<PAGE>
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 October 28, 2000
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 December 1, 2000 there were 53,377,106 shares of the registrant's Common
Stock outstanding.
1
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Index Page
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PART I - FINANCIAL INFORMATION:
Item 1. Condensed Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets -
October 28, 2000 and January 29, 2000 3
Consolidated Statements of Operations -
Thirteen and Thirty-nine weeks ended
October 28,2000 and October 30, 1999 4
Consolidated Statements of Cash Flows -
Thirty-nine weeks ended October 28, 2000
and October 30, 1999 5
Notes to Condensed Consolidated
Financial Statements 6-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10-15
Item 3. Quantitative and Qualitative Disclosures 16
About Market Risk
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE 18
2
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
<TABLE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except per share amounts)
<CAPTION>
Oct. 28, 2000 Jan. 29, 2000*
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 10,834 $ 18,485
Accounts receivable, net................................... 19,141 17,281
Merchandise inventories.................................... 573,913 582,898
Prepaid expenses........................................... 13,957 39,184
Deferred income taxes...................................... 44,311 16,606
Other...................................................... 39,657 46,278
Assets held for disposal................................... 22,587 -
------------- -------------
Total Current Assets.................................... 724,400 720,732
Property and Equipment - at cost:
Land....................................................... 277,347 287,039
Building and improvements.................................. 913,557 954,638
Furniture, fixtures and equipment.......................... 633,233 647,557
Construction in progress................................... 23,448 25,763
------------ -------------
1,847,585 1,914,997
Less accumulated depreciation and amortization............. 627,079 579,248
------------- -------------
Total Property and Equipment............................ 1,220,506 1,335,749
Other........................................................ 11,846 16,191
------------- -------------
Total Assets.................................................. $1,956,752 $2,072,672
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 241,019 $ 320,066
Accrued expenses........................................... 230,326 228,151
Current maturities of convertible debt..................... 156,864 -
Current maturities of long-term debt....................... 193 183
------------- -------------
Total Current Liabilities............................... 628,402 548,400
Long-Term Debt, less current maturities...................... 649,917 612,668
Convertible Debt, less current maturities.................... - 171,356
Deferred Income Taxes........................................ 81,864 81,964
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $1 per share:
Authorized 500,000,000 shares - Issued 63,910,577......... 63,911 63,911
Additional paid-in capital................................. 177,247 177,247
Retained earnings.......................................... 584,741 649,487
------------- ------------
825,899 890,645
Less shares in treasury - 10,533,471 and
10,721,208 shares, at cost................................ 170,066 173,097
Less shares in benefits trust - 2,195,270 shares, at cost.. 59,264 59,264
------------- ------------
Total Stockholders' Equity.............................. 596,569 658,284
------------- ------------
Total Liabilities and Stockholders' Equity.................... $1,956,752 $2,072,672
============= ============
See notes to condensed consolidated financial statements.
*Taken from the audited financial statements at Jan. 29, 2000.
</TABLE>
3
<PAGE>
<TABLE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
-------------------------------- ---------------------------------
Oct. 28, 2000 Oct. 30, 1999 Oct. 28, 2000 Oct. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Merchandise Sales.................................... $504,533 $493,838 $1,519,016 $1,503,222
Service Revenue...................................... 117,849 111,995 352,062 336,330
-------------- -------------- -------------- --------------
Total Revenues....................................... 622,382 605,833 1,871,078 1,839,552
Costs of Merchandise Sales........................... 449,519 357,180 1,187,172 1,074,936
Costs of Service Revenue............................. 106,505 90,884 300,110 268,300
-------------- -------------- -------------- --------------
Total Costs of Revenues.............................. 556,024 448,064 1,487,282 1,343,236
Gross Profit from Merchandise Sales.................. 55,014 136,658 331,844 428,286
Gross Profit from Service Revenue.................... 11,344 21,111 51,952 68,030
-------------- -------------- -------------- --------------
Total Gross Profit................................... 66,358 157,769 383,796 496,316
Selling, General and Administrative Expenses......... 148,929 130,194 428,273 395,849
-------------- -------------- -------------- --------------
Operating (Loss) Profit.............................. (82,571) 27,575 (44,477) 100,467
Nonoperating Income.................................. 469 731 1,494 1,801
Interest Expense..................................... 15,196 12,790 42,102 39,630
-------------- -------------- -------------- --------------
(Loss) Earnings Before Income Taxes.................. (97,298) 15,516 (85,085) 62,638
