UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One) | ||||
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| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
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For the quarterly period ended May 5, 2007 | ||||
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OR | ||||
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| 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) |
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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 o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 1, 2007 there were 51,404,789 shares of the registrant’s Common Stock outstanding.
EXPLANATORY NOTE
This amendment to the Quarterly Report on Form 10-Q/A (“Amendment No. 1”) is being filed in order to reflect the restatement of previously issued condensed consolidated financial statements as of May 5, 2007 and for the thirteen weeks ended May 5, 2007 and April 29, 2006 included in the original Quarterly Report on Form 10-Q for the quarterly period ended May 5, 2007, previously filed on June 13, 2007 (the “Original Filing”).
Subsequent to the issuance of the Company’s condensed consolidated financial statements included in Item 1, “Condensed Consolidated Financial Statements (Unaudited),” in the Original Filing, the Company determined that certain information in the condensed consolidating financial statements presented in the supplemental guarantor information note (Note 10) contained errors. The correction of these errors has no impact, for any previously reported interim or annual period, on the Company’s (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations, (iii) condensed consolidated statements of stockholders’ equity, or (iv) condensed consolidated statements of cash flows.
In addition, the Company corrected its presentation of borrowings and payments under its line of credit agreement and vendor financing trade payable program to a gross basis versus a net basis in its condensed consolidated statements of cash flows for the thirteen weeks ended May 5, 2007 and April 29, 2006. For further discussion regarding the restatement, see “Note 14 – Restatement of Previously Issued Financial Statements” under “Notes to Condensed Consolidated Financial Statements” included in Item 1.
This Amendment No. 1 amends and restates only Items 1 and 4 of Part I of the Original Filing to reflect the restatement of the Company’s condensed consolidated financial statements and notes thereto for the periods presented. The remaining items contained within this Amendment No. 1 consist of all other items originally contained in the Form 10-Q for the quarterly period ended May 5, 2007. These remaining items are not amended hereby, but are included for the convenience of the reader. Except for the foregoing amended information, this Amendment No. 1 on Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. We are also updating the Signature Page and certifications of our Chief Executive and Financial Officers contained in Exhibits 31.1, 31.2, 32.1 and 32.2.
2
Index |
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| Condensed Consolidated Statements of Operations and Changes in Retained Earnings - |
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| Condensed Consolidated Statements of Cash Flows (Restated) - |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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3
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except share data)
UNAUDITED
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| May 5, 2007 |
| February 3, 2007 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 30,781 |
| $ | 21,884 |
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Accounts receivable, net |
| 31,261 |
| 29,582 |
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Merchandise inventories |
| 618,814 |
| 607,042 |
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Prepaid expenses |
| 40,145 |
| 39,264 |
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Other |
| 62,142 |
| 70,368 |
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Total Current Assets |
| 783,143 |
| 768,140 |
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Property and Equipment - at cost: |
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Land |
| 251,705 |
| 251,705 |
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Buildings and improvements |
| 931,268 |
| 929,225 |
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Furniture, fixtures and equipment |
| 692,391 |
| 684,042 |
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Construction in progress |
| 3,049 |
| 3,464 |
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| 1,878,413 |
| 1,868,436 |
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Less accumulated depreciation and amortization |
| 982,585 |
| 962,189 |
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Property and Equipment - net |
| 895,828 |
| 906,247 |
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Deferred income taxes |
| 24,845 |
| 24,828 |
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Other |
| 64,476 |
| 67,984 |
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Total Assets |
| $ | 1,768,292 |
| $ | 1,767,199 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
| $ | 232,872 |
| $ | 265,489 |
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Trade payable program liability |
| 14,046 |
| 13,990 |
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Accrued expenses |
| 281,120 |
| 292,280 |
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Deferred income taxes |
| 25,215 |
| 28,931 |
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Current maturities of long-term debt and obligations under capital leases |
| 3,474 |
| 3,490 |
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Total Current Liabilities |
| 556,727 |
| 604,180 |
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Long-term debt and obligations under capital leases, less current maturities |
| 623,761 |
| 535,031 |
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Other long-term liabilities |
| 66,339 |
| 60,233 |
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Commitments and Contingencies |
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Stockholders’ Equity: |
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Common Stock, par value $1 per share: |
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Authorized 500,000,000 shares; Issued 68,557,041 shares |
| 68,557 |
| 68,557 |
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Additional paid-in capital |
| 292,837 |
| 289,384 |
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Retained earnings |
| 462,757 |
| 463,797 |
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Accumulated other comprehensive loss |
| (9,906 | ) | (9,380 | ) | ||
Less cost of shares in treasury - 15,000,595 shares and 12,427,687 shares |
| 233,516 |
| 185,339 |
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Less cost of shares in benefits trust - 2,195,270 shares |
| 59,264 |
| 59,264 |
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Total Stockholders’ Equity |
| 521,465 |
| 567,755 |
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Total Liabilities and Stockholders’ Equity |
| $ | 1,768,292 |
| $ | 1,767,199 |
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See notes to condensed consolidated financial statements.
4
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN RETAINED EARNINGS
(dollar amounts in thousands, except per share amounts)
UNAUDITED
Thirteen weeks ended |
| May 5, 2007 |
| April 29, 2006 |
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Merchandise Sales |
| $ | 445,035 |
| $ | 457,315 |
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Service Revenue |
| 100,978 |
| 99,286 |
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Total Revenues |
| 546,013 |
| 556,601 |
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Costs of Merchandise Sales |
| 315,310 |
| 329,548 |
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Costs of Service Revenue |
| 88,911 |
| 88,175 |
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Total Costs of Revenues |
| 404,221 |
| 417,723 |
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Gross Profit from Merchandise Sales |
| 129,725 |
| 127,767 |
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Gross Profit from Service Revenue |
| 12,067 |
| 11,111 |
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Total Gross Profit |
| 141,792 |
| 138,878 |
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Selling, General and Administrative Expenses |
| 128,072 |
| 131,221 |
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Net Gain (Loss) from Dispositions of Assets |
| 2,359 |
| (415 | ) | ||
Operating Profit |
| 16,079 |
| 7,242 |
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Non-operating Income |
| 1,905 |
| 2,259 |
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Interest Expense |
| 12,656 |
| 10,337 |
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Earnings (Loss) From Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle |
| 5,328 |
| (836 | ) | ||
Income Tax Expense |
| 2,108 |
| 31 |
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Net Earnings (Loss) From Continuing Operations Before Cumulative Effect of Change in Accounting Principle |
| 3,220 |
| (867 | ) | ||
Loss From Discontinued Operations, Net of Tax |
| (45 | ) | (103 | ) | ||
Cumulative Effect of Change in Accounting Principle, Net of Tax |
| — |
| 267 |
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Net Earnings (Loss) |
| 3,175 |
| (703 | ) | ||
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Retained Earnings, beginning of period |
| 463,797 |
| 481,926 |
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Cumulative effect adjustment for adoption of FIN 48 |
| (155 | ) | — |
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Cash Dividends |
| (3,581 | ) | (3,705 | ) | ||
Effect of Stock Options |
| (479 | ) | (66 | ) | ||
Dividend Reinvestment Plan |
| — |
| (14 | ) | ||
Retained Earnings, end of period |
| $ | 462,757 |
| $ | 477,438 |
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Basic Earnings (Loss) Per Share: |
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Basic weighted average shares outstanding |
| 53,122 |
| 54,224 |
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Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle |
| $ | 0.06 |
| $ | (0.02 | ) |
Discontinued Operations, Net of Tax |
| — |
| — |
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Cumulative Effect of Change in Accounting Principle, Net of Tax |
| — |
| 0.01 |
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Basic Earnings (Loss) Per Share |
| $ | 0.06 |
| $ | (0.01 | ) |
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Diluted Earnings (Loss) Per Share: |
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Diluted weighted average shares outstanding |
| 53,634 |
| 54,224 |
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Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle |
| $ | 0.06 |
| $ | (0.02 | ) |
Discontinued Operations, Net of Tax |
| — |
| — |
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Cumulative Effect of Change in Accounting Principle, Net of Tax |
| — |
| 0.01 |
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Diluted Earnings (Loss) Per Share |
| $ | 0.06 |
| $ | (0.01 | ) |
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Cash Dividends Per Share |
| $ | 0.0675 |
| $ | 0.0675 |
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See notes to condensed consolidated financial statements.
