3,466 6,948 6,926 Effect of Stock Options.............................. (16) 48 149 48 Dividend Reinvestment Plan........................... 72 83 72 999 -------------- -------------- -------------- -------------- Retained Earnings, End of Period..................... $ 624,894 $ 595,322 $ 624,894 $ 595,322 ============== ============== ============== ============== Basic Earnings per Share: Before Extraordinary Item.......................... $ .32 $ .24 $ .59 $ .42 Extraordinary Item, Net of Tax..................... - - - - ------------- ------------- ------------- ------------- Basic Earnings per Share............................. $ .32 $ .24 $ .59 $ .42 ============= ============= ============= ============= Diluted Earnings per Share: Before Extraordinary Item.......................... $ .30 $ .24 $ .56 $ .42 Extraordinary Item, Net of Tax..................... - - - - ------------- ------------- ------------- ------------- Diluted Earnings per Share........................... $ .30 $ .24 $ .56 $ .42 ============= ============= ============= ============= Cash Dividends per Share............................. $ .0675 $ .0675 $ .1350 $ .1350 ============= ============= ============= ============= See notes to condensed consolidated financial statements.
4 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollar amounts in thousands) UNAUDITED
Twenty-six weeks ended ---------------------------------- Aug. 3, 2002 Aug. 4, 2001 -------------- -------------- Cash Flows from Operating Activities: Net earnings.................................................... $ 30,119 $ 21,627 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Extraordinary item, net of tax............................... 129 (234) Depreciation and amortization................................ 40,535 43,271 Deferred income taxes........................................ (377) - Accretion of bond discount................................... - 2,709 Loss on assets held for disposal............................. 1,360 309 Loss (Gain) from sale of assets.............................. 134 (1,940) Changes in operating assets and liabilities: Decrease in accounts receivable, prepaid expenses and other................................................. 22,314 10,592 (Increase) decrease in merchandise inventories................ (2,882) 16,987 Increase in accounts payable................................. 3,807 38,445 (Decrease) Increase in accrued expenses....................... (708) 8,977 ------------- ------------- Net Cash Provided by Operating Activities....................... 94,431 140,743 Cash Flows from Investing Activities: Capital expenditures............................................ (13,252) (8,455) Proceeds from sales of assets................................... 5,252 24,592 ------------- ------------- Net Cash (Used in) Provided by Investing Activities............. (8,000) 16,137 Cash Flows from Financing Activities: Net payments under line of credit agreements.................... (70,539) (87,393) Repayment of life insurance policy loan......................... (20,686) - Capital lease obligations....................................... 993 - Reduction of long-term debt..................................... (65,769) (2,721) Reduction of convertible debt................................... - (52,774) Net proceeds from issuance of notes............................. 146,250 87,522 Dividends paid.................................................. (6,948) (6,926) Proceeds from exercise of stock options......................... 475 33 Proceeds from dividend reinvestment plan........................ 677 695 ------------- ------------- Net Cash Used in Financing Activities........................... (15,547) (61,564) ------------- ------------- Net Increase in Cash................................................. 70,884 95,316 Cash and Cash Equivalents at Beginning of Period..................... 15,981 7,995 ------------- ------------- Cash and Cash Equivalents at End of Period........................... $ 86,865 $ 103,311 ============= ============= See notes to condensed consolidated financial statements.
5 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Condensed Consolidated Financial Statements The consolidated balance sheet as of August 3, 2002, the consolidated statements of earnings for the thirteen and twenty-six week periods ended August 3, 2002 and August 4, 2001 and the consolidated statements of cash flows for the twenty-six week periods ended August 3, 2002 and August 4, 2001 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at August 3, 2002 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's February 2, 2002 annual report to shareholders. The results of operations for the thirteen and twenty-six week periods ended August 3, 2002 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation. NOTE 2. Merchandise Inventories Merchandise inventories are valued at the lower of cost (last-in, first-out) or market. If the first-in, first-out method of valuing inventories had been used by the Company, the inventory valuation difference would have been immaterial on both August 3, 2002 and February 2, 2002. NOTE 3. Profit Enhancement Plan In the third quarter 2000, the Company performed a comprehensive review of its field, distribution, and Store Support Center infrastructure as well as the performance of each store. As a result of this review, the Company implemented a number of changes that have improved its performance. These changes included the closure of 38 under-performing stores and two distribution centers, a reduction in store operating hours and the Store Support Center infrastructure. PLAN UPDATE The Company is progressing towards the disposal of the 38 stores, 11 which were owned and 27 which were leased by the Company, two distribution centers and two development parcels owned by the Company which were closed or abandoned in connection with the Profit Enhancement Plan. As of August 3, 2002, the Company had successfully disposed of 19 of the closed stores, the two distribution centers and the two development parcels. Additionally, in the second quarter 2002, due to changes in the real estate market affecting two of its owned properties which were to be disposed of, the Company has opted to lease rather than sell such stores. As a result, the Company has reclassified two of its owned properties as assets held for use. The Company estimates the remaining closed properties will be disposed of by the end of the first quarter of fiscal 2003. 6 ASSETS HELD FOR DISPOSAL As of August 3, 2002, the assets held for disposal included the building, land and equipment of the remaining closed stores owned by the Company which have a carrying value of $5,972,000. The Company has sold five of the 11 owned properties originally held for sale, and the two development parcels. In the second quarter 2002, due to changes in the real estate market affecting two of its owned properties, the Company has opted to lease rather than sell such stores. As a result, the Company has reclassified two of its owned properties to assets held for use and began to depreciate them at the estimated market value, which is lower than cost adjusted for depreciation. The Company is actively marketing the remaining four owned properties and will make adjustments to the property values in accordance with the change in market values. As a result of the review of the market, the Company has extended the original estimated time needed for selling the owned properties. It is expected that two of these properties with a carrying value of $2,945,000 will be disposed of by the end of the third quarter 2002, with the remaining two properties with a carrying value of $2,544,000 expected to be disposed of by the end of the first quarter 2003. The Company will continue to monitor the status for disposing of its owned properties and make any necessary adjustments. An adjustment was reflected in the accrual of on-going expenses for the increased time required to maintain these properties. In the second quarter of 2002, the Company sold two properties for $3,281,000, net of commission. The sale of the properties resulted in a loss of $48,000 due to higher than anticipated costs related to the sale. The charges related to the assets held for disposal were recorded in costs of merchandise sales on the consolidated statement of earnings. In the first quarter of 2002, the Company sold two properties for $2,228,000, net of commission. One of these properties, which was sold for a loss of $641,000, was completed in a real estate transaction in which the Company was released from the lease obligations associated with two other properties, one of which was related to the Profit Enhancement Plan reserve. The other property sold resulted in a gain of $31,000. Additionally, the Company adjusted the carrying value of certain remaining assets held for disposal, which resulted in a net decrease of $702,000. The charges related to the assets held for disposal were recorded in costs of merchandise sales on the consolidated statement of earnings. In the second quarter of 2001, the Company sold one property for $1,986,000, net of commission. The sale resulted in a gain of $91,000 which was recorded in costs of merchandise sales. In the first quarter of 2001, the carrying values for the buildings and land was reduced from their original estimated value of $21,680,000 by $400,000 due to a downward revision in the estimated value for one site. The charge related to this reduction was recorded in costs of merchandise sales on the consolidated statement of earnings. 