Income Taxes......................................... (35,027) 5,586 (30,630) 22,550
-------------- -------------- -------------- --------------
Net (Loss) Earnings Before Extraordinary Item........ (62,271) 9,930 (54,455) 40,088
Extraordinary (Loss) Gain, Net of Tax................ (938) - 2,069 -
-------------- -------------- -------------- --------------
Net (Loss) Earnings.................................. (63,209) 9,930 (52,386) 40,088
Retained Earnings, beginning of period............... 652,271 659,408 649,487 636,475
Cash Dividends....................................... 3,450 3,439 10,338 10,254
Dividend Reinvestment Plan........................... 871 - 2,022 -
Effect of Shares Repurchased from Benefits Trust..... - - - 410
Effect of Issuance of Treasury Shares................ - 1,874 - 1,874
-------------- -------------- -------------- --------------
Retained Earnings, end of period..................... $584,741 $664,025 $584,741 $664,025
============== ============== ============== ==============
Basic (Loss) Earnings per Share:
Before Extraordinary (Loss) Gain................... $ (1.22) $ .20 $ (1.07) $ .79
Extraordinary (Loss) Gain on Extinguishment
of Debt, Net of Tax.............................. (.02) - .04 -
------------- ------------- ------------- -------------
Basic (Loss) Earnings per Share...................... $ (1.24) $ .20 $ (1.03) $ .79
============= ============= ============= =============
Diluted (Loss) Earnings per Share:
Before Extraordinary (Loss) Gain................... $ (1.22) $ .20 $ (1.07) $ .79
Extraordinary (Loss) Gain on Extinguishment
of Debt, Net of Tax.............................. (.02) - .04 -
------------- ------------- ------------- -------------
Diluted (Loss) Earnings per Share.................... $ (1.24) $ .20 $ (1.03) $ .79
============= ============= ============= =============
Cash Dividends per Share............................. $ .0675 $ .0675 $ .2025 $ .2025
============= ============= ============= =============
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
(Unaudited)
<CAPTION>
Thirty-nine weeks ended
----------------------------------
Oct. 28, 2000 Oct. 30, 1999
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (Loss) earnings............................................. $ (52,386) $ 40,088
Adjustments to Reconcile Net (Loss) Earnings to Net Cash
Provided by Operating Activities:
Extraordinary gain on extinguishment of debt, net of tax..... (3,007) -
Depreciation and amortization................................ 75,429 73,230
Accretion of bond discount................................... 4,734 4,966
Increase in deferred income taxes............................ (27,805) -
Loss on assets held for disposal............................. 53,773 -
Loss on asset impairment..................................... 5,429 -
Loss (Gain) from sale of assets.............................. 2,868 (441)
Changes in operating assets and liabilities:
Decrease in accounts receivable, prepaid expenses
and other................................................. 34,332 22,252
Decrease (Increase) in merchandise inventories............... 8,985 (17,215)
(Decrease) Increase in accounts payable....................... (79,047) 35,990
Increase in accrued expenses................................. 2,175 31,936
------------- -------------
Net Cash Provided by Operating Activities....................... 25,480 190,806
Cash Flows from Investing Activities:
Capital expenditures............................................ (46,972) (78,590)
Net proceeds from sales of assets............................... 2,129 1,482
------------- -------------
Net Cash Used in Investing Activities........................... (44,843) (77,108)
Cash Flows from Financing Activities:
Net borrowings under line of credit agreements.................. 113,254 -
Short-term borrowings........................................... - -
Reduction of long-term debt..................................... (70,000) (127)
Reduction of convertible debt................................... - (72,294)
Dividends paid.................................................. (10,338) (10,254)
Net proceeds from issuance of notes............................. - 76,000
Early extinguishment of debt.................................... (22,213) -
Repurchase of treasury shares................................... - (182,065)
Proceeds from exercise of stock options......................... - 6,471
Proceeds from dividend reinvestment plan........................ 1,009 858
------------- -------------
Net Cash Provided by (Used in) Financing Activities............. 11,712 (181,411)
------------- -------------
Net Decrease in Cash................................................. (7,651) (67,713)
Cash and Cash Equivalents at Beginning of Period..................... 18,485 114,548
------------- -------------
Cash and Cash Equivalents at End of Period........................... $ 10,834 $ 46,835
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
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 October 28, 2000, the consolidated
statements of operations for the thirteen and thirty-nine week periods ended
October 28, 2000 and October 30, 1999 and the consolidated statements of
cash flows for the thirty-nine week periods ended October 28, 2000 and
October 30, 1999 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 October 28, 2000
and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
to shareholders for the year ended January 29, 2000. The results of operations
for the thirteen and thirty-nine week periods ended October 28, 2000 are not
necessarily indicative of the operating results for the full year.