5
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
UNAUDITED
Thirteen weeks ended |
| May 5, 2007 |
| April 29, 2006 |
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Cash Flows from Operating Activities: |
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Net Earnings (Loss) |
| $ | 3,175 |
| $ | (703 | ) |
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by continuing operations: |
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Net loss from discontinued operations |
| 45 |
| 103 |
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Depreciation and amortization |
| 21,111 |
| 20,723 |
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Cumulative effect of change in accounting principle, net of tax |
| — |
| (267 | ) | ||
Accretion of asset disposal obligation |
| 65 |
| 67 |
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Stock compensation expense |
| 4,390 |
| 1,148 |
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Deferred income taxes |
| 1,642 |
| (90 | ) | ||
(Gain) loss from dispositions of assets & insurance recoveries |
| (3,719 | ) | 415 |
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Change in fair value of derivatives |
| 1,802 |
| — |
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Excess tax benefits from stock based awards |
| (301 | ) | (23 | ) | ||
Increase in cash surrender value of life insurance policies |
| (534 | ) | (385 | ) | ||
Changes in Operating Assets and Liabilities: |
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Decrease in accounts receivable, prepaid expenses and other |
| 10,178 |
| 12,901 |
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Increase in merchandise inventories |
| (11,772 | ) | (2,358 | ) | ||
Decrease in accounts payable |
| (32,617 | ) | (5,200 | ) | ||
Decrease in accrued expenses |
| (2,257 | ) | (10,088 | ) | ||
Increase in other long-term liabilities |
| 1,075 |
| 696 |
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Net cash (used in) provided by continuing operations |
| (7,717 | ) | 16,939 |
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Net cash used in discontinued operations |
| (90 | ) | (165 | ) | ||
Net Cash (Used in) Provided by Operating Activities |
| (7,807 | ) | 16,774 |
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Cash Flows from Investing Activities: |
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Cash paid for property and equipment |
| (11,610 | ) | (5,628 | ) | ||
Proceeds from dispositions of assets |
| — |
| 135 |
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Net Cash Used in Investing Activities |
| (11,610 | ) | (5,493 | ) | ||
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Cash Flows from Financing Activities: |
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Borrowings under line of credit agreements |
| 207,505 |
| 151,581 |
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Payments under line of credit agreements |
| (117,900 | ) | (158,031 | ) | ||
Excess tax benefits from stock based awards |
| 301 |
| 23 |
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Borrowings on trade payable program liability |
| 17,461 |
| 17,365 |
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Payments on trade payable program liability |
| (17,405 | ) | (15,278 | ) | ||
Reduction of long-term debt |
| (808 | ) | (5 | ) | ||
Payments on capital lease obligations |
| (83 | ) | (81 | ) | ||
Dividends paid |
| (3,581 | ) | (3,705 | ) | ||
Repurchase of common stock |
| (58,152 | ) | — |
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Proceeds from exercise of stock options |
| 773 |
| 48 |
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Proceeds from dividend reinvestment plan |
| 203 |
| 219 |
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Net Cash Provided by (Used in) Financing Activities |
| 28,314 |
| (7,864 | ) | ||
Net Increase in Cash and Cash Equivalents |
| 8,897 |
| 3,417 |
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Cash and Cash Equivalents at Beginning of Period |
| 21,884 |
| 48,281 |
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Cash and Cash Equivalents at End of Period |
| $ | 30,781 |
| $ | 51,698 |
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Supplemental Disclosure of Cash Flow Information: |
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Non-cash investing activities: |
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Accrued purchases of property and equipment |
| $ | 2,804 |
| $ | 672 |
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See notes to condensed consolidated financial statements.
6
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of May 5, 2007, the condensed consolidated statements of operations and changes in retained earnings for the thirteen week periods ended May 5, 2007 and April 29, 2006 and the condensed consolidated statements of cash flows for the thirteen week periods ended May 5, 2007 and April 29, 2006 are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at May 5, 2007 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, as permitted by Rule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “Interim Financial Statements”. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, Amendment No. 1 for the fiscal year ended February 3, 2007. The results of operations for the thirteen weeks ended May 5, 2007 are not necessarily indicative of the operating results for the full year.
NOTE 2. New Accounting Standards
Adopted:
In June 2006, the FASB issued Financial Interpretation No 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No 109, “Accounting for Income Taxes”. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company and its subsidiaries file income tax returns in the U.S federal, various states and Puerto Rico jurisdictions. The Company is no longer subject to federal income tax examination by tax authorities for years before fiscal 2001. The federal audit of tax fiscal years 2001, 2002 and 2003 has been completed, but is still pending review by the Joint Committee on Taxation. The impact of any changes made as a result of a federal audit remains subject to examination by various states for a period of up to one year after notification of such changes to the respective states. State and local income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The Company and its subsidiaries have various state income tax returns in the process of examination, appeals and litigation.
The Company adopted the provisions of FIN 48 on February 4, 2007. In connection with the adoption, the Company recorded a net decrease to retained earnings of $155,000 and reclassified certain previously recognized deferred tax attributes as FIN 48 liabilities. The amount of unrecognized tax benefits at February 4, 2007 was $7,126,000 of which $2,216,000 would impact the Company’s tax rate, if recognized. The amount of unrecognized tax benefits did not materially change as of May 5, 2007.
The Company recognizes potential interest and penalties for unrecognized tax benefits in income tax expense and, accordingly, during the thirteen weeks ended May 5, 2007, the Company recognized approximately $25,282 in potential interest and penalties associated with uncertain tax positions. At February 5, 2007, the Company has recorded approximately $734,000 for the payment of interest and penalties, which is included in the $7,126,000 unrecognized tax benefit noted above.
The Company’s tax returns are under various audits, including a review by the Joint Committee of Taxation, certain of which are scheduled to be finalized with the next twelve months. It is reasonably possible that the uncertain tax positions relative to the years under audit could be resolved in Company’s favor resulting in the recognition of up to $4,227,000 of additional income tax benefit.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This statement simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or SFAS No. 133, by allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. The Company adopted this standard on February 4, 2007, which did not affect our financial statements.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006. The Company adopted this standard on February 4, 2007, which did not affect our financial statements.
In June of 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation). The Company presents sales net of sales taxes in its condensed consolidated statement of operations and the adoption of this EITF did not affect our financial statements.
To be adopted:
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS 157 defines the term fair value, establishes a framework for measuring it within generally accepted accounting principles and expands disclosures about its measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 157 on its consolidated financial statements.
7
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159 on its consolidated financial statements.
In March 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on issue number 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements”, (“EITF 06-10”). EITF 06-10 provides guidance to help companies determine whether a liability for the postretirement benefit associated with a collateral assignment split-dollar life insurance arrangement should be recorded in accordance with either SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (if, in substance, a postretirement benefit plan exists), or Accounting Principles Board Opinion No. 12. (if the arrangement is, in substance, an individual deferred compensation contract). EITF 06-10 also provides guidance on how a company should recognize and measure the asset in a collateral assignment split-dollar life insurance contract. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, although early adoption is permitted. The Company is currently evaluating the impact of EITF 06-10 on its consolidated financial statements.
NOTE 3. Accounting for Stock-Based Compensation
The Company has stock-based compensation plans, under which it grants stock options and restricted stock units to key employees and members of its Board of Directors. Generally, new stock option grants vest over a four-year period, with one-fifth vesting on each of the grant date and the next four anniversaries thereof and have an expiration date of seven years. Generally, new restricted stock unit grants vest over a four-year period, with one-fourth vesting on each of the first four anniversaries of the grant date. During the first quarter ended May 5, 2007, we granted 1,052,367 stock options with a weighted average fair value of $5.09 per option and 630,300 restricted stock units with a weighted average fair value of $15.26 per unit. Such grants included an inducement grant of 1,000,000 stock options and 500,000 restricted stock units to our newly-hired President & Chief Executive Officer on March 13, 2007. One-fourth of such awards vest on each of the first three anniversaries of the date of grant.
In accordance with SFAS No. 123(R), we recognize compensation expense on a straight-line basis over the vesting period. We recognized $4,390,000 and $1,148,000 of stock-based compensation expense during the thirteen weeks ended May 5, 2007 and April 29, 2006, respectively.
NOTE 4. Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (FIFO) method of costing inventory had been used by the Company, inventory would have been $605,139,000 and $593,265,000 as of May 5, 2007 and February 3, 2007, respectively.
The Company also records valuation adjustments (reserves) for potentially excess and obsolete inventories based on current inventory levels, the historical analysis of product sales and current market conditions. The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess inventory has historically been returned to the Company’s vendors for credit. The Company provides reserves when less than full credit is expected from a vendor or when market is lower than recorded costs. The reserves are revised, if necessary, on a quarterly basis for adequacy. The Company’s reserves against inventory for these matters were $ 14,178,000 at May 5, 2007 and $ 13,462,000 at February 3, 2007.
8
NOTE 5. Other Current Assets
The Company’s other current assets for the periods ended May 5, 2007 and February 3, 2007 were as follows:
|
| May 5, |
| February 3, |
| ||
(dollar amounts in thousands) |
| 2007 |
| 2007 |
| ||
|
|
|
|
|
| ||
Reinsurance premiums and receivable |
| $ | 62,038 |
| $ | 69,239 |
|
Other |
| 104 |
| 1,129 |
| ||
Total |
| $ | 62,142 |
| $ | 70,368 |
|
The Company has risk participation arrangements with respect to workers’ compensation, general liability, automobile liability, and other casualty coverages. The Company has a wholly owned captive insurance subsidiary through which it reinsures this retained exposure. This subsidiary uses both risk sharing pools and third party insurance to manage this exposure. In addition, the Company self insures certain employee-related health care benefit liabilities. The Company maintains stop loss coverage with third party insurers through which it reinsures certain of its casualty and health care benefit liabilities. The Company records both liabilities and reinsurance receivables using actuarial methods utilized in the insurance industry based upon our historical claims experience.
NOTE 6. Discontinued Operations
In accordance with SFAS No. 144, our discontinued operations continues to reflect the costs associated with the stores remaining from the 33 stores closed on July 31, 2003 as part of our corporate restructuring. The remaining reserve balance is not material.
During the second quarter of fiscal 2006, we sold a store that we have leased back and will continue to operate. Due to our significant continuing involvement with this store following the sale, we reclassified back into continuing operations, for all periods presented, this store’s revenues and costs that had been previously classified into discontinued operations during the third quarter of fiscal 2005, in accordance with SFAS No. 144 and EITF No. 03-13.