7 LEASE RESERVE As of August 3, 2002, the Company was able to sublease eight and exit the lease of an additional six leased properties. The Company expects 7 of remaining 13 leased properties to be subleased or otherwise disposed of by the end of fiscal 2002 with the remaining 6 properties to be sublet by the end of the first quarter of 2003. In the second quarter of 2002, the Company increased the lease reserve by $192,000. These charges were a result of a $689,000 increase due primarily to an increase in the estimated time it will take to sublease certain properties offset, in part, by a $497,000 decrease due primarily to an increase in the sublease rates realized. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. In the first quarter of 2002, the Company decreased the lease reserve by $333,000. These changes were a result of a $597,000 decrease due primarily to an increase in the estimated sublease rates. This decrease was offset, in part, by a $264,000 increase due primarily to an increase in the estimated time it will take the Company to sublease certain properties. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. The lease reserve increased during the second quarter of 2001 by $1,812,000. This increase was attributed to a $2,083,000 increase due primarily to a decrease in the estimated months of sublease income coupled with higher estimated lease costs as the Company attempts to exit leases for certain stores early. This increase was offset, in part, by a decrease in lease expense of $270,000 due primarily to an increase in certain estimated sublease rates. The effect of these adjustments were recorded through costs of merchandise sales and costs of service revenue. The lease reserve decreased during the first quarter of 2001 by $173,000. This reduction was primarily a result of a reduction in lease expense of $498,000 due to an increase in estimated sublease income resulting from an increase in certain estimated rates. This reduction was offset, in part, by a $325,000 decrease in expected sublease income due to an increase in the estimated time it may take to sublease certain properties. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. 8 ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit activities that will be continued. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed of. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed of and such activities are estimated to be completed by the end of the first quarter of fiscal 2003. In the second quarter of 2002, the Company increased the on-going expense reserve $272,000 due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. In the first quarter of 2002, the Company increased the on-going expense reserve $160,000 due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. In the second quarter of 2001, the on-going reserve was decreased by approximately $579,000 due primarily to lower than anticipated utility costs to maintain the closed stores and lower personal property taxes. This adjustment was reversed through costs of merchandise sales and costs of service revenue. This decrease was offset, in part, by an approximate $375,000 increase in the reserve primarily due to an increase in the estimated time it is expected to take to sublease or sell certain remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses. In the first quarter of 2001, the on-going reserve was increased by approximately $380,000 which was due primarily to an increase in estimated time to sublease or sell certain properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. SEVERANCE RESERVE In the second quarter of 2001, the Company reversed the remaining severance reserve of $17,000 due to a lower than estimated final payment. In the first quarter of 2001, the Company reversed the severance reserve by $52,000 due primarily to certain employees originally expected to be receiving severance failing to qualify to receive payments. There were no adjustments made to this reserve in fiscal 2002. 9 NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. There were no expenses of this nature incurred in fiscal 2002. The expenses of this nature incurred in the second quarter of fiscal 2001 totaling $166,000 are due primarily to the removal of the remaining equipment from the first closed distribution center. These expenses were primarily recorded in costs of merchandise sales as incurred. The expenses of this nature incurred in the first quarter of fiscal 2001 totaling $512,000 were due primarily to the removal of inventory and equipment from closed distribution centers. These expenses were primarily recorded in costs of merchandise sales as incurred. 10 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Below is a table summarizing expenses related to the Profit Enhancement Plan for the thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001. The details and reasons for the changes to the charge are as described above in the respective reserve categories.
(dollar amounts in thousands) Thirteen Thirteen Twenty-Six Twenty-Six Income Statement Weeks Ended Weeks Ended Weeks Ended Weeks Ended Classification Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001 ------------------------------------------------------------------------------- Costs of Merchandise Sales $ 390 $ 1,060 $ 1,570 $ 1,997 Costs of Service Revenue 119 609 68 697 Selling, General and Administrative 3 (3) 13 38 ------------------------------------------------------------------------------- Total Expenses $ 512 $ 1,666 $ 1,651 $ 2,732 -------------------------------------------------------------------------------
At the end of the third quarter 2000, the Company set up a reserve liability account which is included in accrued liabilities on the consolidated balance sheet. This liability account tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve from the fiscal year ended February 2, 2002 through August 3, 2002. All additions and adjustments were charged or credited through the appropriate line items on the consolidated statement of earnings.
(Amounts in Lease Fixed On-going thousands) Expenses Assets Severance Expenses Total ----------------------------------------------------------------------------------- Reserve balance at February 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470 Addition 264 1,312 - 160 1,736 Utilization (742) (1,312) - (140) (2,194) Adjustments (597) - - - (597) ----------------------------------------------------------------------------------- Reserve Balance at May 4, 2002 $ 2,075 $ - $ - $ 1,340 $ 3,415 ----------------------------------------------------------------------------------- Addition 689 48 - 272 1,009 Utilization (614) (48) - (514) (1,176) Adjustments (497) - - - (497) ----------------------------------------------------------------------------------- Reserve Balance at August 3, 2002 $ 1,653 $ - $ - $ 1,098 $ 2,751 -----------------------------------------------------------------------------------
11 NOTE 4. Net Earnings Per Share
Thirteen weeks ended Twenty-six weeks ended (in thousands, except per share data) ---------------------------------- ----------------------------------- Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001 --------------- -------------- --------------- -------------- (a) Net earnings before extraordinary item........... $ 16,683 $ 12,285 $ 30,248 $ 21,393 Adjustment for interest on convertible senior notes, net of income tax effect................ 826 - 826 - ----------------------------------------------------------------------------------------------------------------------------------- (b) Adjusted net earnings before extraordinary item.. $ 17,509 $ 12,285 $ 31,074 $ 21,393 ----------------------------------------------------------------------------------------------------------------------------------- (c) Average number of common shares outstanding during the period.............................. 51,489 51,344 51,467 51,305 Common shares assumed issued upon conversion of convertible senior notes....................... 5,520 - 2,760 - Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price........ 1,059 689 1,111 344 ----------------------------------------------------------------------------------------------------------------------------------- (d) Average number of common shares assumed outstanding during the period.................. 58,068 52,033 55,338 51,649 ----------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: Before extraordinary item (a/c).................. $ .32 $ .24 $ .59 $ .42 Extraordinary item, net of tax................... - - - - ----------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ .32 $ .24 $ .59 $ .42 ----------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Before extraordinary item (b/d).................. $ .30 $ .24 $ .56 $ .42 Extraordinary item, net of tax................... - - - - ----------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ .30 $ .24 $ .56 $ .42 -----------------------------------------------------------------------------------------------------------------------------------
