exempt from the overtime provisions of California law and sought to be compensated for all overtime hours worked. The Company made final payments of $26,582,000 in satisfaction of the settlement in the first quarter of fiscal 2004 from its legal reserves recorded in accrued expenses on the Company’s Consolidated Balance Sheet.
In the third quarter of fiscal 2004, the Company announced a share repurchase program for up to $100,000,000 of our common shares. Under the program, the Company may repurchase its shares of common stock in the open market or in privately negotiated transactions, from time to time prior to September 8, 2005. As of January 29, 2005, the Company had repurchased a total of 3,077,000 shares at an average cost of $12.91 ($39,718,000).
The following chart represents the Company’s total contractual obligations and commercial commitments as of January 29, 2005
The table excludes our pension obligation. We made voluntary contributions of $1,819,000, $14,043,000 and $6,766,000 to our pension plans in fiscal 2004, 2003, and 2002, respectively. Future plan contributions are dependent upon actual plan asset returns and interest rates. We expect contributions to approximate $1,100,000 in fiscal 2005. See Note 10 of Notes to Consolidated Financial Statements in “Item 8 Financial Statements and Supplementary Data” for further discussion of our pension plans.
In January 2005, the Company repurchased, in private transactions, $31,000,000 aggregate principal amount of its 4.25% Convertible Senior Notes due June 1, 2007, with proceeds from the Company’s 7.50% Senior Subordinated Notes offering.
On December 14, 2004, the Company issued $200,000,000 aggregate principal amount of 7.50% Senior Subordinated Notes due December 15, 2014. These notes are unsecured and jointly and severally guaranteed by its wholly-owned direct and indirect operating subsidiaries, The Pep Boys—Manny, Moe and Jack of California, Pep Boys—Manny, Moe and Jack of Delaware, Inc., Pep Boys — Manny, Moe and Jack of Puerto Rico, Inc. and PBY Corporation. Interest on the notes is payable on June 15 and December 15 starting on June 15, 2005.
On December 2, 2004, the Company further amended its amended and restated line of credit agreement. The amendment increased the amount available for borrowings to $357,500,000, with the ability, upon satisfaction of certain conditions, to increase such amount to $400,000,000. The amendment also reduced the interest rate under the agreement to the London Interbank Offered Rate (“LIBOR”) plus 1.75% from LIBOR plus 2.0%. After June 1, 2005, the rate reduces to LIBOR plus 1.50%, subject to 0.25% incremental increases as excess availability falls below $50,000,000. The amendment also provided the flexibility, upon satisfaction of certain conditions, to release
up to $99,000,000 of reserves required as of December 2, 2004 to support certain operating leases. This reserve was reduced to $76,401,378 on December 2, 2004. Finally, the amendment extended the term of the agreement through December 2009. The weighted average interest rate on borrowings under the line of credit agreement was 4.1% and 3.4% at January 29, 2005 and January 31, 2004, respectively.
In December 2004, the Company repurchased, through a tender offer, $59,556,000 aggregate principal amount of its 7.00% Senior Notes due June 1, 2005 with proceeds from the Company’s 7.50% Senior Subordinated Notes offering. In the second quarter of 2004, the Company reclassified the $100,000,000 aggregate principal amount of the 7.00% Senior Notes then outstanding to current liabilities on the consolidated balance sheet.
Upon maturity on November 5, 2004, the Company retired the remaining $16,000,000 aggregate principal amount of its 6.67% Medium-Term Notes with cash from operations and its existing line of credit. In the fourth quarter of fiscal 2003, the Company reclassified the $16,000,000 aggregate principal amount of these Notes then outstanding to current liabilities on the balance sheet.
Upon maturity on November 3, 2004, the Company retired the remaining $30,000,000 aggregate principal amount of its 6.71% Medium-Term Notes with cash from operations and its existing line of credit. In the second quarter of fiscal 2004, the Company repurchased, on the open market, $5,000,000 aggregate principal amount of the 6.71% Medium-Term Notes with cash from operations. In the fourth quarter of 2003, the Company reclassified the $35,000,000 aggregate principal amount of these Notes then outstanding to current liabilities on the balance sheet.
On April 1, 2004, the Company prepaid $22,419,000 in aggregate principal amount of the outstanding Senior Secured Credit Facility (equipment and real estate) with proceeds from the Company’s March 2004 common stock offering.
In the first quarter of fiscal 2004, the Company repurchased, on the open market, $32,000,000 aggregate principal amount of its 6.75% Medium-Term Notes due March 10, 2004 and $25,000,000 aggregate principal amount of its 6.65% Medium-Term Notes due March 3, 2004. Within the first quarter of fiscal 2003, the Company reclassified the $32,000,000 aggregate principal amount of the 6.75% Medium-Term Notes then outstanding and the $25,000,000 aggregate principal amount of the 6.65% Medium-Term Notes then outstanding to current liabilities on the consolidated balance sheet.