NOTE 7. Pension and Savings Plan
Pension expense includes the following:
|
| Thirteen weeks ended |
| ||||
(dollar amounts in thousands) |
| May 5, 2007 |
| April 29, 2006 |
| ||
|
|
|
|
|
| ||
Service cost |
| $ | 51 |
| $ | 73 |
|
Interest Cost |
| 836 |
| 756 |
| ||
Expected return on plan assets |
| (587 | ) | (581 | ) | ||
Amortization of transition obligation |
| 41 |
| 41 |
| ||
Amortization of prior service cost |
| 91 |
| 87 |
| ||
Amortization of net loss |
| 488 |
| 528 |
| ||
Net periodic benefit cost |
| $ | 920 |
| $ | 904 |
|
The Company has a qualified defined benefit pension plan with accrued benefits frozen at December 31, 1996. The Company makes contributions to this plan in accordance with the requirements of ERISA. The Company does not anticipate making a contribution to this plan during fiscal 2007.
The Company has an unfunded, non-qualified Executive Supplemental Retirement Plan (SERP) defined benefit plan that was closed to new participants on January 31, 2004. As of May 5, 2007, the Company contributed $200,000 of an anticipated $1,000,000 contribution during fiscal 2007 to this plan.
The Company has a non-qualified SERP defined contribution plan for key employees who were designated by the Board of Directors after January 31, 2004. The Company’s contribution expense for the defined contribution portion of the plan was approximately $212,000 and $244,000 for the thirteen weeks ended May 5, 2007, and April 29, 2006, respectively.
The Company has two 401(k) savings plans, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant’s contributions or 3% of the participant’s compensation. The Company’s savings plans’ contribution expense was approximately $976,000 and $829,000 for the thirteen weeks ended May 5, 2007 and April 29, 2006, respectively.
9
NOTE 8. Debt and Financing Arrangements
On February 15, 2007, the Company amended its $320,000,000 Senior Secured Term Loan, due in 2013, to reduce the interest rate from London Interbank Offered Rate (LIBOR) plus 2.75% to LIBOR plus 2.00%.
NOTE 9. Warranty Reserve
The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions.
Components of the reserve for warranty costs for the thirteen-week period ended May 5, 2007 were as follows:
(dollar amounts in thousands) |
|
|
| |
Beginning balance at February 3, 2007 |
| $ | 645 |
|
|
|
|
| |
Additions related to current period sales |
| 2,576 |
| |
|
|
|
| |
Warranty costs incurred in current period |
| (2,750 | ) | |
|
|
|
| |
Ending Balance at May 5, 2007 |
| $ | 471 |
|
NOTE 10. Supplemental Guarantor Information
The Company’s $200,000,000 aggregate principal amount of 7.50% Senior Subordinated Notes (the “Notes”) are fully and unconditionally and joint and severally guaranteed by certain of the Company’s direct and indirectly wholly-owned subsidiaries - namely, The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc., Pep Boys — Manny, Moe & Jack of Puerto Rico, Inc. and PBY Corporation, (collectively, the “Subsidiary Guarantors”). The Notes are not guaranteed by the Company’s wholly owned subsidiary, Colchester Insurance Company.
The following condensed consolidating information presents, in separate columns, the condensed consolidating balance sheets as of May 5, 2007 and February 3, 2007 and the related condensed consolidating statements of operations and condensed consolidating statements of cash flows for the thirteen weeks ended May 5, 2007 and April 29, 2006 for (i) the Company (“Pep Boys”) on a parent only basis, with its investment in subsidiaries recorded under the equity method, (ii) the Subsidiary Guarantors on a combined basis including the consolidation by PBY Corporation of its wholly owned subsidiary, The Pep Boys Manny Moe & Jack of California, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis.
10
CONDENSED CONSOLIDATING BALANCE SHEET
(dollars in thousands)
As of May 5, 2007 |
| Pep Boys (1) |
| Subsidiary |
| Subsidiary |
| Consolidation / |
| Consolidated |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 13,986 |
| $ | 12,972 |
| $ | 3,823 |
| $ | — |
| $ | 30,781 |
|
Accounts receivable, net |
| 33,806 |
| — |
| — |
| (2,545 | ) | 31,261 |
| |||||
Merchandise inventories |
| 232,890 |
| 385,924 |
| — |
| — |
| 618,814 |
| |||||
Prepaid expenses |
| 35,211 |
| 11,038 |
| 18,212 |
| (24,316 | ) | 40,145 |
| |||||
Other |
| 458 |
| 12 |
| 61,672 |
| — |
| 62,142 |
| |||||
Total Current Assets |
| 316,351 |
| 409,946 |
| 83,707 |
| (26,861 | ) | 783,143 |
| |||||
Property and Equipment—at cost: |
|
|
|
|
|
|
|
|
|
|
| |||||
Land |
| 78,508 |
| 166,766 |
| 12,893 |
| (6,462 | ) | 251,705 |
| |||||
Buildings and improvements |
| 310,459 |
| 610,484 |
| 20,937 |
| (10,612 | ) | 931,268 |
| |||||
Furniture, fixtures and equipment |
| 289,628 |
| 402,763 |
| — |
| — |
| 692,391 |
| |||||
Construction in progress |
| 2,674 |
| 375 |
| — |
| — |
| 3,049 |
| |||||
|
| 681,269 |
| 1,180,388 |
| 33,830 |
| (17,074 | ) | 1,878,413 |
| |||||
Less accumulated depreciation and amortization |
| 389,517 |
| 589,307 |
| 411 |
| 3,350 |
| 982,585 |
| |||||
Total Property and Equipment—Net |
| 291,752 |
| 591,081 |
| 33,419 |
| (20,424 | ) | 895,828 |
| |||||
Investment in subsidiaries (1) |
| 1,598,807 |
| — |
| — |
| (1,598,807 | ) | — |
| |||||
Intercompany receivable (1) |
| — |
| 769,697 |
| 78,091 |
| (847,788 | ) | — |
| |||||
Deferred income taxes |
| 23,163 |
| 1,682 |
| — |
| — |
| 24,845 |
| |||||
Other |
| 60,567 |
| 3,909 |
| — |
| — |
| 64,476 |
| |||||
Total Assets (1) |
| $ | 2,290,640 |
| $ | 1,776,315 |
| $ | 195,217 |
| $ | (2,493,880 | ) | $ | 1,768,292 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable |
| $ | 232,863 |
| $ | 9 |
| $ | — |
| $ | — |
| $ | 232,872 |
|
Trade payable program liability |
| 14,046 |
| — |
| — |
| — |
| 14,046 |
| |||||
Accrued expenses (1) |
| 53,794 |
| 69,006 |
| 179,413 |
| (21,093 | ) | 281,120 |
| |||||
Deferred income taxes |
| 3,371 |
| 27,612 |
| — |
| (5,768 | ) | 25,215 |
| |||||
Current maturities of long-term debt and obligations under capital leases |
| 3,474 |
| — |
| — |
| — |
| 3,474 |
| |||||
Total Current Liabilities (1) |
| 307,548 |
| 96,627 |
| 179,413 |
| (26,861 | ) | 556,727 |
| |||||
Long-term debt and obligations under capital leases, less current maturities |
| 556,910 |
| 66,851 |
| — |
| — |
| 623,761 |
| |||||
Other long-term liabilities |
| 56,929 |
| 29,834 |
| — |
| (20,424 | ) | 66,339 |
| |||||
Intercompany liabilities (1) |
| 847,788 |
| — |
| — |
| (847,788 | ) | — |
| |||||
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
| |||||
Common stock (1) |
| 68,557 |
| 2 |
| 100 |
| (102 | ) | 68,557 |
| |||||
Additional paid-in capital (1) |
| 292,837 |
| 386,857 |
| 3,900 |
| (390,757 | ) | 292,837 |
| |||||
Retained earnings (1) |
| 462,757 |
| 1,196,144 |
| 11,804 |
| (1,207,948 | ) | 462,757 |
| |||||
Accumulated other comprehensive loss |
| (9,906 | ) | — |
| — |
| — |
| (9,906 | ) | |||||
Less: |
| — |
|
|
|
|
|
|
|
|
| |||||
Cost of shares in treasury |
| 233,516 |
| — |
| — |
| — |
| 233,516 |
| |||||
Cost of shares in benefits trust |
| 59,264 |
| — |
| — |
| — |
| 59,264 |
| |||||
Total Stockholders’ Equity (1) |
| 521,465 |
| 1,583,003 |
| 15,804 |
| (1,598,807 | ) | 521,465 |
| |||||
Total Liabilities and Stockholders’ Equity (1) |
| $ | 2,290,640 |
| $ | 1,776,315 |
| $ | 195,217 |
| $ | (2,493,880 | ) | $ | 1,768,292 |
|
(1) As restated, see Note 14
11
CONDENSED CONSOLIDATING BALANCE SHEET
(dollars in thousands)
As of February 3, 2007 |
| Pep Boys |
| Subsidiary |
| Subsidiary |
| Consolidation / |
| Consolidated |
| |||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Current Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 13,581 |
| $ | 7,946 |
| $ | 357 |
| $ | — |
| $ | 21,884 |
|
Accounts receivable, net |
| 17,377 |
| 12,205 |
| — |
| — |
| 29,582 |
| |||||
Merchandise inventories |
| 211,445 |
| 395,597 |
| — |
| — |
| 607,042 |
| |||||