NOTE 2. Merchandise Inventories
Merchandise inventories are valued at the lower of cost (last-in, first-out)
or market. If the first-in, first-out method of valuing inventories had been
used by the Company, inventories would have been approximately the same at both
October 28, 2000 and January 29, 2000.
NOTE 3. Comprehensive Income
Comprehensive Income is reported in accordance with Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Accumulated other comprehensive income in the consolidated balance sheets as
of October 28, 2000 and January 29, 2000 consists of a minimum pension
liability adjustment. There were no differences between net earnings and
comprehensive income for the thirteen and thirty-nine week periods ended
October 28, 2000 and October 30, 1999.
NOTE 4. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. As amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities (an amendment of FASB
statement no. 133)" this statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000, although early adoption is
encouraged. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition issues. In
March 2000, the SEC issued SAB no. 101A which amended the date of
implementation from no later than the first fiscal quarter following
December 15, 1999 for all companies and delayed the implementation date for
companies with fiscal years beginning between December 15, 1999 and
March 15, 2000 until the second quarter of the fiscal year beginning after
December 15, 1999. Companies with fiscal years beginning after March 15, 2000
were still required to implement the SAB in the first quarter of that fiscal
year. In June 2000, the SEC issued SAB 101B which delayed the implementation
date to no later than the last fiscal quarter of the fiscal year beginning
after December 15, 1999. The Company does not anticipate any material impacts
on its financial position or the results of operations upon implementation.
6
<PAGE>
NOTE 5. Debt and Financing Arrangements
In September 2000, the Company entered into a new revolving credit
agreement and new operating lease facility. The new revolving credit agreement
provides up to $225,000,000 of borrowing availability, which is collateralized
by inventory and accounts receivable. Funds may be drawn and repaid anytime
prior to September 10, 2004. Sixty days prior to each anniversary date, the
Company may request and, upon agreement with the bank, extend the maturity of
this facility an additional year. The interest rate on any loan is equal to
the London Interbank Offered Rate ("LIBOR") plus 1.75%, and increases in 0.25%
increments as the excess availability falls below $50,000,000. The revolver is
subject to a financial convenant for minimum adjusted tangible net worth. The
Company recorded an after-tax extraordinary charge related to the restructuring
of its revolving line of credit of $938,000 in the third quarter. As of the
balance sheet date October 28, 2000, the Company had $101,610,000 of the
revolving line of credit available.
The new $143,000,000 of operating leases, which have an interest rate of LIBOR
plus 1.85% replaces $143,000,000 of leases, which had an interest rate of LIBOR
plus 2.27%. The company, as a result of replacing the existing operating
leases, recorded a pretax charge to earnings of $1,630,000 of unamortized lease
costs, which was recorded in the Cost of Merchandise Sold Section of the
Consolidated Statement of Operations.
In September 2000, the Company retired $70,000,000 of Senior Notes, at par,
using the proceeds from its new $225,000,000 revolving line of credit. The
retired notes were issued in a private placement in February 1999 in two
tranches. The first tranche was for $45,000,000 and had a coupon of 8.45%
with a maturity of 2011. The second tranche was for $25,000,000 and had a
coupon of 8.30% with a maturity of 2009.
In September 2000, the Company reclassed the zero coupon convertible Liquid
Yield Option Notes (LYONs), which have a put option at the option of the holder
beginning September 2001, to current liabilities on the consolidated balance
sheet. The Company expects to repurchase these notes in cash by September
2001.
In June 2000, the Company repurchased $5,995,000 face value of the $49,000,000
medium-term note which was redeemable at the option of the holder on September
19, 2002. The after-tax extraordinary gain was $967,000.