Adjustments for convertible securities were antidilutive during the thirteen and twenty-six week periods ended August 4, 2001 and therefore excluded from the calculation. Options to purchase shares of common stock which were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the shares of common stock during the thirteen and twenty-six week periods ended August 3, 2002 and August 4, 2001 were as follows:
Thirteen weeks ended Twenty-six weeks ended (in thousands) ---------------------------------- ---------------------------------- Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001 --------------- -------------- --------------- -------------- Common shares associated with antidilutive stock options excluded from computation of diluted EPS ..... 4,250 3,952 4,225 3,961 --------------- -------------- --------------- --------------
12 Note 5. Debt and Financing Arrangements On May 21, 2002, the Company issued $150,000,000 aggregate principle amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes will be paid by the Company on June 1 and December 1 of each year, beginning December 1, 2002. On July 16, 2002, the Company retired $49,915,000 aggregate principle amount of Medium-Term Notes which were redeemed at the option of the holders. The after-tax extraordinary loss was $129,000. In the second quarter of 2002, the Company reclassified the $75,000,000, 6.625% notes with a stated maturity date of May 15, 2003 to current liabilities on the consolidated balance sheet. Note 6. Supplemental Guarantor Information - Convertible Senior Notes On May 21, 2002, the Company issued $150,000,000 aggregate principle amount of 4.25% Convertible Senior Notes. The notes are jointly and severally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. 13 The following are consolidating balance sheets of the Company as of August 3, 2002 and February 2, 2002 and the related consolidating statements of earnings for the thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001 and the condensed consolidating statements of cash flows for the twenty-six weeks ended August 3, 2002 and August 4, 2001:
CONSOLIDATING BALANCE SHEET (Unaudited) Non- Subsidiary guarantor August 3, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) ASSETS Current Assets: Cash and cash equivalents....................... $ 61,070 $ 11,222 $ 14,573 $ - $ 86,865 Accounts receivable, net........................ 8,308 11,817 - - 20,125 Merchandise inventories......................... 186,593 335,762 - - 522,355 Prepaid expenses................................ 21,407 6,667 8,139 (8,632) 27,581 Deferred income taxes........................... 9,025 350 5,542 - 14,917 Other........................................... 2 - 41,569 - 41,571 Assets held for disposal........................ 65 5,907 - - 5,972 ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets......................... 286,470 371,725 69,823 (8,632) 719,386 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land............................................. 92,540 185,696 - - 278,236 Buildings and improvements....................... 311,278 616,072 - - 927,350 Furniture, fixtures and equipment................ 277,694 312,374 - - 590,068 Construction in progress......................... 6,565 6,255 - - 12,820 --------- ---------- -------- -------- --------- 688,077 1,120,397 - - 1,808,474 Less accumulated depreciation and amortization... 310,549 404,478 - - 715,027 --------- ---------- -------- -------- ---------- Total Property and Equipment.................. 377,528 715,919 - - 1,093,447 Investment in subsidiaries........................ 1,431,582 - 1,088,418 (2,520,000) - Intercompany receivable........................... - 347,303 309,031 (656,334) - Other............................................. 35,640 4,886 - - 40,526 ----------------------------------------------------------------------------------------------------------------------------- Total Assets................................. $ 2,131,220 $ 1,439,833 $ 1,467,272 $ (3,184,966) $ 1,853,359 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................ $ 219,883 $ 9 $ - $ - $ 219,892 Accrued expenses................................ 61,027 79,342 108,753 (8,632) 240,490 Current maturities of long-term debt and obligations under capital leases............... 148,400 - - - 148,400 ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities.................... 429,310 79,351 108,753 (8,632) 608,782 ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities.................. 385,115 203 - - 385,318 Convertible long-term debt........................ 150,000 - - - 150,000 Intercompany liabilities.......................... 491,139 165,195 - (656,334) - Deferred income taxes............................. 32,244 30,503 - - 62,747 Deferred gain on sale leaseback................... 1,299 3,100 - - 4,399 Stockholders' Equity: Common stock.................................... 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital...................... 177,244 240,359 200,398 (440,757) 177,244 Retained earnings............................... 624,894 919,621 1,158,020 (2,077,641) 624,894 Less: Cost of shares in treasury...................... 164,672 - - - 164,672 Cost of shares in benefits trust................ 59,264 - - - 59,264 ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity................... 642,113 1,161,481 1,358,519 (2,520,000) 642,113 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity... $ 2,131,220 $ 1,439,833 $ 1,467,272 $ (3,184,966) $ 1,853,359 -----------------------------------------------------------------------------------------------------------------------------
14
CONSOLIDATING BALANCE SHEET Non- Subsidiary guarantor February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) ASSETS Current Assets: Cash and cash equivalents....................... $ 4,796 $ 10,874 $ 311 $ - $ 15,981 Accounts receivable, net........................ 17,124 928 - - 18,052 Merchandise inventories......................... 176,696 342,777 - - 519,473 Prepaid expenses................................ 42,384 (15,815) 17,851 (2,250) 42,170 Deferred income taxes........................... 8,395 483 6,942 - 15,820 Other........................................... 3 - 67,305 (15,000) 52,308 Assets held for disposal........................ 2,755 13,252 - - 16,007 ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets......................... 252,153 352,499 92,409 (17,250) 679,811 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land............................................. 92,661 185,065 - - 277,726 Buildings and improvements....................... 308,444 613,621 - - 922,065 Furniture, fixtures and equipment................ 273,028 310,890 - - 583,918 Construction in progress......................... 5,380 5,361 - - 10,741 ----------- ---------- -------- -------- ----------- 679,513 1,114,937 - - 1,794,450 Less accumulated depreciation and amortization... 293,704 383,260 - - 676,964 ----------- ---------- -------- -------- ----------- Total Property and Equipment.................. 385,809 731,677 - - 1,117,486 Investment in subsidiaries........................ 1,388,724 - 1,050,494 (2,439,218) - Intercompany receivable........................... - 575,377 301,321 (876,698) - Other............................................. 13,355 2,000 - - 15,355 ----------------------------------------------------------------------------------------------------------------------------- Total Assets................................. $ 2,040,041 $ 1,661,553 $ 1,444,224 $ (3,333,166) $ 1,812,652 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................ $ 216,076 $ 9 $ - $ - $ 216,085 Accrued expenses................................ 62,402 65,636 130,485 (17,250) 241,273 Current maturities of long-term debt............ 124,615 - - - 124,615 ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities.................... 403,093 65,645 130,485 (17,250) 581,973 ----------------------------------------------------------------------------------------------------------------------------- Long-term debt, less current maturities........... 497,603 46,815 - - 544,418 Intercompany liabilities.......................... 488,067 388,631 - (876,698) - Deferred income taxes............................. 32,172 31,855 - - 64,027 Deferred gain on sale leaseback................... 1,316 3,128 - - 4,444 Stockholders' Equity: Common stock.................................... 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital...................... 177,244 240,359 200,398 (440,757) 177,244 Retained earnings............................... 601,944 883,619 1,113,240 (1,996,859) 601,944 Less: Cost of shares in treasury...................... 166,045 - - - 166,045 Cost of shares in benefits trust................ 59,264 - - - 59,264 ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity................... 617,790 1,125,479 1,313,739 (2,439,218) $ 617,790 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity... $ 2,040,041 $ 1,661,553 $ 1,444,224 $ (3,333,166) $ 1,812,652 -----------------------------------------------------------------------------------------------------------------------------