Prepaid expenses |
| 24,511 |
| 13,469 |
| 20,044 |
| (18,760 | ) | 39,264 |
| |||||
Other |
| — |
| 2,255 |
| 75,038 |
| (6,925 | ) | 70,368 |
| |||||
Total Current Assets |
| 266,914 |
| 431,472 |
| 95,439 |
| (25,685 | ) | 768,140 |
| |||||
Property and Equipment—at cost: |
|
|
|
|
|
|
|
|
|
|
| |||||
Land |
| 78,507 |
| 166,767 |
| 12,893 |
| (6,462 | ) | 251,705 |
| |||||
Buildings and improvements |
| 310,952 |
| 607,948 |
| 20,937 |
| (10,612 | ) | 929,225 |
| |||||
Furniture, fixtures and equipment |
| 289,005 |
| 395,037 |
| — |
| — |
| 684,042 |
| |||||
Construction in progress |
| 2,654 |
| 810 |
| — |
| — |
| 3,464 |
| |||||
|
| 681,118 |
| 1,170,562 |
| 33,830 |
| (17,074 | ) | 1,868,436 |
| |||||
Less accumulated depreciation and amortization |
| 382,363 |
| 576,186 |
| 239 |
| 3,401 |
| 962,189 |
| |||||
Total Property and Equipment—Net |
| 298,755 |
| 594,376 |
| 33,591 |
| (20,475 | ) | 906,247 |
| |||||
Investment in subsidiaries |
| 1,589,279 |
| — |
| — |
| (1,589,279 | ) | — |
| |||||
Intercompany receivable |
| — |
| 684,520 |
| 81,160 |
| (765,680 | ) | — |
| |||||
Deferred income taxes |
| 24,828 |
| — |
| — |
| — |
| 24,828 |
| |||||
Other |
| 63,843 |
| 4,141 |
| — |
| — |
| 67,984 |
| |||||
Total Assets |
| $ | 2,243,619 |
| $ | 1,714,509 |
| $ | 210,190 |
| $ | (2,401,119 | ) | $ | 1,767,199 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
| |||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable |
| $ | 265,480 |
| $ | 9 |
| $ | — |
| $ | — |
| $ | 265,489 |
|
Trade payable program liability |
| 13,990 |
| — |
| — |
| — |
| 13,990 |
| |||||
Accrued expenses |
| 43,815 |
| 72,692 |
| 195,321 |
| (19,548 | ) | 292,280 |
| |||||
Deferred income taxes |
| 6,344 |
| 28,724 |
| — |
| (6,137 | ) | 28,931 |
| |||||
Current maturities of long-term debt and obligations under capital leases |
| 3,490 |
| — |
| — |
| — |
| 3,490 |
| |||||
Total Current Liabilities |
| 333,119 |
| 101,425 |
| 195,321 |
| (25,685 | ) | 604,180 |
| |||||
Long-term debt and obligations under capital leases, less current maturities |
| 523,735 |
| 11,296 |
| — |
| — |
| 535,031 |
| |||||
Other long-term liabilities |
| 53,330 |
| 27,378 |
| — |
| (20,475 | ) | 60,233 |
| |||||
Intercompany liabilities |
| 765,680 |
| — |
| — |
| (765,680 | ) | — |
| |||||
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
| |||||
Common stock |
| 68,557 |
| 2 |
| 100 |
| (102 | ) | 68,557 |
| |||||
Additional paid-in capital |
| 289,384 |
| 386,857 |
| 3,900 |
| (390,757 | ) | 289,384 |
| |||||
Retained earnings |
| 463,797 |
| 1,187,551 |
| 10,869 |
| (1,198,420 | ) | 463,797 |
| |||||
Accumulated other comprehensive loss |
| (9,380 | ) | — |
| — |
| — |
| (9,380 | ) | |||||
Less: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of shares in treasury |
| 185,339 |
| — |
| — |
| — |
| 185,339 |
| |||||
Cost of shares in benefits trust |
| 59,264 |
| — |
| — |
| — |
| 59,264 |
| |||||
Total Stockholders’ Equity |
| 567,755 |
| 1,574,410 |
| 14,869 |
| (1,589,279 | ) | 567,755 |
| |||||
Total Liabilities and Stockholders’ Equity |
| $ | 2,243,619 |
| $ | 1,714,509 |
| $ | 210,190 |
| $ | (2,401,119 | ) | $ | 1,767,199 |
|
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(dollars in thousands)
Thirteen weeks ended May 5, 2007 |
| Pep Boys |
| Subsidiary |
| Subsidiary |
| Consolidation / |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise Sales |
| $ | 154,284 |
| $ | 290,751 |
| $ | — |
| $ | — |
| $ | 445,035 |
|
Service Revenue |
| 35,612 |
| 65,366 |
| — |
| — |
| 100,978 |
| |||||
Other Revenue |
| — |
| — |
| 6,260 |
| (6,260 | ) | — |
| |||||
Total Revenues |
| 189,896 |
| 356,117 |
| 6,260 |
| (6,260 | ) | 546,013 |
| |||||
Costs of Merchandise Sales |
| 109,481 |
| 205,829 |
| — |
| — |
| 315,310 |
| |||||
Costs of Service Revenue |
| 30,215 |
| 58,696 |
| — |
| — |
| 88,911 |
| |||||
Costs of Other Revenue |
| — |
| — |
| 5,566 |
| (5,566 | ) | — |
| |||||
Total Costs of Revenues |
| 139,696 |
| 264,525 |
| 5,566 |
| (5,566 | ) | 404,221 |
| |||||
Gross Profit from Merchandise Sales |
| 44,803 |
| 84,922 |
| — |
| — |
| 129,725 |
| |||||
Gross Profit from Service Revenue |
| 5,397 |
| 6,670 |
| — |
| — |
| 12,067 |
| |||||
Gross Profit from Other Revenue |
| — |
| — |
| 694 |
| (694 | ) | — |
| |||||
Total Gross Profit |
| 50,200 |
| 91,592 |
| 694 |
| (694 | ) | 141,792 |
| |||||
Selling, General and Administrative Expenses |
| 42,297 |
| 86,621 |
| 86 |
| (932 | ) | 128,072 |
| |||||
Net Gain (Loss) from Sale of Assets |
| 2,367 |
| (8 | ) | — |
| — |
| 2,359 |
| |||||
Operating Profit |
| 10,270 |
| 4,963 |
| 608 |
| 238 |
| 16,079 |
| |||||
Non-Operating (Expense) Income |
| (3,901 | ) | 33,719 |
| 640 |
| (28,553 | ) | 1,905 |
| |||||
Interest Expense (Income) |
| 31,913 |
| 10,383 |
| (1,325 | ) | (28,315 | ) | 12,656 |
| |||||
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle |
| (25,544 | ) | 28,299 |
| 2,573 |
| — |
| 5,328 |
| |||||
Income Tax (Benefit) Expense |
| (18,619 | ) | 19,706 |
| 1,021 |
|
|
| 2,108 |
| |||||
Equity in Earnings of Subsidiaries (1) |
| 10,145 |
| — |
| — |
| (10,145 | ) | — |
| |||||
Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (1) |
| 3,220 |
| 8,593 |
| 1,552 |
| (10,145 | ) | 3,220 |
| |||||
Loss From Discontinued Operations, Net of Tax |
| (45 | ) | — |
| — |
| — |
| (45 | ) | |||||
Net Earnings (1) |
| $ | 3,175 |
| $ | 8,593 |
| $ | 1,552 |
| $ | (10,145 | ) | $ | 3,175 |
|
(1) As restated, see Note 14
13
Thirteen weeks ended April 29, 2006 |
| Pep Boys |
| Subsidiary |
| Subsidiary |
| Consolidation / |
| Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Merchandise Sales |
| $ | 159,704 |
| $ | 297,611 |
| $ | — |
| $ | — |
| $ | 457,315 |
|
Service Revenue |
| 34,867 |
| 64,419 |
| — |
| — |
| 99,286 |
| |||||
Other Revenue |
| — |
| — |
| 7,137 |
| (7,137 | ) | — |
| |||||
Total Revenues |
| 194,571 |
| 362,030 |
| 7,137 |
| (7,137 | ) | 556,601 |
| |||||
Costs of Merchandise Sales |
| 114,460 |
| 215,088 |
| — |
| — |
| 329,548 |
| |||||
Costs of Service Revenue |
| 30,568 |
| 57,607 |
| — |
| — |
| 88,175 |
| |||||
Costs of Other Revenue |
| — |
| — |
| 8,608 |
| (8,608 | ) | — |
| |||||
Total Costs of Revenues |
| 145,028 |
| 272,695 |
| 8,608 |
| (8,608 | ) | 417,723 |
| |||||
Gross Profit from Merchandise Sales |
| 45,244 |
| 82,523 |
| — |
| — |
| 127,767 |
| |||||
Gross Profit from Service Revenue |
| 4,299 |
| 6,812 |
| — |
| — |
| 11,111 |
| |||||
Gross Loss from Other Revenue |
| — |
| — |
| (1,471 | ) | 1,471 |
| — |
| |||||
Total Gross Profit (Loss) |
| 49,543 |
| 89,335 |
| (1,471 | ) | 1,471 |
| 138,878 |
| |||||
Selling, General and Administrative Expenses |
| 43,016 |
| 86,653 |
| 81 |
| 1,471 |
| 131,221 |
| |||||
Net Loss from Sale of Assets |
| — |
| (415 | ) | — |
| — |
| (415 | ) | |||||
Operating Profit (Loss) |
| 6,527 |
| 2,267 |
| (1,552 | ) | — |
| 7,242 |
| |||||
Non-Operating (Expense) Income |
| (4,675 | ) | 27,916 |
| 298 |
| (21,280 | ) | 2,259 |
| |||||
Interest Expense (Income) |
| 24,961 |
| 7,844 |
| (1,188 | ) | (21,280 | ) | 10,337 |
| |||||
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle |
| (23,109 | ) | 22,339 |
| (66 | ) | — |
| (836 | ) | |||||
Income Tax (Benefit) Expense |
| (120 | ) | 151 |
| — |
|
|
| 31 |
| |||||
Equity in Earnings of Subsidiaries (1) |
| 22,024 |
| — |
| — |
| (22,024 | ) | — |
| |||||
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (1) |
| (965 | ) | 22,188 |
| (66 | ) | (22,024 | ) | (867 | ) | |||||
Loss From Discontinued Operations, Net of Tax |
| (5 | ) | (98 | ) | — |
| — |
| (103 | ) | |||||
Cumulative Effect of Change in Accounting Principle, Net of Tax |
| 267 |
| — |
| — |
| — |
| 267 |
| |||||
Net (Loss) Earnings (1) |
| $ | (703 | ) | $ | 22,090 |
| $ | (66 | ) | $ | (22,024 | ) | $ | (703 | ) |
(1) As restated, see Note 14
14
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollars in thousands)
Thirteen weeks ended May 5, 2007 |