In April 2000, the Company repurchased $30,200,000 face value of its LYONs at
a price of $520 per LYON. The book value of the LYONs were $19,226,000 and the
after-tax extraordinary gain was $2,040,000.
7
<PAGE>
Note 6. 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, including the closure of 38 underperforming stores, that
it believes will improve its performance. The Company recorded a pretax charge
to earnings of $71,234,000, $62,665,000 of which was recorded as Costs of
Merchandise Sold on the Company's Consolidated Statement of Operations and
includes costs associated with the closure of 38 stores and two distribution
centers, certain equipment write-offs and the severance costs associated with
the contraction of the special order department. The remaining $8,569,000 was
split with $5,361,000 recorded as Cost of Service Revenue which includes
service department costs associated with the store closures and $3,208,000
recorded as Selling, General and Administrative which includes costs associated
with the closure of two regional offices, the abandonment of future development
projects and severance for the reduction of the store support center
infrastructure. Approximately, 1,269 of the Company's employees were
notified of their separation from the Company as of the balance sheet date. As
of November 11, 2000, 81% of these affected employees have left their positions
and the remaining 19% will leave the Company by early 2001. The 1,269
employees were composed of 1,009 store employees, 151 distribution center
employees, and 109 store support center and field administrative employees.
At the end of the third quarter 2000, the Company has set up a reserve
liability account which is included in Accrued Liabilities on the Consolidated
Balance Sheet. This liability account will track all accruals including
remaining rent on leases net of sublease income, severance, and the on-going
costs for the closed facilities. The accrued balance as of October 28, 2000
was $13,500,000 which is composed of lease costs of $7,916,000, on-going
costs for the closing facilities of $3,890,000 and severance of $1,694,000. The
remaining charges were the adjustments of the fixed assets held for disposal to
estimated fair value and asset write-offs. The total carrying costs of the
assets held for disposal or written off were $80,267,000 of which the Company
recorded a loss on disposal of $57,680,000.
Note 7. Impairment charges
At the end of the third quarter 2000, the Company, as a result of the
comprehensive review of the performance of the stores, recorded an impairment
charge on 15 stores which due to an increasingly or consistently negative
cashflow indicated to management that the total carrying values of the assets
were not recoverable. The $5,429,000 pretax charge was recorded as Cost of
Merchandise Sold on the Consolidated Statement of Operations. The impairment
charge on the assets was determined using management's estimate of the current
fair value.
Note 8. Legal Proceedings
On August 9, 2000, the class action entitled "Brian Lee, Anthony Baxton, and
Harry Schlein v. The Pep Boys - Manny, Moe & Jack," which was pending in the
Circuit Court of Mobile County, Alabama was dismissed.
8
<PAGE>
NOTE 9. Net Earnings Per Share
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
(in thousands, except per share data) ---------------------------------- ----------------------------------
Oct. 28, 2000 Oct. 30, 1999 Oct. 28, 2000 Oct. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(a) Net (loss) earnings before
extraordinary (loss) gain...................... $ (62,271) $ 9,930 $ (54,455) $40,088
Adjustment for interest on 4% convertible
subordinated notes, net of income tax effect... - - - 968
Adjustment for interest on zero coupon convertible
subordinated notes, net of income tax effect... - - - -
----------------------------------------------------------------------------------------------------------------------------------
(b) Adjusted net (loss) earnings before
extraordinary (loss) gain...................... $ (62,271) $ 9,930 $ (54,455) $41,056
----------------------------------------------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during the period.............................. 51,112 50,771 51,055 50,567
Common shares assumed issued upon conversion of
4% convertible subordinated notes.............. - - - 1,251
Common shares assumed issued upon conversion of
zero coupon convertible subordinated notes..... - - - -
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price........ - 68 - 233
----------------------------------------------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during the period.................. 51,112 50,839 51,055 52,051
----------------------------------------------------------------------------------------------------------------------------------
Basic (Loss) Earnings per Share:
Before Extraordinary (Loss) Gain (a/c)........... $ (1.22) $ .20 $ (1.07) $ .79
Extraordinary (Loss) Gain........................ (.02) - .04 -
----------------------------------------------------------------------------------------------------------------------------------