15
CONSOLIDATING STATEMENT OF EARNINGS (Unaudited) Non- Subsidiary guarantor Thirteen weeks ended Aug. 3, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ---------------------------------------------------------------------------------------------------------------------------- (in thousands) Merchandise Sales............................. $ 164,966 $ 312,881 $ - $ - $ 477,847 Service Revenue............................... 37,506 70,432 - - 107,938 Other Revenue................................. - - 6,409 (6,409) - ------------ ----------- ---------- --------- ----------- Total Revenues................................ 202,472 383,313 6,409 (6,409) 585,785 Costs of Merchandise Sales.................... 115,213 216,776 - - 331,989 Costs of Service Revenue...................... 27,892 54,328 - - 82,220 Costs of Other Revenue........................ - - 5,898 (5,898) - ------------ ----------- ---------- --------- ----------- Total Costs of Revenues....................... 143,105 271,104 5,898 (5,898) 414,209 Gross Profit from Merchandise Sales........... 49,753 96,105 - - 145,858 Gross Profit from Service Revenue............. 9,614 16,104 - - 25,718 Gross Profit from Other Revenue............... - - 511 (511) - ------------ ----------- ---------- --------- ----------- Total Gross Profit............................ 59,367 112,209 511 (511) 171,576 Selling, General and Administrative Expenses.. 46,661 87,114 72 (511) 133,336 ------------ ----------- ---------- --------- ----------- Operating Profit.............................. 12,706 25,095 439 - 38,240 Equity in Earnings of Subsidiaries............ 22,500 - 19,454 (41,954) - Non-operating (Expense) Income................ (4,532) 12,755 5,248 (12,474) 997 Interest Expense.............................. 17,576 7,318 - (12,474) 12,420 ------------ ----------- ---------- --------- ----------- Earnings Before Income Taxes.................. 13,098 30,532 25,141 (41,954) 26,817 Income Tax (Benefit) Expense.................. (3,585) 11,563 2,156 - 10,134 ------------ ----------- ---------- --------- ----------- Net Earnings Before Extraordinary Item........ 16,683 18,969 22,985 (41,954) 16,683 Extraordinary Item, Net of Tax................ (129) - - - (129) ------------ ----------- ---------- --------- ----------- Net Earnings.................................. $ 16,554 $ 18,969 $ 22,985 $(41,954) $ 16,554 ============ =========== ========== ========= ===========
16
CONSOLIDATING STATEMENT OF EARNINGS Non- Subsidiary guarantor Thirteen weeks ended Aug. 4, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Merchandise Sales............................. $ 158,256 $ 305,147 $ - $ - $ 463,403 Service Revenue............................... 38,593 71,078 - - 109,671 Other Revenue................................. - - 5,854 (5,854) - ------------ ---------- ----------- ---------- ----------- Total Revenues................................ 196,849 376,225 5,854 (5,854) 573,074 Costs of Merchandise Sales.................... 114,153 212,589 - - 326,742 Costs of Service Revenue...................... 28,378 53,650 - - 82,028 Costs of Other Revenue........................ - - 5,886 (5,886) - ------------ ---------- ----------- ---------- ----------- Total Costs of Revenues....................... 142,531 266,239 5,886 (5,886) 408,770 Gross Profit from Merchandise Sales........... 44,103 92,558 - - 136,661 Gross Profit from Service Revenue............. 10,215 17,428 - - 27,643 Gross Loss from Other Revenue................. - - (32) 32 - ------------ ---------- ----------- ---------- ----------- Total Gross Profit (Loss)..................... 54,318 109,986 (32) 32 164,304 Selling, General and Administrative Expenses.. 57,300 74,737 71 32 132,140 ------------ ---------- ----------- ---------- ----------- Operating (Loss) Profit....................... (2,982) 35,249 (103) - 32,164 Equity in Earnings of Subsidiaries............ 26,268 - 20,880 (47,148) - Non-operating (Expense) Income................ (4,539) 8,307 5,825 (8,718) 875 Interest Expense.............................. 14,561 7,851 - (8,718) 13,694 ------------ ---------- ----------- ---------- ----------- Earnings Before Income Taxes.................. 4,186 35,705 26,602 (47,148) 19,345 Income Tax (Benefit) Expense.................. (8,099) 13,070 2,089 - 7,060 ------------ ---------- ----------- ---------- ----------- Net Earnings Before Extraordinary Item........ 12,285 22,635 24,513 (47,148) 12,285 Extraordinary Item, Net of Tax................ 234 - - - 234 ------------ ---------- ----------- ---------- ----------- Net Earnings.................................. $ 12,519 $ 22,635 $ 24,513 $ (47,148) $ 12,519 ============ ========== =========== ========== ===========
17
CONSOLIDATING STATEMENT OF EARNINGS (Unaudited) Non- Subsidiary guarantor Twenty-six weeks ended Aug. 3, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Merchandise Sales............................. $ 323,462 $ 608,156 $ - $ - $ 931,618 Service Revenue............................... 74,871 138,269 - - 213,140 Other Revenue................................. - - 12,668 (12,668) - ------------ ---------- ---------- --------- ----------- Total Revenues................................ 398,333 746,425 12,668 (12,668) 1,144,758 Costs of Merchandise Sales.................... 226,724 424,028 - - 650,752 Costs of Service Revenue...................... 55,228 105,267 - - 160,495 Costs of Other Revenue........................ - - 12,187 (12,187) - ------------ ---------- ---------- --------- ----------- Total Costs of Revenues....................... 281,952 529,295 12,187 (12,187) 811,247 Gross Profit from Merchandise Sales........... 96,738 184,128 - - 280,866 Gross Profit from Service Revenue............. 19,643 33,002 - - 52,645 Gross Profit from Other Revenue............... - - 481 (481) - ------------ ---------- ---------- --------- ----------- Total Gross Profit............................ 116,381 217,130 481 (481) 333,511 Selling, General and Administrative Expenses.. 92,657 170,791 151 (481) 263,118 ------------ ---------- ---------- --------- ----------- Operating Profit.............................. 23,724 46,339 330 - 70,393 Equity in Earnings of Subsidiaries............ 42,859 - 37,923 (80,782) - Non-operating (Expense) Income................ (9,053) 24,101 10,554 (23,782) 1,820 Interest Expense.............................. 34,689 13,294 - (23,782) 24,201 ------------ ---------- ---------- --------- ----------- Earnings Before Income Taxes.................. 22,841 57,146 48,807 (80,782) 48,012 Income Tax (Benefit) Expense.................. (7,407) 21,144 4,027 - 17,764 ------------ ---------- ---------- --------- ----------- Net Earnings Before Extraordinary Item........ 30,248 36,002 44,780 (80,782) 30,248 Extraordinary Item, Net of Tax................ (129) - - - (129) ------------ ---------- ---------- --------- ----------- Net Earnings.................................. $ 30,119 $ 36,002 $ 44,780 $(80,782) $ 30,119 ============ ========== ========== ========= ===========
18