| Pep Boys (1) |
| Subsidiary |
| Subsidiary Non- |
| Consolidation |
| Consolidated |
| |||||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net Earnings (1) |
| $ | 3,175 |
| $ | 8,593 |
| $ | 1,552 |
| $ | (10,145 | ) | $ | 3,175 |
|
Adjustments to Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing Operations (1) |
| 3,760 |
| 10,725 |
| 539 |
| 9,477 |
| 24,501 |
| |||||
Changes in operating assets and liabilities (1) |
| (59,878 | ) | 25,513 |
| (1,079 | ) | 51 |
| (35,393 | ) | |||||
Net cash (used in) provided by continuing operations (1) |
| (52,943 | ) | 44,831 |
| 1,012 |
| (617 | ) | (7,717 | ) | |||||
Net cash used in discontinued operations |
| (90 | ) | — |
| — |
| — |
| (90 | ) | |||||
Net Cash (Used in) Provided by Operating Activities (1) |
| (53,033 | ) | 44,831 |
| 1,012 |
| (617 | ) | (7,807 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Cash (Used in) Investing Activities |
| (1,758 | ) | (9,852 | ) | — |
| — |
| (11,610 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Cash Provided by (Used in) Financing Activities (1) |
| 55,196 |
| (29,953 | ) | 2,454 |
| 617 |
| 28,314 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Increase in Cash and Cash Equivalents |
| 405 |
| 5,026 |
| 3,466 |
| — |
| 8,897 |
| |||||
Cash and Cash Equivalents at Beginning of Year |
| 13,581 |
| 7,946 |
| 357 |
| — |
| 21,884 |
| |||||
Cash and Cash Equivalents at End of Year |
| $ | 13,986 |
| $ | 12,972 |
| $ | 3,823 |
| $ | — |
| $ | 30,781 |
|
(1) As restated, see Note 14
Thirteen weeks ended April 29, 2006 |
| Pep Boys |
| Subsidiary |
| Subsidiary Non- |
| Consolidation |
| Consolidated |
| |||||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Net (Loss) Earnings (1) |
| $ | (703 | ) | $ | 22,090 |
| $ | (66 | ) | $ | (22,024 | ) | $ | (703 | ) |
Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing Operations (1) |
| (14,425 | ) | 14,030 |
| 62 |
| 22,024 |
| 21,691 |
| |||||
Changes in operating assets and liabilities |
| 1,301 |
| (477 | ) | (4,873 | ) | — |
| (4,049 | ) | |||||
Net cash (used in) provided by continuing operations (1) |
| (13,827 | ) | 35,643 |
| (4,877 | ) | — |
| 16,939 |
| |||||
Net cash used in discontinued operations |
| (46 | ) | (119 | ) | — |
| — |
| (165 | ) | |||||
Net Cash (Used in) Provided by Operating Activities (1) |
| (13,873 | ) | 35,524 |
| (4,877 | ) | — |
| 16,774 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Cash Used in Investing Activities |
| (373 | ) | (5,120 | ) | — |
| — |
| (5,493 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Cash Provided by (Used in) Financing Activities (1) |
| 15,237 |
| (29,875 | ) | 6,774 |
| — |
| (7,864 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net Increase in Cash and Cash Equivalents |
| 991 |
| 529 |
| 1,897 |
| — |
| 3,417 |
| |||||
Cash and Cash Equivalents at Beginning of Year |
| 12,019 |
| 6,953 |
| 29,309 |
| — |
| 48,281 |
| |||||
Cash and Cash Equivalents at End of Year |
| $ | 13,010 |
| $ | 7,482 |
| $ | 31,206 |
| $ | — |
| $ | 51,698 |
|
(1) As restated, see Note 14
15
NOTE 11. Contingencies
During the fourth quarter of 2006 and first quarter of 2007, the Company was served with four separate lawsuits brought by former associates employed in California, each of which lawsuits purports to be a class action on behalf of all current and former California store associates. One or more of the lawsuits claim that the plaintiff was not paid for (i) overtime, (ii) accrued vacation time, (iii) all time worked (i.e. “off the clock” work) and/or (iv) late or missed meal periods or rest breaks. The plaintiffs also allege that the Company violated certain record keeping requirements arising out of the foregoing alleged violations. The lawsuits (i) claim these alleged practices are unfair business practices, (ii) request back pay, restitution, penalties, interest and attorney fees and (iii) request that the Company be enjoined from committing further unfair business practices. The Company believes that it has meritorious defenses to all of these claims and intends to defend these claims vigorously. The resolution of these claims cannot be predicted and there is no reasonable estimate of the amount or range of potential loss. Accordingly, the Company has not recorded any provision for loss associated with these claims. However, an adverse determination of these claims could have a material effect on the Company’s results of operations and cash flows in the period(s) during which they are determined.
The Company is also party to various actions and claims arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
NOTE 12. Other Comprehensive Income (Loss) and Stockholders’ Equity
Following are the components of comprehensive income (loss):
|
| Thirteen weeks ended |
| ||||
|
| May 5, |
| April 29, |
| ||
(dollar amounts in thousands) |
| 2007 |
| 2006 |
| ||
|
|
|
|
|
| ||
Net earning (loss) |
| $ | 3,175 |
| $ | (703 | ) |
|
|
|
|
|
| ||
Other comprehensive (loss) income, net of tax: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Derivative financial instrument adjustments |
| (916 | ) | 336 |
| ||
|
|
|
|
|
| ||
Comprehensive income (loss) |
| $ | 2,259 |
| $ | (367 | ) |
The components of Accumulated Other Comprehensive Loss are:
|
| May 5, |
| February 3, |
| ||
(dollar amounts in thousands) |
| 2007 |
| 2007 |
| ||
|
|
|
|
|
| ||
Derivative financial instrument adjustment, net of tax |
| $ | (916 | ) | $ | — |
|
|
|
|
|
|
| ||
Defined benefit plan adjustment, net of tax |
| (8,990 | ) | (9,380 | ) | ||
|
|
|
|
|
| ||
Accumulated Other Comprehensive Loss |
| $ | (9,906 | ) | $ | (9,380 | ) |
On September 7, 2006, the Company renewed its share repurchase program and reset the authority back to $100,000,000 for repurchases to be made from time to time in the open market or in privately negotiated transactions through September 30, 2007. During the first quarter of fiscal 2007, the Company repurchased 2,702,460 shares of Common Stock for $50,841,000. These shares were placed into the Company’s treasury. The Company also disbursed $7,311,000 for 494,800 shares of Common Stock repurchased during the fourth quarter of 2006.
16
NOTE 13. Interest Rate Swap Agreements
On June 3, 2003, the Company entered into an interest rate swap which was designated as a cash flow hedge of the Company’s real estate operating lease payments. During the fourth quarter 2006, the Company removed the designation as a cash flow hedge and records the change in fair value of the swap through the operating statement through its termination date on July 1, 2008. During the thirteen weeks ended May 5, 2007, an $829,000 expense was recorded in cost of merchandise sales for the change in fair value of this swap.
On November 2, 2006, the Company entered into an interest rate swap for a notional amount of $200,000,000. The Company has designated the swap a cash flow hedge on the first $200,000,000 of the Company’s $320,000,000 senior secured notes. The interest rate swap converts the variable LIBOR portion of the interest payments to a fixed rate of 5.036% and terminates in October 2013. The Company, from inception through April 8, 2007, reflected the change in fair value in Interest Expense. The Company documented that the swap met the requirements of SFAS No. 133 for hedge accounting on April 9, 2007, and prospectively recorded the effective portion of the change in fair value of the swap through Accumulated Other Comprehensive Loss. During the period from February 4, 2007 through April 8, 2007, a $974,000 expense was recorded in interest expense for the change in fair value of this swap.
As of May 5, 2007 and February 3, 2007, the fair values of the interest rate swaps were $2,254,000 and $5,522,000, respectively. $1,465,000 ($916,000, net of tax) of the $3,268,000 decline in fair value was included in Accumulated Other Comprehensive Loss on the condensed consolidated balance sheet.