Basic (Loss) Earnings per Share: $ (1.24) $ .20 $ (1.03) $ .79
----------------------------------------------------------------------------------------------------------------------------------
Diluted (Loss) Earnings per Share:
Before Extraordinary (Loss) Gain (b/d)........... $ (1.22) $ .20 $ (1.07) $ .79
Extraordinary (Loss) Gain........................ (.02) - .04 -
----------------------------------------------------------------------------------------------------------------------------------
Diluted (Loss) Earnings per Share: $ (1.24) $ .20 $ (1.03) $ .79
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Adjustments for certain convertible securities were antidilutive during the
thirteen and thirty-nine week periods ended October 28, 2000 and the thirteen
week period ended October 30, 1999, and therefore, excluded from the computation
of diluted EPS; however, these securities could potentially be dilutive in the
future. Options to purchase shares of common stock which were not included in
the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the shares of common stock during the
thirteen and thirty-nine week periods ended October 28, 2000 and October 30,
1999 were as follows:
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
(in thousands) ---------------------------------- ----------------------------------
Oct. 28, 2000 Oct. 30, 1999 Oct. 28, 2000 Oct. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Common shares associated with antidilutive stock
options excluded from computation of diluted EPS ...... 5,410 4,944 5,349 3,608
-------------- -------------- -------------- --------------
</TABLE>
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES - October 28, 2000
--------------------------------------------------
The Company's cash requirements arise principally from the need to finance
the acquisition, construction and equipping of new stores, to renovate existing
stores, and to purchase inventory. During the first nine months of 2000, the
Company invested $46,972,000 in property and equipment while net inventory (net
inventory includes the change in inventory less the change in accounts payable)
increased $70,062,000. Working capital decreased from $172,332,000 at
January 29, 2000 to $73,411,000 at October 28, 2000. At October 28, 2000, the
Company had stockholders' equity of $596,569,000 and long-term debt of
$649,917,000. The Company's long-term debt was 52% of its total capitalization
at October 28, 2000 and 54% at January 29, 2000. As of October 28, 2000, the
Company had available lines of credit totaling $101,610,000.
In September 2000, the Company entered into a new revolving credit
agreement and new operating lease facility. The new revolving credit agreement
provides up to $225,000,000 of borrowing availability, which is collateralized
by inventory and accounts receivable. Funds may be drawn and repaid anytime
prior to September 10, 2004. Sixty days prior to each anniversary date, the
Company may request and, upon agreement with the bank, extend the maturity of
this facility an additional year. The interest rate on any loan is equal to
the London Interbank Offered Rate ("LIBOR") plus 1.75%, and increases in 0.25%
increments as the excess availability falls below $50,000,000. The revolver is
subject to a financial convenant for minimum adjusted tangible net worth. The
Company recorded an after-tax extraordinary charge related to the restructuring
of its revolving line of credit of $938,000 in the third quarter.
The new $143,000,000 of operating leases, which have an interest rate of LIBOR
plus 1.85% replaces $143,000,000 of leases, which had an interest rate of LIBOR
plus 2.27%. The company, as a result of replacing the existing operating
leases, recorded a pretax charge to earnings of $1,630,000 of unamortized lease
costs, which was recorded in the Cost of Merchandise Sold Section of the
Consolidated Statement of Operations.
In September 2000, the Company retired $70,000,000 of Senior Notes, at par,
using the proceeds from its new $225,000,000 revolving line of credit. The
retired notes were issued in a private placement in February 1999 in two
tranches. The first tranche was for $45,000,000 and had a coupon of 8.45%
with a maturity of 2011. The second tranche was for $25,000,000 and had a
coupon of 8.30% with a maturity of 2009.
In September 2000, the Company reclassed the zero coupon convertible Liquid
Yield Option Notes (LYONs), which have a put option at the option of the holder
beginning September 2001, to current liabilities on the consolidated balance
sheet. The Company expects to repurchase these notes in cash by September
2001.
In June 2000, the Company repurchased $5,995,000 face value of the $49,000,000
medium-term note which was redeemable at the option of the holder on September
19, 2002. The after-tax extraordinary gain was $967,000.
In April 2000, the Company repurchased $30,200,000 face value of its LYONs at
a price of $520 per LYON. The book value of the LYONs were $19,226,000 and the
after-tax extraordinary gain was $2,040,000.