CONSOLIDATING STATEMENT OF EARNINGS Non- Subsidiary guarantor Twenty-six weeks ended Aug. 4, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Merchandise Sales............................. $ 311,729 $ 594,668 $ - $ - $ 906,397 Service Revenue............................... 77,533 140,721 - - 218,254 Other Revenue................................. - - 11,442 (11,442) - ------------ ---------- ---------- --------- ---------- Total Revenues................................ 389,262 735,389 11,442 (11,442) 1,124,651 Costs of Merchandise Sales.................... 224,627 418,164 - - 642,791 Costs of Service Revenue...................... 56,698 105,127 - - 161,825 Costs of Other Revenue........................ - - 11,503 (11,503) - ------------ ---------- ---------- ---------- ---------- Total Costs of Revenues....................... 281,325 523,291 11,503 (11,503) 804,616 Gross Profit from Merchandise Sales........... 87,102 176,504 - - 263,606 Gross Profit from Service Revenue............. 20,835 35,594 - - 56,429 Gross Loss from Other Revenue................. - - (61) 61 - ------------ ---------- ---------- ---------- ---------- Total Gross Profit (Loss)..................... 107,937 212,098 (61) 61 320,035 Selling, General and Administrative Expenses.. 119,023 141,407 147 61 260,638 ------------ ---------- ---------- ---------- ---------- Operating (Loss) Profit....................... (11,086) 70,691 (208) - 59,397 Equity in Earnings of Subsidiaries............ 55,323 44,971 (100,294) - Non-operating (Expense) Income................ (9,102) 21,971 12,016 (23,387) 1,498 Interest Expense.............................. 33,307 17,286 - (23,387) 27,206 ------------ ---------- ---------- ---------- ---------- Earnings Before Income Taxes.................. 1,828 75,376 56,779 (100,294) 33,689 Income Tax (Benefit) Expense.................. (19,565) 27,551 4,310 - 12,296 ------------ ---------- ---------- ---------- ---------- Net Earnings Before Extraordinary Item........ 21,393 47,825 52,469 (100,294) 21,393 Extraordinary Item, Net of Tax................ 234 - - - 234 ------------ ---------- ---------- ---------- ---------- Net Earnings.................................. $ 21,627 $ 47,825 $ 52,469 $(100,294) $ 21,627 ============ ========== ========== ========== ==========
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited) Non- Subsidiary guarantor Twenty-six weeks ended Aug. 3, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Cash Flows from Operating Activities: Net Earnings............................... $ 30,119 $ 36,002 $ 44,780 $ (80,782) $ 30,119 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Non-cash operating activities........... (25,625) 23,148 (36,524) 80,782 41,781 Change in operating assets and liabilities............................ 21,573 (12,757) 13,715 - 22,531 ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 26,067 46,393 21,971 - 94,431 ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Net Cash Used in Investing Activities................. (6,709) (1,291) - - (8,000) Cash Flows from Financing Activities: Net Cash Provided by (Used in) Financing Activities................. 36,916 (44,754) (7,709) - (15,547) ----------------------------------------------------------------------------------------------------------------------------- Net Increase in Cash............................ 56,274 348 14,262 - 70,884 Cash and Cash Equivalents at Beginning of Period 4,796 10,874 311 - 15,981 ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period...... $ 61,070 $ 11,222 $ 14,573 $ - $ 86,865 -----------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Non- Subsidiary guarantor Twenty-six weeks ended Aug. 4, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Cash Flows from Operating Activities: Net Earnings............................... $ 21,627 $ 47,825 $ 52,469 $(100,294) $ 21,627 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Non-cash operating activities........... (34,339) 23,131 (44,971) 100,294 44,115 Change in operating assets and liabilities............................ 29,766 42,156 3,079 - 75,001 ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 17,054 113,112 10,577 - 140,743 ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Net Cash Provided by Investing Activities................. 1,504 14,633 - - 16,137 Cash Flows from Financing Activities: Net Cash Provided by (Used in) Financing Activities................. 70,014 (120,856) (10,722) - (61,564) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash................. 88,572 6,889 (145) - 95,316 Cash and Cash Equivalents at Beginning of Period 482 7,038 475 - 7,995 ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period...... $ 89,054 $ 13,927 $ 330 $ - $103,311 -----------------------------------------------------------------------------------------------------------------------------
20 Note 7. New Accounting Standards In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In May 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds FASB Statements No. 4 and No. 64, which pertained to issues related to the extinguishment of debt. SFAS No. 145 also rescinds FASB Statement No. 44, which established accounting requirements for motor carriers, and amends FASB Statement No. 13, "Accounting for Leases," to enable certain capital lease modifications to be accounted for by lessees as sale-leaseback transactions. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES - August 3, 2002 ------------------------------------------------ The Company's cash requirements arise principally from the capital expenditures related to existing stores, offices and warehouses, the need to finance the acquisition, construction and equipping of new stores and to purchase inventory. During the first six months of 2002, the Company invested $13,252,000 in property and equipment. The Company's net inventory (net inventory includes the change in inventory less the change in accounts payable) decreased $925,000. Working capital increased from $97,838,000 at February 2, 2002 to $110,604,000 at August 3, 2002. At August 3, 2002, the Company had stockholders' equity of $642,113,000 and long-term debt of $535,318,000. The Company's long-term debt was 46% of its total capitalization at August 3, 2002 and 47% at February 2, 2002. As of August 3, 2002, the Company had an available line of credit totaling $173,878,000. The Company plans to open one new Supercenter during the balance of the current fiscal year. Management estimates the costs of opening the Supercenter and the expected capital expenditures relating to existing stores, warehouses and offices for the remainder of fiscal 2002, will be approximately $29,748,000. The Company anticipates that its net cash provided by operating activities and its existing line of credit will exceed its principal cash requirements for capital expenditures and net inventory in fiscal 2002. In the second quarter of 2002, the Company reclassified the $75,000,000, 6.625% notes with a stated maturity date of May 15, 2003 to current liabilities on the consolidated balance sheet. The Company anticipates being able to repurchase these notes with cash from operations and its existing line of credit. On July 16, 2002, the Company retired $49,915,000 aggregate principle amount of Medium-Term Notes which were redeemed at the option of the holders. The Company repurchased these notes with a portion of the proceeds from the sale of the 4.25% Senior Convertible Notes. The after-tax extraordinary loss was $129,000. On May 21, 2002, the Company issued $150,000,000 aggregate principle amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes will be paid by the Company on June 1 and December 1 of each year, beginning December 1, 2002. The proceeds from the sale of the notes are being used to retire debt. In the third quarter of 2001, the Company reclassified the remaining $43,005,000 aggregate principle amount of the $49,000,000 Medium-Term Notes originally issued to current liabilities on the consolidated balance sheet. These Medium- Term Notes are redeemable at the option of the holders on September 19, 2002. The Company intends to repurchase any of these notes so redeemed with the proceeds from the sale of the 4.25% Senior Convertible Notes. PROFIT ENHANCEMENT PLAN ----------------------- In the third quarter 2000, the Company performed a comprehensive review of its field, distribution, and Store Support Center infrastructure as well as the performance of each store. As a result of this review, the Company implemented a number of changes that have improved its performance. These changes included the closure of 38 under-performing stores and two distribution centers, a reduction in store operating hours and the Store Support Center infrastructure. 