NOTE 14. Restatement of Previously Issued Financial Statements
Subsequent to the issuance of the Company’s condensed consolidated financial statements for the quarterly period ended May 5, 2007, the Company determined that certain information presented in the condensed consolidating balance sheet as of May 5, 2007 and the related condensed consolidating statements of operations and cash flows for the thirteen weeks ended May 5, 2007 and April 29, 2006 presented in the supplemental guarantor information note (Note 10) contained errors. The errors resulted from (i) the failure to correctly record consolidating intercompany journal entries between Pep Boys and Subsidiary Guarantors (ii) the failure to correctly record certain reclassification entries to intercompany receivables and liabilities and (iii) the failure to consolidate PBY Corporation’s wholly owned subsidiary, The Pep Boys Manny Moe & Jack of California in the Subsidiary Guarantors column. The Company has corrected the errors and restated the condensed consolidating balance sheet, as of May 5, 2007, and the related condensed consolidating statements of operations and cash flows for the thirteen weeks ended May 5, 2007 and April 29, 2006 included in Note 10. The correction of these errors did not affect the Company’s previously reported interim or annual consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders’ equity or consolidated statements of cash flows.
The following table reflects the effects of the restatement on the condensed consolidating financial statements as of May 5, 2007 and for the thirteen weeks ended May 5, 2007 and April 29, 2006:
|
| Pep Boys |
| Subsidiary Guarantors |
| Consolidation / Elimination |
| ||||||||||||
(dollars in thousands) |
| Previously |
| Restated |
| Previously |
| Restated |
| Previously |
| Restated |
| ||||||
Condensed Consolidated Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
As of May 5, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment in subsidiaries |
| $ | 1,558,353 |
| $ | 1,598,807 |
| $ | 1,384,492 |
| $ | — |
| $ | (2,942,845 | ) | $ | (1,598,807 | ) |
Intercompany receivable |
| — |
| — |
| 823,495 |
| 769,697 |
| (901,586 | ) | (847,788 | ) | ||||||
Total Assets |
| 2,250,186 |
| 2,290,640 |
| 3,214,605 |
| 1,776,315 |
| (3,891,716 | ) | (2,493,880 | ) | ||||||
Accrued expenses |
| — |
| 53,794 |
| 144,407 |
| 69,006 |
| (42,700 | ) | (21,093 | ) | ||||||
Total Current Liabilities |
| 253,754 |
| 307,548 |
| 172,028 |
| 96,627 |
| (48,468 | ) | (26,861 | ) | ||||||
Intercompany liabilities |
| 901,585 |
| 847,788 |
| — |
| — |
| (901,585 | ) | (847,788 | ) | ||||||
Common stock |
| — |
| — |
| 1,502 |
| 2 |
| (1,602 | ) | (102 | ) | ||||||
Additional paid-in capital |
| 292,836 |
| 292,837 |
| 436,858 |
| 386,857 |
| (440,757 | ) | (390,757 | ) | ||||||
Retained earnings |
| 422,301 |
| 462,757 |
| 2,507,532 |
| 1,196,144 |
| (2,478,880 | ) | (1,207,948 | ) | ||||||
Total Stockholders’ Equity |
| 481,008 |
| 521,465 |
| 2,945,892 |
| 1,583,003 |
| (2,921,239 | ) | (1,598,807 | ) | ||||||
Total Liabilities and Stockholders’ Equity |
| 2,250,186 |
| 2,290,640 |
| 3,214,605 |
| 1,776,315 |
| (3,891,716 | ) | (2,493,880 | ) | ||||||
17
|
| Subsidiary Guarantors |
| Consolidation / Elimination |
| ||||||||
(dollars in thousands) |
| Previously |
| Restated |
| Previously |
| Restated |
| ||||
Condensed Consolidating Statement of Operations |
|
|
|
|
|
|
|
|
| ||||
Thirteen weeks ended May 5, 2007 |
|
|
|
|
|
|
|
|
| ||||
Equity in Earnings of Subsidiaries |
| $ | 18,849 |
| $ | — |
| $ | (28,994 | ) | $ | (10,145 | ) |
Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle |
| 27,442 |
| 8,593 |
| (28,994 | ) | (10,145 | ) | ||||
Net Earnings (Loss) |
| 27,442 |
| 8,593 |
| (28,994 | ) | (10,145 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Thirteen weeks ended April 29, 2006 |
|
|
|
|
|
|
|
|
| ||||
Equity in Earnings of Subsidiaries |
| $ | 33,026 |
| $ | — |
| $ | (55,050 | ) | $ | (22,024 | ) |
Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle |
| 55,214 |
| 22,188 |
| (55,050 | ) | (22,024 | ) | ||||
Net Earnings |
| 55,116 |
| 22,090 |
| (55,050 | ) | (22,024 | ) |
|
| Pep Boys |
| Subsidiary Guarantors |
| Consolidation / Elimination |
| ||||||||||||
|
| Previously |
| Restated |
| Previously |
| Restated |
| Previously |
| Restated |
| ||||||
Condensed Consolidating Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Thirteen weeks ended May 5, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net Earnings |
| $ | — |
| $ | — |
| $ | 27,442 |
| $ | 8,593 |
| $ | (28,994 | ) | $ | (10,145 | ) |
Adjustments to Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing Operations |
| (1,962 | ) | 3,760 |
| (3,019 | ) | 10,725 |
| 28,943 |
| 9,477 |
| ||||||
Changes in operating assets and liabilities |
| (71,707 | ) | (59,878 | ) | 37,342 |
| 25,513 |
| — |
| — |
| ||||||
Net cash (used in) provided by continuing operations |
| (70,494 | ) | (52,943 | ) | 61,765 |
| 44,831 |
| — |
| (617 | ) | ||||||
Net Cash (Used in) Provided by Operating Activities |
| (70,584 | ) | (53,033 | ) | 61,765 |
| 44,831 |
| — |
| (617 | ) | ||||||
Net Cash Provided by (Used in) Financing Activities |
| 72,747 |
| 55,196 |
| (46,887 | ) | (29,953 | ) | — |
| 617 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Thirteen weeks ended April 29, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net (Loss) Earnings |
| $ | — |
| $ | — |
| $ | 55,116 |
| $ | 22,090 |
| $ | (55,050 | ) | $ | (22,024 | ) |
Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing Operations |
| (13,311 | ) | (14,425 | ) | (20,110 | ) | 14,030 |
| 55,050 |
| 22,024 |
| ||||||
Net cash (used in) provided by continuing operations |
| (12,713 | ) | (13,827 | ) | 34,529 |
| 35,643 |
| — |
| — |
| ||||||
Net Cash (Used in) Provided by Operating Activities |
| (12,759 | ) | (13,873 | ) | 34,410 |
| 35,524 |
| — |
| — |
| ||||||
Net Cash Provided by (Used in) Financing Activities |
| 14,123 |
| 15,237 |
| (28,761 | ) | (29,875 | ) | — |
| — |
|
Additionally, the Company incorrectly presented borrowings and payments under its line of credit agreement and vendor financing trade payable program on a net basis rather than a gross basis in the financing activities section of the condensed consolidated statements of cash flows for the thirteen weeks ended May 5, 2007 and April 29, 2006. The corrections did not affect the Company’s previously reported net cash used in financing activities on the condensed consolidated statements of cash flows for the periods presented in this Quarterly Report on Form 10-Q/A.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below should be read in conjunction with (i) the condensed consolidated interim financial statements and the notes to such financial statements included elsewhere in this Form10-Q/A and (ii) the consolidated financial statements and the notes to such financial statements included in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form10-K/A for the fiscal year ended February 3, 2007.
OVERVIEW
The Pep Boys - Manny, Moe & Jack is a leader in the automotive aftermarket with 593 stores located throughout 36 states and Puerto Rico. All of our stores feature the nationally-recognized Pep Boys brand name, established through more than 80 years of providing high-quality automotive merchandise and services, and are company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, accessories, tires and parts under one roof, positioning us to achieve our goal of becoming the category dominant one-stop shop for automotive maintenance products and services.
For the thirteen weeks ended May 5, 2007, our comparable sales (sales generated by locations in operation during the same period) decreased by 2.3% compared to a decrease of 0.9% for the thirteen weeks ended April 29, 2006. This decrease in comparable sales was comprised of a 3.1% decrease in comparable merchandise sales partially offset by a 1.5% increase in comparable service revenue. Comparable merchandise sales were reduced due to the elimination of commercial delivery in fifty-five locations and fewer promotional events.
Our net earnings for the first quarter of 2007 were $3,175,000 or $3,878,000 higher than the $703,000 loss incurred in the first quarter of 2006. This increase in profitability was the result of a focus on more profitable sales (higher gross margin) and expense control initiatives resulting in lower Selling, General and Administrative expenses.
The following discussion explains the material changes in our results of operations for the thirteen weeks ended May 5, 2007 and the significant developments affecting our financial condition since February 3, 2007. We strongly recommend that you read the audited consolidated financial statements and footnotes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the fiscal year ended February 3, 2007.
LIQUIDITY AND CAPITAL RESOURCES — May 5, 2007
Our cash requirements arise principally from the purchase of inventory, capital expenditures related to existing stores, offices and warehouses and information systems. The primary capital expenditures for the thirteen weeks ended May 5, 2007 were primarily for store maintenance and improvements. During the thirteen weeks ended May 5, 2007, we invested approximately $10,453,000 in property and equipment versus $6,300,000 invested in the first quarter of fiscal 2006. We estimate that capital expenditures related to existing stores, warehouses and offices during fiscal 2007 will be approximately $45,000,000 and $55,000,000, related primarily to the redesign of our existing stores.