The Company plans to open 2 new stores during the balance of the current fiscal
year. Management estimates that the cost of the expansion, coupled with
expenditures in renovating existing stores, and expenditures for warehouses and
offices will be approximately $13,028,000. Funds required to finance the store
expansion including related inventory requirements, to finance the renovation
project of existing stores and to repay its debt maturities are expected to
come primarily from operating activities and the Company's lines of credit.
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, including the closure of 38 underperforming stores, that
it believes will improve its performance. The Company recorded a pretax charge
to earnings of $71,234,000, $62,665,000 of which was recorded as Costs of
Merchandise Sold on the Company's Consolidated Statement of Operations and
includes costs associated with the closure of 38 stores and two distribution
centers, certain equipment write-offs and the severance costs associated with
the contraction of the special order department. The remaining $8,569,000 was
split with $5,361,000 recorded as Cost of Service Revenue which includes
service department costs associated with the store closures and $3,208,000
recorded as Selling, General and Administrative which includes costs associated
with the closure of two regional offices, the abandonment of future development
projects and severance for the reduction of the store support center
infrastructure. Approximately, 1,269 of the Company's employees were
notified of their separation from the Company as of the balance sheet date. As
of November 11, 2000, 81% of these affected employees have left their positions
and the remaining 19% will leave the Company by early 2001. The 1,269
employees were composed of 1,009 store employees, 151 distribution center
employees, and 109 store support center and field administrative employees.
At the end of the third quarter 2000, the Company has set up a reserve
liability account which is included in Accrued Liabilities on the Consolidated
Balance Sheet. This liability account will track all accruals including
remaining rent on leases net of sublease income, severance, and the on-going
costs for the closed facilities. The accrued balance as of October 28, 2000
was $13,500,000 which is composed of lease costs of $7,916,000, on-going
costs for the closing facilities of $3,890,000 and severance of $1,694,000. The
remaining charges were the adjustments of the fixed assets held for disposal to
estimated fair value and asset write-offs. The total carrying costs of the
assets held for disposal or written off were $80,267,000 of which the Company
recorded a loss on disposal of $57,680,000.
10
<PAGE>
IMPAIRMENT CHARGES
------------------
At the end of the third quarter 2000, the Company, as a result of the
comprehensive review of the performance of the stores, recorded an impairment
charge on 15 stores which due to an increasingly or consistently negative
cashflow indicated to management that the total carrying values of the assets
were not recoverable. The $5,429,000 pretax charge was recorded as Cost of
Merchandise Sold on the Consolidated Statement of Operations. The impairment
charge on the assets was determined using management's estimate of the current
fair value.
NEW ACCOUNTING STANDARDS
------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. As amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities (an amendment of FASB
statement no. 133)" this statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000, although early adoption is
encouraged. The Company is in the process of analyzing the impact of the
adoption of this statement on its consolidated financial statements.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition issues. In
March 2000, the SEC issued SAB no. 101A which amended the date of
implementation from no later than the first fiscal quarter following
December 15, 1999 for all companies and delayed the implementation date for
companies with fiscal years beginning between December 15, 1999 and
March 15, 2000 until the second quarter of the fiscal year beginning after
December 15, 1999. Companies with fiscal years beginning after March 15, 2000
were still required to implement the SAB in the first quarter of that fiscal
year. In June 2000, the SEC issued SAB 101B which delayed the implementation
date to no later than the last fiscal quarter of the fiscal year beginning
after December 15, 1999. The Company does not anticipate any material impacts
on its financial position or the results of operations upon implementation.
11
<PAGE>
<TABLE>
Results of Operation -
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.
<CAPTION>
Percentage of Total Revenues Percentage Change
------------------------------------------------------ ---------------------------------- -----------------
Thirteen weeks ended Oct. 28, 2000 Oct. 30, 1999 Fiscal 2000 vs.