22 PLAN UPDATE The Company is progressing towards the disposal of the 38 stores, 11 which were owned and 27 which were leased by the Company, two distribution centers and two development parcels owned by the Company which were closed or abandoned in connection with the Profit Enhancement Plan. As of August 3, 2002, the Company had successfully disposed of 19 of the closed stores, the two distribution centers and the two development parcels. Additionally, in the second quarter 2002, due to changes in the real estate market affecting two of its owned properties which were to be disposed of, the Company has opted to lease rather than sell such stores. As a result, the Company has reclassified two of its owned properties as assets held for use. The Company estimates the remaining closed properties will be disposed of by the end of the first quarter of fiscal 2003. ASSETS HELD FOR DISPOSAL As of August 3, 2002, the assets held for disposal included the building, land and equipment of the remaining closed stores owned by the Company which have a carrying value of $5,972,000. The Company has sold five of the 11 owned properties originally held for sale, and the two development parcels. In the second quarter 2002, due to changes in the real estate market affecting two of its owned properties, the Company has opted to lease rather than sell such stores. As a result, the Company has reclassified two of its owned properties to assets held for use and began to depreciate them at the estimated market value, which is lower than cost adjusted for depreciation. The Company is actively marketing the remaining four owned properties and will make adjustments to the property values in accordance with the change in market values. As a result of the review of the market, the Company has extended the original estimated time needed for selling the owned properties. It is expected that two of these properties with a carrying value of $2,945,000 will be disposed of by the end of the third quarter 2002, with the remaining two properties with a carrying value of $2,544,000 expected to be disposed of by the end of the first quarter 2003. The Company will continue to monitor the status for disposing of its owned properties and make any necessary adjustments. An adjustment was reflected in the accrual of on-going expenses for the increased time required to maintain these properties. In the second quarter of 2002, the Company sold two properties for $3,281,000, net of commission. The sale of the properties resulted in a loss of $48,000 due to higher than anticipated costs related to the sale. The charges related to the assets held for disposal were recorded in costs of merchandise sales on the consolidated statement of earnings. In the first quarter of 2002, the Company sold two properties for $2,228,000, net of commission. One of these properties, which was sold for a loss of $641,000, was completed in a real estate transaction in which the Company was released from the lease obligations associated with two other properties, one of which was related to the Profit Enhancement Plan reserve. The other property sold resulted in a gain of $31,000. Additionally, the Company adjusted the carrying value of certain remaining assets held for disposal, which resulted in a net decrease of $702,000. The charges related to the assets held for disposal were recorded in costs of merchandise sales on the consolidated statement of earnings. In the second quarter of 2001, the Company sold one property for $1,986,000, net of commission. The sale resulted in a gain of $91,000 which was recorded in costs of merchandise sales. In the first quarter of 2001, the carrying values for the buildings and land was reduced from their original estimated value of $21,680,000 by $400,000 due to a downward revision in the estimated value for one site. The charge related to this reduction was recorded in costs of merchandise sales on the consolidated statement of earnings. 23 LEASE RESERVE As of August 3, 2002, the Company was able to sublease eight and exit the lease of an additional six leased properties. The Company expects 7 of remaining 13 leased properties to be subleased or otherwise disposed of by the end of fiscal 2002 with the remaining 6 properties to be sublet by the end of the first quarter of 2003. In the second quarter of 2002, the Company increased the lease reserve by $192,000. These charges were a result of a $689,000 increase due primarily to an increase in the estimated time it will take to sublease certain properties offset, in part, by a $497,000 decrease due primarily to an increase in the sublease rates realized. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. In the first quarter of 2002, the Company decreased the lease reserve by $333,000. These changes were a result of a $597,000 decrease due primarily to an increase in the estimated sublease rates. This decrease was offset, in part, by a $264,000 increase due primarily to an increase in the estimated time it will take the Company to sublease certain properties. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. The lease reserve increased during the second quarter of 2001 by $1,812,000. This increase was attributed to a $2,083,000 increase due primarily to a decrease in the estimated months of sublease income coupled with higher estimated lease costs as the Company attempts to exit leases for certain stores early. This increase was offset, in part, by a decrease in lease expense of $270,000 due primarily to an increase in certain estimated sublease rates. The effect of these adjustments were recorded through costs of merchandise sales and costs of service revenue. The lease reserve decreased during the first quarter of 2001 by $173,000. This reduction was primarily a result of a reduction in lease expense of $498,000 due to an increase in estimated sublease income resulting from an increase in certain estimated rates. This reduction was offset, in part, by a $325,000 decrease in expected sublease income due to an increase in the estimated time it may take to sublease certain properties. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of earnings. 24 ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit activities that will be continued. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed of. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed of and such activities are estimated to be completed by the end of the first quarter of fiscal 2003. In the second quarter of 2002, the Company increased the on-going expense reserve $272,000 due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. In the first quarter of 2002, the Company increased the on-going expense reserve $160,000 due to an increase in the estimated time it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. In the second quarter of 2001, the on-going reserve was decreased by approximately $579,000 due primarily to lower than anticipated utility costs to maintain the closed stores and lower personal property taxes. This adjustment was reversed through costs of merchandise sales and costs of service revenue. This decrease was offset, in part, by an approximate $375,000 increase in the reserve primarily due to an increase in the estimated time it is expected to take to sublease or sell certain remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses. In the first quarter of 2001, the on-going reserve was increased by approximately $380,000 which was due primarily to an increase in estimated time to sublease or sell certain properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of earnings. SEVERANCE RESERVE In the second quarter of 2001, the Company reversed the remaining severance reserve of $17,000 due to a lower than estimated final payment. In the first quarter of 2001, the Company reversed the severance reserve by $52,000 due primarily to certain employees originally expected to be receiving severance failing to qualify to receive payments. There were no adjustments made to this reserve in fiscal 2002. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. There were no expenses of this nature incurred in fiscal 2002. The expenses of this nature incurred in the second quarter of fiscal 2001 totaling $166,000 are due primarily to the removal of the remaining equipment from the first closed distribution center. These expenses were primarily recorded in costs of merchandise sales as incurred. The expenses of this nature incurred in the first quarter of fiscal 2001 totaling $512,000 were due primarily to the removal of inventory and equipment from closed distribution centers. These expenses were primarily recorded in costs of merchandise sales as incurred. 25 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Below is a table summarizing expenses related to the Profit Enhancement Plan for the thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001. The details and reasons for the changes to the charge are as described above in the respective reserve categories.
(dollar amounts in thousands) Thirteen Thirteen Twenty-Six Twenty-Six Income Statement Weeks Ended Weeks Ended Weeks Ended Weeks Ended Classification Aug. 3, 2002 Aug. 4, 2001 Aug. 3, 2002 Aug. 4, 2001 ------------------------------------------------------------------------------- Costs of Merchandise Sales $ 390 $ 1,060 $ 1,570 $ 1,997 Costs of Service Revenue 119 609 68 697 Selling, General and Administrative 3 (3) 13 38 ------------------------------------------------------------------------------- Total Expenses $ 512 $ 1,666 $ 1,651 $ 2,732 -------------------------------------------------------------------------------
At the end of the third quarter 2000, the Company set up a reserve liability account which is included in accrued liabilities on the consolidated balance sheet. This liability account tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve from the fiscal year ended February 2, 2002 through August 3, 2002. All additions and adjustments were charged or credited through the appropriate line items on the consolidated statement of earnings.