We anticipate that our net cash provided by operating activities and our existing revolving credit facility will exceed our principal cash requirements for capital expenditures and inventory purchases in fiscal 2007. We have no material debt maturities due within the next twelve months.
On September 7, 2006, the Company renewed its share repurchase program and reset the authority back to $100,000,000 for repurchases to be made from time to time in the open market or in privately negotiated transactions through September 30, 2007. During the first quarter of fiscal 2007, the Company repurchased 2,702,460 shares of Common Stock for $50,841,000. These shares were placed into the Company’s treasury. The Company also disbursed $7,311,000 for 494,800 shares of Common Stock repurchased during the fourth quarter of 2006.
Working Capital increased from $163,960,000 at February 3, 2007 to $226,416,000 at May 5, 2007. At May 5, 2007, we had stockholders’ equity of $521,465,000 and long-term debt, net of current maturities, of $623,761,000. Our long-term debt was approximately 55% of our total capitalization at May 5, 2007 and 49% at February 3, 2007. As of May 5, 2007, we had further undrawn availability under our revolving credit facility totaling $107,000,000.
19
CONTRACTUAL OBLIGATIONS
The following charts represent our total contractual obligations and commercial commitments as of May 5, 2007:
Contractual Obligations (2)(3) |
|
|
| Due in less |
| Due in |
| Due in |
| Due after |
| |||||
(dollar amounts in thousands) |
| Total |
| than 1 year |
| 1–3 years |
| 3–5 years |
| 5 years |
| |||||
Long-term debt (1) |
| $ | 626,632 |
| $ | 3,219 |
| $ | 113,245 |
| $ | 6,400 |
| $ | 503,768 |
|
Operating leases |
| 457,563 |
| 62,936 |
| 97,773 |
| 83,961 |
| 212,893 |
| |||||
Expected scheduled interest payments on all long-term debt |
| 294,170 |
| 46,975 |
| 91,774 |
| 74,623 |
| 80,798 |
| |||||
Capital leases |
| 603 |
| 255 |
| 348 |
| — |
| — |
| |||||
Total cash obligations |
| $ | 1,378,968 |
| $ | 113,385 |
| $ | 303,140 |
| $ | 164,984 |
| $ | 797,459 |
|
(1) Long-term debt includes current maturities.
(2) The contractual obligations table excludes our defined benefit pension obligation. Future plan contributions are dependent upon actual plan asset returns and interest rates. For the thirteen weeks ended May 5, 2007, the Company contributed $200,000 of an anticipated $1,000,000 contribution during fiscal 2007, to its non-qualified defined benefit pension plan.
(3) The contractual obligations table excludes the Company’s FIN 48 liabilities of $7,126,000 because the Company cannot make a reliable estimate of the timing of cash payments.
Commercial Commitments |
|
|
| Due in less |
| Due in |
| Due in |
| Due after |
| |||||
(dollar amounts in thousands) |
| Total |
| than 1 year |
| 1–3 years |
| 3–5 years |
| 5 years |
| |||||
Import letters of credit |
| $ | 511 |
| $ | 511 |
| $ | — |
| $ | — |
| $ | — |
|
Standby letters of credit |
| 55,859 |
| 42,784 |
| 13,075 |
| — |
| — |
| |||||
Surety bonds |
| 10,497 |
| 5,810 |
| 4,687 |
| — |
| — |
| |||||
Purchase obligations (1) (2) |
| 14,838 |
| 12,463 |
| 1,900 |
| 475 |
| — |
| |||||
Total commercial commitments |
| $ | 81,705 |
| $ | 61,568 |
| $ | 19,662 |
| $ | 475 |
| $ | — |
|
(1) Our open purchase orders are based on current inventory or operational needs and are fulfilled by our vendors within short periods of time. We currently do not have minimum purchase commitments under our vendor supply agreements and generally our open purchase orders (orders that have not been shipped) are not binding agreements. Those purchase obligations that are in transit from our vendors at May 5, 2007 are considered to be a contractual obligation.
(2) In the first quarter of fiscal 2005, we entered into a contractual commitment to purchase approximately $4,800,000 of products over a six-year period. The commitment for years two through five is approximately $950,000 per year, while the final year’s commitment is approximately half that amount. Following year two, we are obligated to pay the vendor a per unit fee if there is a shortfall between our cumulative purchases during the two year period and the minimum purchase requirement. For years three through six, we are obligated to pay the vendor a per unit fee for any annual shortfall. The maximum annual obligation under any shortfall is approximately $950,000. At May 5, 2007, we expect to meet the cumulative minimum purchase requirements under this contract.
DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, our discontinued operations continues to reflect the costs associated with the stores remaining from the 33 stores closed on July 31, 2003 as part of our corporate restructuring. The remaining reserve balance is not material.
During the second quarter of fiscal 2006, we sold a store that we have leased back and will continue to operate. Due to our significant continuing involvement with this store following the sale, we reclassified back into continuing operations, for all periods presented, this store’s revenues and costs that had been previously classified into discontinued operations during the third quarter of fiscal 2005, in accordance with SFAS No. 144 and EITF No. 03-13.
20
RESULTS OF OPERATIONS
The following table presents for the periods indicated certain items in the condensed consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
|
|
|
|
|
| Percentage |
|
|
| Percentage of Total Revenues |
| Change |
| ||
|
| May 5, 2007 |
| April 29, 2006 |
| Fiscal 2007 vs. |
|
Thirteen weeks ended |
| (Fiscal 2007) |
| (Fiscal 2006) |
| Fiscal 2006 |
|
Merchandise Sales |
| 81.5 | % | 82.2 | % | (2.7 | )% |
Service Revenue (1) |
| 18.5 |
| 17.8 |
| 1.7 |
|
Total Revenues |
| 100.0 |
| 100.0 |
| (1.9 | ) |
Costs of Merchandise Sales (2) |
| 70.9 | (3) | 72.1 | (3) | 4.3 |
|
Costs of Service Revenue (2) |
| 88.0 | (3) | 88.8 | (3) | 0.8 |
|
Total Costs of Revenues |
| 74.0 |
| 75.0 |
| (3.2 | ) |
Gross Profit from Merchandise Sales |
| 29.1 | (3) | 27.9 | (3) | 1.5 |
|
Gross Profit from Service Revenue |
| 12.0 | (3) | 11.2 | (3) | 8.6 |
|
Total Gross Profit |
| 26.0 |
| 25.0 |
| 2.1 |
|
Selling, General and Administrative Expenses |
| 23.5 |
| 23.6 |
| (2.4 | ) |
Net Gain (Loss) from Dispositions of Assets |
| 0.4 |
| (0.1 | ) | 668.4 |
|
Operating Profit |
| 2.9 |
| 1.3 |
| 122.0 |
|
Non-operating Income |
| 0.3 |
| 0.4 |
| (15.7 | ) |
Interest Expense |
| 2.3 |
| 1.9 |
| 22.4 |
|
Earnings (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle |
| 1.0 |
| (0.2 | ) | 737.3 |
|
Income Tax (Benefit) Expense |
| 39.6 | (4) | (3.7 | )(4) | 6,700.0 |
|
Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle |
| 0.6 |
| (0.2 | ) | 471.4 |
|
Discontinued Operations, Net of Tax |
| — |
| — |
| 56.3 |
|
Cumulative Effect of Change in Accounting Principle, Net of Tax |
| — |
| — |
| (100.0 | ) |
Net Earnings (Loss) |
| 0.6 |
| (0.2 | ) | 551.6 |
|
| 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 (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle. |
Thirteen Weeks Ended May 5, 2007 vs. Thirteen Weeks Ended April 29, 2006
Total revenues for the first quarter decreased 1.9% and comparable store revenues decreased 2.3% primarily due to reduced retail and commercial merchandise sales. Comparable merchandise sales decreased 3.1%, while comparable service revenue increased 1.5%. Merchandise sales were affected by the removal of commercial delivery from fifty-five stores and fewer promotional sales.
Gross profit from merchandise sales increased as a percentage of merchandise sales, to 29.1% in fiscal 2007 from 27.9% in fiscal 2006. Gross profit from merchandise sales increased 1.5% or $1,958,000 from the comparative period in the prior year. Our product margin improved due to improved acquisition costs, reduced inventory shrinkage and a $1,300,000 gain on the settlement of an inventory insurance claim resulting from Hurricane Katrina. In addition to our improving product margin, our merchandise margin was favorably impacted by reduced warehousing and distribution costs which was offset slightly by increased rental expense within our occupancy cost.
21
Gross profit from service revenue increased, as a percentage of service revenue to 12.0% in fiscal 2007 from 11.2% in fiscal 2006. Gross profit from service revenue increased 8.6% or $956,000 from the comparative period in the prior year. This increase, as a percentage of service revenue, was due to reduced depreciation and employee benefit expenses.
Selling, general and administrative expenses, as a percentage of total revenues, were 23.5% and 23.6% in fiscal 2007 and fiscal 2006, respectively. Selling, general and administrative expenses decreased 2.4% or $3,149,000 from the comparative period in the prior year. Fiscal year 2007 reflects a $3,900,000 CEO transition charge and fiscal year 2006 reflects a favorable $2,300,000 insurance settlement. Also contributing to the decrease in selling, general and administrative expense was lower payroll and media expenses.
Net gain (loss) from dispositions of assets favorably increased from the prior year, principally from a $2,400,000 gain, recorded in the first quarter of fiscal 2007, for the settlement of an insurance claim relating to stores impaired during Hurricane Katrina in 2005.