(Fiscal 2000) (Fiscal 1999) Fiscal 1999
------------------------------------------------------ -------------- -------------- -----------------
<S> <C> <C> <C>
Merchandise Sales..................................... 81.1% 81.5% 2.2 %
Service Revenue (1)................................... 18.9 18.5 5.2
------ ------ -------
Total Revenues........................................ 100.0 100.0 2.7
Costs of Merchandise Sales (2)........................ 89.1 (3) 72.3 (3) 25.9
Costs of Service Revenue (2).......................... 90.4 (3) 81.2 (3) 17.2
------ ------ -------
Total Costs of Revenues............................... 89.3 74.0 24.1
Gross Profit from Merchandise Sales................... 10.9 (3) 27.7 (3) (59.7)
Gross Profit from Service Revenue..................... 9.6 (3) 18.8 (3) (46.3)
------ ------ -------
Total Gross Profit.................................... 10.7 26.0 (57.9)
Selling, General and Administrative Expenses.......... 23.9 21.4 14.4
------ ------ -------
Operating (Loss) Profit............................... (13.3) 4.6 (399.4)
Nonoperating Income................................... .1 .1 (35.8)
Interest Expense...................................... 2.4 2.1 18.8
------ ------ -------
(Loss) Earnings Before Income Taxes................... (15.6) 2.6 (727.1)
Income Taxes.......................................... 36.0 (4) 36.0 (4) (727.1)
------ ------ -------
Net (Loss) Earnings Before Extraordinary Loss......... (10.0) 1.6 (727.1)
Extraordinary Loss, Net of Tax........................ (.2) .0 N/A
------ ------ -------
Net (Loss) Earnings................................... (10.2) 1.6 (736.6)
====== ====== =======
<FN>
(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 (loss) earnings before income taxes.
</FN>
</TABLE>
12
<PAGE>
Thirteen Weeks Ended October 28, 2000 vs. Thirteen Weeks Ended October 30, 1999
-------------------------------------------------------------------------------
Total revenues for the third quarter increased 2.7% due primarily to more
stores in operation during 2000 vs. 1999, as well as a 1.4% increase in
comparable store revenues (revenues generated by stores in operation during the
same months of each period). Comparable store merchandise sales increased
0.8%, while comparable store service revenue increased 4.0%.
Gross profit from merchandise sales significantly decreased, as a percentage of
merchandise sales, due primarily to the pretax charges from the Profit
Enhancement Plan of $62,665,000 coupled with an impairment charge, an increase
in store occupancy costs, lower merchandise margins and increased warehousing
costs.
Gross profit from service revenue significantly decreased, as a percentage of
service revenue, due primarily to the pretax charges from the Profit
Enhancement Plan of $5,361,000 and an increase in service center personnel
costs, as a percentage of service revenue offset, in part by, a decrease in
service center occupancy costs, as a percentage of service revenue.
Selling, general and administrative expenses significantly increased, as
a percentage of total revenues, due primarily to the pretax charge from the
Profit Enhancement Plan of $3,208,000 coupled with increases in store expenses,
general office costs and employee benefits, as a percentage of total revenues.
<TABLE>
Nonoperating income consisted of the following:
(in thousands)
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Net rental revenue $ 455 $ 263
Investment income 71 477
Other expense (57) (9)
------ ------
Total $ 469 $ 731
====== ======
</TABLE>
Interest expense increased, as a percentage of total revenues, due primarily to
higher interest rates coupled with higher debt levels.
The Company recorded a net loss for the quarter due primarily to decreases in
gross profit from merchandise sales and gross profit from service revenues,
the increase in selling, general and administrative expenses and an increase in
interest expense described above. Also included is an extraordinary loss on
the early extinguishment of the Company's revolving line of credit.
13
<PAGE>
<TABLE>
Results of Operation -
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.
<CAPTION>
Percentage of Total Revenues Percentage Change
------------------------------------------------------ ---------------------------------- -----------------
Thirty-nine weeks ended Oct. 28, 2000 Oct. 30, 1999 Fiscal 2000 vs.