In the first quarter of fiscal 2004, the Company entered into arrangements with certain of its vendors and banks to extend payment terms on certain merchandise purchases. Under this program, the bank makes payments to the vendor based upon a negotiated discount rate between the parties and the Company makes its payment of the full payable to the bank at the extended payment term. As of July 31, 2004, all obligations under these arrangements were fully satisfied and the agreement was terminated.
Other Contractual Obligations
In the third quarter of fiscal 2004, the Company entered into a vendor financing program with an availability of $20,000,000. Under this program, the Company’s factor makes accelerated and discounted payments to its vendors and the Company, in turn, makes its regularly-scheduled full vendor payments to the factor. As of January 29, 2005, there was no outstanding balance under this program.
In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773,000 over four years. During the second quarter of fiscal 2004, it was determined that the Company would be unable to meet this obligation for the 2004 contract year which ended on November 30, 2004. As a result, the Company recorded a $1,579,000 charge to selling, general and administrative expenses in the quarter ending July 31, 2004 related to the anticipated shortfall in this purchase commitment. The minimum required purchases for 2005 (the remaining year of this commitment) is $7,009,000, which the Company expects to meet.
The Company has letter of credit arrangements with selected vendors to assure collectibility of balances owed to these vendors. The Company is contingently liable for $959,793 in outstanding import letters of credit and $35,493,000 in outstanding standby letters of credit as of January 29, 2005.
The Company is also contingently liable for surety bonds in the amount of approximately $4,442,000 as of January 29, 2005. The surety bonds guarantee certain payments (for example utilities, easement repairs, workers’ compensation, customs fees, etc.) for the Company’s stores.
17
Off-balance Sheet Arrangements
In the third quarter of fiscal 2004, the Company entered into a new operating lease for certain operating equipment. The new $35,000,000 equipment operating lease has an interest rate of LIBOR plus 2.25%. The Company has evaluated this transaction in accordance with the original guidance of Financial Interpretation Number (FIN) 46 and has determined that it is not required to consolidate the leasing entity. As of January 29, 2005, there was an outstanding balance of $18,172,000 under the lease.
On August 1, 2003, the Company refinanced $132,000,000 in operating leases. These leases, which expire on August 1, 2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in accordance with the original guidance of FIN 46 and has determined that it is not required to consolidate the leasing entity. The leases include a residual value guarantee with a maximum value of approximately $105,000,000. The Company expects the fair market value of the leased real estate to substantially reduce or eliminate the Company’s payment under the residual guarantee at the end of the lease term.
In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee related to this operating lease. As of January 29, 2005, the current value of this liability was $3,491,000 which is recorded in other long-term liabilities on the consolidated balance sheets.
In May 2001, the Company sold certain operating assets for $14,000,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease was accounted for as an operating lease and the gain of $3,817,000 from the sale of certain operating assets was deferred at the time of sale. In May 2004, the Company repurchased these assets for $5,468,000. The remaining deferred gain of $3,729,000 was netted against the purchase price of the repurchased assets resulting in a net book value of $1,739,000 recorded on the consolidated balance sheet as of July 31, 2004 for the repurchased assets.
The Company leases certain property and equipment under operating leases and capital leases which contain renewal and escalation clauses, step rent provisions, capital improvements funding and other lease concessions. These provisions are considered in the Company’s calculation of its minimum lease payments which are recognized as expense on a straight-line basis over the applicable lease term. In accordance with the Financial Accounting Standards Board (FASB), Statement of Financial Accounting Standards (SFAS) No. 13, as amended by SFAS No. 29, any lease payments that are based upon an existing index or rate are included in the Company’s minimum lease payment calculations. Total operating lease commitments as of January 29, 2005 were $471,028,000.
Pension Plans
The Company has a defined benefit pension plan covering its full-time employees hired on or before February 1, 1992 and an unfunded Supplemental Executive Retirement Plan (SERP) that includes a defined benefit portion. The pension expense under these plans for fiscal 2004, 2003 and 2002 was $4,076,000, $11,937,000 and $3,243,000, respectively. This expense is calculated based upon a number of actuarial assumptions, including an expected return on plan assets of 6.75% and a discount rate of 6.25%. In developing the expected return on asset assumptions, the Company evaluated input from its actuaries, including their review of asset class return expectations. The discount rate utilized is based on a review of AA bond performance. The Company will continue to evaluate its actuarial assumptions and adjust as necessary. In fiscal 2004, the Company contributed an aggregate of $1,819,000 to the defined benefit pension plan and the defined benefit portion of the SERP. Based upon the current funded status of the defined benefit pension plan and the unfunded defined benefit portion of the SERP, aggregate cash contributions are expected to be $1,090,000 in fiscal 2005.