(Amounts in Lease Fixed On-going thousands) Expenses Assets Severance Expenses Total ----------------------------------------------------------------------------------- Reserve balance at February 2, 2002 $ 3,150 $ - $ - $ 1,320 $ 4,470 Addition 264 1,312 - 160 1,736 Utilization (742) (1,312) - (140) (2,194) Adjustments (597) - - - (597) ----------------------------------------------------------------------------------- Reserve Balance at May 4, 2002 $ 2,075 $ - $ - $ 1,340 $ 3,415 ----------------------------------------------------------------------------------- Addition 689 48 - 272 1,009 Utilization (614) (48) - (514) (1,176) Adjustments (497) - - - (497) ----------------------------------------------------------------------------------- Reserve Balance at August 3, 2002 $ 1,653 $ - $ - $ 1,098 $ 2,751 -----------------------------------------------------------------------------------
26 Results of Operations - The following table presents for the periods indicated certain items in the consolidated statements of earnings as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change ------------------------------------------------------ ---------------------------------- ----------------- Thirteen weeks ended Aug. 3, 2002 Aug. 4, 2001 Fiscal 2002 vs. (Fiscal 2002) (Fiscal 2001) Fiscal 2001 ------------------------------------------------------ -------------- -------------- ----------------- Merchandise Sales..................................... 81.6% 80.9% 3.1% Service Revenue (1)................................... 18.4 19.1 (1.6) ------ ------ ------ Total Revenues........................................ 100.0 100.0 2.2 Costs of Merchandise Sales (2)........................ 69.5 (3) 70.5 (3) 1.6 Costs of Service Revenue (2).......................... 76.2 (3) 74.8 (3) 0.2 ------ ------ ------ Total Costs of Revenues............................... 70.7 71.3 1.3 Gross Profit from Merchandise Sales................... 30.5 (3) 29.5 (3) 6.7 Gross Profit from Service Revenue..................... 23.8 (3) 25.2 (3) (7.0) ------ ------ ------ Total Gross Profit.................................... 29.3 28.7 4.4 Selling, General and Administrative Expenses.......... 22.8 23.1 0.9 ------ ------ ------ Operating Profit...................................... 6.5 5.6 18.9 Non-operating Income.................................. 0.2 0.2 13.9 Interest Expense...................................... 2.1 2.4 (9.3) ------ ------ ------ Earnings Before Income Taxes.......................... 4.6 3.4 38.6 Income Taxes.......................................... 37.8 (4) 36.5 (4) 43.5 ------ ------ ------ Net Earnings Before Extraordinary Item................ 2.8 2.2 35.8 Extraordinary Item, Net of Tax........................ - - (155.1) ------ ------ ------ Net Earnings.......................................... 2.8 2.2 32.2 ====== ====== ====== (1) Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. (2) Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. (3) As a percentage of related sales or revenue, as applicable. (4) As a percentage of earnings before income taxes.
27 Thirteen Weeks Ended August 3, 2002 vs. Thirteen Weeks Ended August 4, 2001 --------------------------------------------------------------------------- Total revenues for the second quarter increased 2.2% as the total number of stores in operation remained the same in 2002 and 2001. Comparable store revenues increased 2.0% (revenues generated by stores in operation during the same period). Comparable merchandise sales increased 2.9%, while comparable store service revenue decreased 1.6%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 30.5% in 2002 from 29.5% in 2001. This increase, as a percentage of merchandise sales, was due primarily to higher merchandise margins and decreases in store occupancy costs and warehousing costs, as a percentage of merchandise sales. In addition, gross profit from merchandise sales increased as the Company recorded lower pretax charges related to the Profit Enhancement Plan of $390,000 in 2002 versus $1,060,000 in 2001. The improved merchandise margins, as a percentage of merchandise sales, were a result of a combination of an improvement in the mix of sales, selectively higher retail pricing, lower product acquisition costs and improved inventory controls. The decrease in store occupancy costs was due to lower depreciation expense and the loss on a sale leaseback transaction of certain assets in 2001 which resulted in a favorable comparison for 2002. The lower warehousing costs, as a percentage of merchandise sales, were due to continued improvements in efficiencies related to the supply chain. Gross profit from service revenue decreased, as a percentage of service revenue, to 23.8% in 2002 from 25.2% in 2001. This decrease, as a percentage of service revenue, was due primarily to increases in service payroll and service employee benefits, as a percentage of service revenue. The decrease in gross profit from service revenue, as a percentage of service revenue, was offset by lower pretax charge related to the Profit Enhancement Plan of $119,000 in 2002 versus $609,000 in 2001. The increase in service payroll, as a percentage of service revenue, was due to lower than anticipated service revenues in 2002. Selling, general and administrative expenses decreased, as a percentage of total revenues, to 22.8% in 2002 from 23.1% in 2001. This decrease, as a percentage of total revenues, was due primarily to lower store expenses, as a percentage of total revenues. The decrease in store expenses, as a percentage of total revenues, was due primarily to decreases in store payroll expense, as a percentage of total revenues. Interest expense decreased $1,274,000 or 9.3% due primarily to lower debt levels coupled with lower average interest rates on the Company's borrowings. Net earnings increased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales, as a percentage of merchandise sales, and decreases in selling, general and administrative expenses and interest expense, both as a percentage of total revenues, offset, in part, by a decrease in gross profit from service revenue, as a percentage of service revenue. In addition, net earnings was increased due to lower charges related to the Profit Enhancement Plan of $323,000 in 2002 in comparison to $1,058,000 in 2001. These increases were offset, in part, by an increase in the Company's 2002 tax rate. 28 Results of Operations - The following table presents for the periods indicated certain items in the consolidated statements of earnings as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change ------------------------------------------------------ ---------------------------------- ----------------- Twenty-six weeks ended Aug. 3, 2002 Aug. 4, 2001 Fiscal 2002 vs. (Fiscal 2002) (Fiscal 2001) Fiscal 2001 ------------------------------------------------------ -------------- -------------- ----------------- Merchandise Sales..................................... 81.4% 80.6% 2.8% Service Revenue (1)................................... 18.6 19.4 (2.3) ------ ------ ------ Total Revenues........................................ 100.0 100.0 1.8 Costs of Merchandise Sales (2)........................ 69.9 (3) 70.9 (3) 1.2 Costs of Service Revenue (2).......................... 75.3 (3) 74.1 (3) (0.8) ------ ------ ------ Total Costs of Revenues............................... 70.9 71.5 0.8 Gross Profit from Merchandise Sales................... 30.1 (3) 29.1 (3) 6.6 Gross Profit from Service Revenue..................... 24.7 (3) 25.9 (3) (6.7) ------ ------ ------ Total Gross Profit.................................... 29.1 28.5 4.2 Selling, General and Administrative Expenses.......... 23.0 23.2 1.0 ------ ------ ------ Operating Profit...................................... 6.1 5.3 18.5 Non-operating Income.................................. 0.2 0.1 21.5 Interest Expense...................................... 2.1 2.4 (11.1) ------ ------ ------ Earnings Before Income Taxes.......................... 4.2 3.0 42.5 Income Taxes.......................................... 37.0 (4) 36.5 (4) 44.5 ------ ------ ------ Net Earnings Before Extraordinary Item................ 2.6 1.9 41.4 Extraordinary Item, Net of Tax........................ - - (155.1) ------ ------ ------ Net Earnings.......................................... 2.6 1.9 39.3 ====== ====== ====== (1) Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. (2) Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. (3) As a percentage of related sales or revenue, as applicable. (4) As a percentage of earnings before income taxes.