(Fiscal 2000) (Fiscal 1999) Fiscal 1999
------------------------------------------------------ -------------- -------------- -----------------
<S> <C> <C> <C>
Merchandise Sales..................................... 81.2% 81.7% 1.1 %
Service Revenue (1)................................... 18.8 18.3 4.7
------ ------ -------
Total Revenues........................................ 100.0 100.0 1.7
Costs of Merchandise Sales (2)........................ 78.2 (3) 71.5 (3) 10.4
Costs of Service Revenue (2).......................... 85.2 (3) 79.8 (3) 11.9
------ ------ -------
Total Costs of Revenues............................... 79.5 73.0 10.7
Gross Profit from Merchandise Sales................... 21.8 (3) 28.5 (3) (22.5)
Gross Profit from Service Revenue..................... 14.8 (3) 20.2 (3) (23.6)
------ ------ -------
Total Gross Profit.................................... 20.5 27.0 (22.7)
Selling, General and Administrative Expenses.......... 22.9 21.5 8.2
------ ------ -------
Operating (Loss) Profit............................... (2.4) 5.5 (144.3)
Nonoperating Income................................... .1 .1 (17.1)
Interest Expense...................................... 2.3 2.2 6.2
------ ------ -------
(Loss) Earnings Before Income Taxes................... (4.5) 3.4 (235.8)
Income Taxes.......................................... 36.0 (4) 36.0 (4) (235.8)
------ ------ -------
Net (Loss) Earnings Before Extraordinary Gain......... (2.9) 2.2 (235.8)
Extraordinary Gain, Net of Tax........................ .1 .0 N/A
------ ------ -------
Net (Loss) Earnings................................... (2.8) 2.2 (230.7)
====== ====== =======
<FN>
(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 (loss) earnings before income taxes.
</FN>
</TABLE>
14
<PAGE>
Thirty-nine Weeks Ended October 28, 2000 vs. Thirty-nine Weeks Ended
October 30, 1999
-------------------------------------------------------------------------------
Total revenues for the thirty-nine weeks ended increased 1.7% due primarily to
more stores in operation during 2000 vs. 1999. The total comparable store
sales were flat for the thirty-nine weeks ended and were composed of a
comparable store merchandise sales decrease of 0.7% and comparable service
revenue increase of 2.9%.
Gross profit from merchandise sales significantly decreased, as a percentage of
merchandise sales, due primarily to the pretax charges from the Profit
Enhancement Plan of $62,665,000 coupled with the impairment charge, increased
warehouse costs, an increase in store occupancy costs, and lower merchandise
margins.
Gross profit from service revenue significantly decreased, as a percentage of
service revenue, due primarily to the pretax charges from the Profit
Enhancement Plan of $5,361,000 and an increase in service center personnel
costs, as a percentage of service revenue.
Selling, general and administrative expenses significantly increased, as
a percentage of total revenues, due primarily to the pretax charge from the
Profit Enhancement Plan of $3,208,000 coupled with an increase in store
expenses and general office costs, as a percentage of total revenues.
<TABLE>
Nonoperating income consisted of the following:
(in thousands)
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Net rental revenue $1,352 $ 640
Investment income 222 1,090
Other (expense) income (80) 71
------ ------
Total $1,494 $1,801
====== ======
</TABLE>
The Company recorded a net loss for the thirty-nine weeks ended due primarily
to decreases in gross profit from merchandise sales and gross profit from
service revenues and the increase in selling, general and administrative
expenses described above, as a percentage of total revenues offset, in part,
by an extraordinary gain on the early extinguishment of debt.
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.
15
<PAGE>
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 certain revolving credit agreements, changes in the federal funds rate, the
lenders' prime rate or LIBOR could affect the rates at which the Company could
borrow funds thereunder. At October 28, 2000, the Company had $123,390,000
outstanding borrowings under these credit facilities. There have been no
material changes to the market risk disclosures as reported in the Company's
Form 10-K for the fiscal year ended January 29, 2000.
16
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
On August 9, 2000, the class action entitled "Brian Lee, Anthony Baxton, and
Harry Schlein v. The Pep Boys - Manny, Moe & Jack," which was pending in the
Circuit Court of Mobile County, Alabama was dismissed.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
(11) Statement Re: Computation of Earnings Per
Share
(27) Financial Data Schedules
</TABLE>
(b) Reports on Form 8-K.
The Company filed an 8-K on October 18, 2000 describing the
completion of its new credit facilities and the plan to retire
$70 million in senior debt. The new credit facilities
agreements were attached.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEP BOYS - MANNY, MOE & JACK
--------------------------------
(Registrant)
Date: December 12, 2000 By: /s/ George Babich Jr.
----------------------- -------------------------
George Babich Jr.
Senior Vice President &
Chief Financial Officer
18
<PAGE>
INDEX TO EXHIBITS
-----------------
(11) Computations of Earnings Per Share
(27) Financial Data Schedule