On January 31, 2004, the Company amended and restated its SERP. This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants. All vested participants under the defined benefit portion will continue to accrue benefits according to the previous defined benefit formula. In fiscal 2004, the Company settled several obligations related to the benefits under the defined benefit SERP. These obligations totaled $2,065,000. These obligations resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” of approximately $774,000 in fiscal 2004.
In fiscal 2003, the Company settled an obligation of $12,620,000 related to the SERP obligation for the former Chairman and CEO. Also, the Company curtailed the benefits for 15 covered individuals as of January 31, 2004,
18
and transferred a portion of their accrued benefits to the new defined contribution portion of the SERP. These obligations resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” of approximately $5,231,000 and $2,191,000, respectively, in fiscal 2003.
RESULTS OF OPERATIONS
Management Overview—Fiscal 2004
The Company experienced comparable sales growth of 6.6% and improved profitability over 2003, a year in which significant restructuring of the business took place. While our promotional programs in the fourth quarter reduced our merchandise margins, continued focus on controlling and managing our operating expenses and lower debt levels improved our net results from continuing operations.
Restructuring—Fiscal 2003
Following the Profit Enhancement Plan launched in October 2000, the Company, during fiscal 2003, conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon its profitability. These actions were substantially completed by January 31, 2004 with net costs of approximately $65,986,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.
Discontinued Operations
In accordance with SFAS No.144, the Company’s discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of its corporate restructuring. The results for the fifty-two weeks ended January 29, 2005, January 31, 2004, and February 1, 2003 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results:
(dollar amounts in thousands)
| | | |
|---|
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
| Total Revenues | | | | $ | 1 | | | $ | 37,722 | | | $ | 74,711 | |
| Total Gross (Loss) Profit | | | | | (3,342 | ) | | | (15,695 | ) | | | 17,215 | |
| Selling, General, and Administrative Expenses | | | | | (10 | ) | | | 9,981 | | | | 16,283 | |
(Loss) Earnings from Discontinued Operations
Before Income Taxes | | | | | (3,332 | ) | | | (25,675 | ) | | | 932 | |
| (Loss) Earnings from Discontinued Operations, Net of Tax | | | | $ | (2,087 | ) | | $ | (16,265 | ) | | $ | 587 | |
Additionally, the Company has made certain reclassifications to its consolidated balance sheets to reflect the assets held for disposal associated with the 33 stores closed on July 31, 2003. As of January 29, 2005 and January 31, 2004, the balances reclassified to assets held for disposal were as follows:
(dollar amounts in thousands)
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
| Land | | | | $ | 543 | | | $ | 8,954 | |
| Building and improvements | | | | | 122 | | | | 7,975 | |
| | | | | $ | 665 | | | $ | 16,929 | |
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Two of the Company’s closed stores remained unsold as of January 29, 2005. One of the properties is without an executed agreement of sale and was reclassified in the second quarter of fiscal 2004 to assets held for use at market value, which is lower than cost adjusted for depreciation. The other property is the subject of an executed agreement of sale as of January 29, 2005 and therefore will remain in assets held for disposal until the completion of sale.
During fiscal 2004, the Company sold assets held for disposal for proceeds of $13,327,000 resulting in a loss of $91,000 which was recorded in discontinued operations on the consolidated statement of operations.
During fiscal 2003, the Company sold assets held for disposal for proceeds of $12,068,000 resulting in a gain of $7,097,000 which was recorded in discontinued operations on the consolidated statement of operations.
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Analysis of Statement of Operations
The following table presents, for the periods indicated, certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
|
|
|
| Percentage of Total Revenues
|
| Percentage Change
|
|
|---|
Year ended
|
|
|
| Jan. 29, 2005
(fiscal 2004)
|
| Jan. 31, 2004
(fiscal 2003)
|
| Feb. 1, 2003
(Fiscal 2002)
|
| Fiscal 2004 vs.
Fiscal 2003
|
| Fiscal 2003 vs.