29 Twenty-six Weeks Ended August 3, 2002 vs. Twenty-six Weeks Ended August 4, 2001 ------------------------------------------------------------------------------- Total revenues for the first six months increased 1.8% as the total number of stores in operation remained the same in 2002 and 2001. Comparable store revenues increased 1.7% (revenues generated by stores in operation during the same period). Comparable store merchandise sales increased 2.7%, while comparable store service revenue decreased 2.4%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 30.1% in 2001 from 29.1% in 2000. This increase, as a percentage of merchandise sales, was due primarily to higher merchandise margins and decreases in store occupancy costs and warehousing costs, as a percentage of merchandise sales. In addition, gross profit from merchandise sales increased as the Company recorded lower pretax charges related to the Profit Enhancement Plan of $1,570,000 in 2002 versus $1,997,000 in 2001. The improved merchandise margins, as a percentage of merchandise sales, were a result of a combination of an improvement in the mix of sales, selectively higher retail pricing, lower product acquisition costs and improved inventory controls. The decrease in store occupancy costs, as a percentage of merchandise sales, was a result of lower utilities costs, especially in California, which experienced an energy shortage in 2001 and lower rent expense due to decreases on variable rate leases. The lower warehousing costs, as a percentage of merchandise sales, were due to continued improvements in efficiencies related to the supply chain. Gross profit from service revenue decreased, as a percentage of service revenue, to 24.7% in 2002 from 25.9% in 2001. This decrease, as a percentage of service revenue, was due primarily to increases in service payroll and service employee benefits, as a percentage of service revenue. The decrease in gross profit from service revenue was offset, in part, by lower pretax charges related to the Profit Enhancement Plan of $68,000 in 2002 in comparison to $697,000 in 2001. The increase in service payroll and service employee benefits, as a percentage of service revenue, was due to lower than anticipated service revenues in 2002. Selling, general and administrative expenses decreased, as a percentage of total revenues, to 23.0% in 2002 from 23.2% in 2001. This decrease, as a percentage of total revenues, was due primarily to $1,480,000 or 22% lower net media expense and a decrease in store expenses, as a percentage of total revenues. The decrease in net media, as a percentage of total revenues, was due to an increase in cooperative advertising. The decrease in store expenses, as a percentage of total revenues, was due primarily to decreases in store payroll, as a percentage of total revenues. Interest expense decreased $3,005,000 or 11.1% due primarily to lower debt levels coupled with lower average interest rates on the Company's borrowings. Net earnings increased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales, as a percentage of merchandise sales and decreases in interest expense and selling, general and administrative expenses, both as a percentage of total revenues offset, in part, by a decrease in gross profit from service revenue, as a percentage of service revenue. In addition, net earnings was increased due to lower charges related to the Profit Enhancement Plan of $1,040,000 in 2002 in comparison to $1,735,000 in 2001. These increases were offset, in part, by an increase in the Company's 2002 tax rate. 30 NEW ACCOUNTING STANDARDS ------------------------ In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds FASB Statements No. 4 and No. 64, which pertained to issues related to the extinguishment of debt. SFAS No. 145 also rescinds FASB Statement No. 44, which established accounting requirements for motor carriers, and amends FASB Statement No. 13, "Accounting for Leases," to enable certain capital lease modifications to be accounted for by lessees as sale-leaseback transactions. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company is in the process of analyzing the impact of the adoption of this statement on its consolidated financial statements. 31 CRITICAL ACCOUNTING POLICIES AND ESTIMATES ------------------------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to "-Critical Accounting Policies and Estimates" as reported in the Company's Form 10-K for the year ended February 2, 2002, which disclosures are hereby incorporated by reference. FORWARD-LOOKING STATEMENTS -------------------------- Certain statements made herein, including those discussing management's expectations for future periods, are forward-looking and involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond the control of the Company, including the strength of the national and regional economies and retail and commercial consumers' ability to spend, the health of the various sectors of the market that the Company serves, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, location and number of competitors' stores and product and labor costs. Further factors that might cause such a difference include, but are not limited to, the factors described in the Company's filings with the Securities and Exchange Commission. 32 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreements and Secured Credit Facility; changes in the lenders' prime rate or London Interbank Offered Rate (LIBOR) could affect the rates at which the Company could borrow funds thereunder. At August 3, 2002 the Company had $56,179,000 of outstanding borrowings under these credit facilities. There have been no material changes to the "-Quantitative and Qualitative Disclosures About Market Risk" as reported in the Company's Form 10-K for the fiscal year ended February 2, 2002, which disclosures are hereby incorporated by reference. 33 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings No new reportable proceedings were filed, or material developments in previously reported proceedings occurred, during the fiscal quarter ended August 3, 2002. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders An annual meeting of shareholders was held on May 29, 2002. The shareholders approved the election of directors shown below. Directors Elected at Annual Meeting of Shareholders --------------------------------------------------- Name Votes For Votes Withheld ---- --------- -------------- Lester Rosenfeld 48,457,668 4,593,694 Benjamin Strauss 48,468,689 4,582,674 Bernard J. Korman 48,467,082 4,584,282 Mitchell G. Leibovitz 48,455,605 4,595,758 J. Richard Leaman, Jr. 48,466,402 4,584,961 Malcolmn D. Pryor 48,473,246 4,578,117 Peter A. Bassi 48,474,385 4,576,978 Jane Scaccetti 48,481,401 4,569,962 John T. Sweetwood 48,467,873 4,583,490 William Leonard 48,467,873 4,583,490 .................................................................. The shareholders also approved the proposal to increase the number of shares of common stock available for awards under the 1999 Stock Incentive Plan by 2,500,000 shares with 45,180,605 affirmative votes, 7,465,047 negative votes and 405,701 abstentions. .................................................................. The shareholders also approved the appointment of the independent auditors Deloitte & Touche LLP with 52,171,129 affirmative votes, 715,877 negative votes and 164,352 abstentions. .................................................................. 34 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (99.1) Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (99.2) Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K. The Company filed an 8-K on May 15, 2002 announcing its results of operations for the first quarter ended May 4, 2002. An Exhibit containing the press release dated May 15, 2002 was attached. 35 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE PEP BOYS - MANNY, MOE & JACK -------------------------------- (Registrant) Date: September 17, 2002 By: /s/ George Babich, Jr. -------------------- -------------------------- George Babich, Jr. President & Chief Financial Officer 36 CERTIFICATIONS -------------- I, Mitchell G. Leibovitz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Pep Boys - Manny, Moe & Jack; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 17, 2002 /s/ Mitchell G. Leibovitz -------------------- ------------------------- Mitchell G. Leibovitz Chairman of the Board and Chief Executive Officer I, George Babich, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Pep Boys - Manny, Moe & Jack; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 17, 2002 /s/ George Babich, Jr. -------------------- ----------------------- George Babich, Jr. President and Chief Financial Officer 37 INDEX TO EXHIBITS ----------------- (99.1) Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (99.2) Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 38