Interest expense increased $2,319,000 primarily due to higher incurred interest rates and a $974,000 expense for changes in the fair value of an interest rate swap agreement that exchanges floating rate payments for a fixed rate on a $200,000,000 notional amount. On April 9, 2007, the Company documented that the swap qualifies for hedge accounting treatment and prospectively recorded the effective portion of the change in fair value through Accumulated Other Comprehensive Loss.
Net earnings of $3,175,000 for the first quarter of fiscal 2007, improved $3,878,000 from the prior fiscal year principally from improved margins and lower selling, general and administrative expenses which were partially offset by higher interest expense and income tax expense.
INDUSTRY COMPARISON
We operate in the U.S. automotive aftermarket, which has two general competitive arenas: Do-It-For-Me (“DIFM”) (service labor, installed merchandise and tires) market and the Do-It-Yourself (“DIY”) (retail merchandise) market. Generally, the specialized automotive retailers focus on either the “DIY” or “DIFM” areas of the business. We believe that our operation in both the “DIY” and “DIFM” areas of the business positively differentiates us from most of our competitors. Although we manage our store performance at a store level in aggregation, we believe that the following presentation shows a representative comparison against competitors within the two sales arenas. We compete in the “DIY” area of the business through our retail sales floor and commercial sales business (Retail Sales). Our Service Center Business (labor and installed merchandise and tires) competes in the “DIFM” area of the industry.
The following table presents the revenues and gross profit for each area of the business.
|
| Thirteen weeks ended |
| ||||
|
| May 5, |
| April 29, |
| ||
(dollar amounts in thousands) |
| 2007 |
| 2006 |
| ||
|
|
|
|
|
| ||
Retail Sales (1) |
| $ | 314,704 |
| $ | 327,957 |
|
Service Center Revenue (2) |
| 231,309 |
| 228,644 |
| ||
Total Revenues |
| $ | 546,013 |
| $ | 556,601 |
|
|
|
|
|
|
| ||
Gross Profit from Retail Sales (3) |
| $ | 89,743 |
| $ | 89,560 |
|
Gross Profit from Service Center Revenue (3) |
| 52,049 |
| 49,318 |
| ||
Total Gross Profit |
| $ | 141,792 |
| $ | 138,878 |
|
(1) Excludes revenues from installed products.
(2) Includes revenues from installed products.
(3) Gross Profit from Retail Sales includes the cost of products sold, buying, warehousing and store occupancy costs. Gross Profit from Service Center Revenue includes the cost of installed products sold, buying, warehousing, 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.
22
NEW ACCOUNTING STANDARDS TO BE ADOPTED
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines the term fair value, establishes a framework for measuring it within generally accepted accounting principles and expands disclosures about its measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS No. 157 on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS No. 159 on our consolidated financial statements.
In March 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on issue number 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements”, (“EITF 06-10”). EITF 06-10 provides guidance to help companies determine whether a liability for the postretirement benefit associated with a collateral assignment split-dollar life insurance arrangement should be recorded in accordance with either SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (if, in substance, a postretirement benefit plan exists), or Accounting Principles Board Opinion No. 12. (if the arrangement is, in substance, an individual deferred compensation contract). EITF 06-10 also provides guidance on how a company should recognize and measure the asset in a collateral assignment split-dollar life insurance contract. EITF 06-10 is effective for fiscal years beginning after December 15, 2007, though early adoption is permitted. We are currently evaluating the impact of EITF 06-10 on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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. Additionally, the Company estimates its interim product gross margins in accordance with Accounting Principles Bulletin No. 28, “Interim Financial Reporting”.
On an on-going basis, we evaluate our 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. We base our 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 our Form 10-K/A for the year ended February 3, 2007, which disclosures are hereby incorporated by reference.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,” “expect,” “anticipate,” “estimates,” “forecasts” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include management’s expectations regarding future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Our actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond our control, including the strength of the national and regional economies, retail and commercial consumers’ ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of our stores, competitive pricing, the location and number of competitors’ stores, product and labor costs and the additional factors described in our filings with the Securities and Exchange Commission (SEC). We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement, changes in LIBOR could affect the rates at which the Company could borrow funds thereunder. At May 5, 2007, the Company had borrowings of $107,200,000 under this facility. Additionally, the Company has a $320,000,000 Senior Secured Term Loan facility that bears interest at LIBOR plus 2.0%, and approximately $117,066,000 of real estate operating leases which vary based on changes in LIBOR.
On June 3, 2003, we entered into an interest rate swap which was designated as a cash flow hedge of the company’s real estate operating lease payments. During the fourth quarter 2006, we removed the designation as a cash flow hedge and record the change in fair value through the operating statement until its termination date on July 1, 2008. During the thirteen weeks ended May 5, 2007, a $829,000 expense was recorded in cost of merchandise sales for the change in fair value of this swap.
On November 2, 2006, the Company entered into an interest rate swap for a notional amount of $200,000,000. The Company has designated the swap a cash flow hedge on the first $200,000,000 of the Company’s $320,000,000 senior secured notes. The interest rate swap converts the variable LIBOR portion of the interest payments to a fixed rate of 5.036% and terminates in October 2013. The Company, from inception through April 8, 2007, reflected the change in fair value in Interest Expense. The Company documented that the swap met the requirements of SFAS No. 133 for hedge accounting on April 9, 2007, and prospectively recorded the effective portion of the change in fair value through Accumulated Other Comprehensive Loss. During the period from February 4, 2007 through April 8, 2007, a $974,000 expense was recorded in interest expense for the change in fair value of this swap.
As of May 5, 2007 and February 3, 2007, the fair value of the interest rate swaps were $2,254,000 and $5,522,000. $1,465,000 of the $3,268,000 decline in fair value was included in Accumulated Other Comprehensive Loss on the condensed consolidated balance sheet.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our disclosure controls and procedures (as defined in Rule 13a - 15 of the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, re-evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that re-evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, solely due to the fact that there was a material weakness in our internal control over financial reporting (which is a subset of disclosure controls and procedures) as described below.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fiscal quarter covered by this report, a change in the Company’s internal control over financial reporting occurred that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting in that the Company determined it had a material weakness in its internal control over financial reporting related to preparation and review of the Company’s supplemental guarantor information note and condensed consolidated statements of cash flows presentation which resulted in the errors described in Note 14.
Other than described above, no change in the Company’s internal control over financial reporting occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
24
During the fourth quarter of 2006 and the first quarter of 2007, the Company has served with four separate lawsuits brought by former associates employed in California, each of which lawsuits purports to be a class action on behalf of all current and former California store associates. One or more of the lawsuits claim that the plaintiff was not paid for (i) overtime, (ii) accrued vacation time, (iii) all time worked (i.e. “off the clock” work) and/or (iv) late or missed meal periods or rest breaks. The plaintiffs also allege that the Company violated certain record keeping requirements arising out of the foregoing alleged violations. The lawsuits (i) claim these alleged practices are unfair business practices, (ii) request back pay, restitution, penalties, interest and attorney fees and (iii) request that the Company be enjoined from committing further unfair business practices. The Company believes that it has meritorious defenses to all of these claims and intends to defend these claims vigorously. However, an adverse determination of these claims could have a material effect on the Company’s results of operations in the period(s) during which they are determined.
The Company is also party to various actions and claims arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
There have been no changes to the risks described in the Company’s Annual Report on Form 10-K/A for the fiscal year ended February 3, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Company Purchases of Equity Securities
On September 7, 2006, the Company renewed its share repurchase program and reset the authority back to $100,000,000 for repurchases to be made from time to time in the open market or in privately negotiated transactions through September 30, 2007.
Fiscal Period |
| Total |
| Average |
| Total Number of |
| Approximate Dollar |
| |||
February 4 - March 3, 2007 (3) |
| 544,900 |
| $ | 14.80 |
| $ | 544,900 |
| $ | 91,950,000 |
|
March 4 - April 7, 2007 |
| 1,378,675 |
| $ | 18.38 |
| 1,378,675 |
| $ | 66,648,000 |
| |
April 8 - May 5, 2007 |
| 1,273,685 |
| $ | 19.43 |
| 1,273,685 |
| $ | 41,945,000 |
| |
Total |
| 3,197,260 |
| $ | 18.19 |
| $ | 3,197,260 |
|
|
|
(1) All repurchases referenced in this table were made on the open market at prevailing market rates plus related expenses under our stock repurchase program.
(2) Excludes expenses.
(3) Includes 494,800 shares, with an average price paid of $14.77 or $7,310,565, purchased in fiscal year 2006 and settled in this period.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
None.
25
Item 6. Exhibits and Reports on Form 8-K
(a) |
|
|
|
|
|
(31.1)** |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(31.2)** |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(32.1)** |
| 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 |
|
|
|
(32.2)** |
| 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 |
** - - Filed herewith
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the Quarterly Report on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.
| THE PEP BOYS - MANNY, MOE & JACK |
|
| |||
| (Registrant) | |||||
|
| |||||
Date: November 2, 2007 |
| by: |
| /s/ Harry F. Yanowitz | ||
|
|
|
| Harry F. Yanowitz | ||
|
|
|
| Senior Vice President and | ||
|
|
|
| Chief Financial Officer | ||
|
|
|
|
| ||
27
(31.1)** |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(31.2)** |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(32.1)** |
| 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 |
|
|
|
(32.2)** |
| 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 |
** Filed herewith
28