Fiscal 2002
|
|---|
| Merchandise Sales | | | | | 82.0 | % | | | 81.0 | % | | | 80.9 | % | | | 7.8 | % | | | 1.8 | % |
Service Revenue(1) | | | | | 18.0 | | | | 19.0 | | | | 19.1 | | | | 1.0 | | | | 1.4 | |
| Total Revenues | | | | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 6.5 | | | | 1.7 | |
| Costs of Merchandise Sales(2) | | | | | 71.6 | (3) | | | 71.9 | (3) | | | 70.0 | (3) | | | 7.3 | | | | 4.6 | |
Costs of Service Revenue(2) | | | | | 77.4 | (3) | | | 76.7 | (3) | | | 74.9 | (3) | | | 1.9 | | | | 3.8 | |
| Total Costs of Revenues | | | | | 72.6 | | | | 72.8 | | | | 70.9 | | | | 6.2 | | | | 4.4 | |
| | Gross Profit from Merchandise Sales | | | | | 28.4 | (3) | | | 28.1 | (3) | | | 30.0 | (3) | | | 9.0 | | | | (4.6 | ) |
| Gross Profit from Service Revenue | | | | | 22.6 | (3) | | | 23.3 | (3) | | | 25.1 | (3) | | | (2.1 | ) | | | (5.6 | ) |
| Total Gross Profit | | | | | 27.4 | | | | 27.2 | | | | 29.1 | | | | 7.2 | | | | (4.8 | ) |
| Selling, General and
Administrative Expenses | | | | | 24.1 | | | | 26.7 | | | | 24.0 | | | | (3.9 | ) | | | 13.0 | |
| Operating Profit | | | | | 3.3 | | | | 0.5 | | | | 5.1 | | | | 585.8 | | | | (89.7 | ) |
| Non-operating Income | | | | | 0.1 | | | | 0.2 | | | | 0.1 | | | | (45.4 | ) | | | 7.8 | |
| Interest Expense | | | | | 1.6 | | | | 1.8 | | | | 2.2 | | | | (6.0 | ) | | | (19.0 | ) |
Earnings (Loss) from Continuing Operations Before Income Taxes
and Cumulative Effect of Change
in Accounting Principle | | | | | 1.8 | | | | (1.1 | ) | | | 3.0 | | | | 271.0 | | | | (138.9 | ) |
| | Income Tax Expense (Benefit) | | | | | 37.4 | (4) | | | 36.7 | (4) | | | 36.9 | (4) | | | 273.7 | | | | (138.7 | ) |
| Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle | | | | | 1.1 | | | | (0.7 | ) | | | 1.9 | | | | 269.5 | | | | (139.0 | ) |
| | (Loss) Earnings from Discontinued Operations, Net of Tax | | | | | (0.1 | ) | | | (0.8 | ) | | | 0.0 | | | | 87.2 | | | | (2,870.9 | ) |
| | Cumulative Effect of Change in Accounting Principle, Net of Tax | | | | | — | | | | (0.1 | ) | | | — | | | | — | | | | — | |
| Net Earnings (Loss) | | | | | 1.0 | | | | (1.6 | ) | | | 1.9 | | | | 169.6 | | | | (185.9 | ) |
| (1) | | Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. |
| (2) | | Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. |
| (3) | | As a percentage of related sales or revenue, as applicable. |
| (4) | | As a percentage of earnings (loss) before income taxes. |
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Fiscal 2004 vs. Fiscal 2003
Total revenues for fiscal 2004 increased 6.5%. This increase was due primarily to an increase in comparable store revenues of 6.6%. Comparable store service revenue increased 1.1% while comparable store merchandise sales increased 7.9%. All stores that are included in the comparable store sales base as of the end of the period are included in the Company’s comparable store data calculations. Upon reaching its 13th month of operation, a store is added to our comparable store sales base. Stores are removed from the comparable store sales base upon their relocation or closure. Once a relocated store reaches its 13th month of operation at its new location, it is added back into our comparable store sales base. Square footage increases are infrequent and immaterial and, accordingly, are not considered in our calculations of comparable store data.
Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 28.4% in fiscal 2004 from 28.1% in fiscal 2003. This was a 9.0% or $43,693,000 increase from the prior year. This increase, as a percentage of merchandise sales, was due to reduced product costs as a result of an increase of $30,316,000 in excess cooperative advertising reimbursements, and the recognition of a $12,695,000 gain on the disposal of one of the Company’s distribution centers and a decrease in store occupancy costs, offset in part, by decreased merchandise margins. The decrease in store occupancy costs, as a percentage of merchandise sales, was due to the impact of a charge made in 2003 for an asset impairment of $1,371,000 coupled with lower rent, as a percentage of merchandise sales. The decrease in merchandise margins was due primarily to promotional pricing in fiscal 2004 as compared to fiscal 2003 which was negatively impacted by an inventory write down of $24,580,000 made in the second quarter as a result of the restructuring.
Gross profit from service revenue decreased, as a percentage of service revenue, to 22.6% in fiscal 2004 from 23.3% in fiscal 2003. This was a 2.1% or $2,023,000 decrease from the prior year. This decrease, as a percentage of service revenue, was due primarily to increases in service employee benefits. The increase in employee benefits was due primarily to increased workers’ compensation costs.
Selling, general and administrative expenses decreased, as a percentage of total revenues, to 24.1% in fiscal 2004 from 26.7% in fiscal 2003. This was a $22,498,000 or 3.9% decrease over the prior year. This decrease, as a percentage of total revenues, was due primarily to a decrease in general office costs and employee benefits offset, in part, by an increase in net media expense. The decrease in general office costs was due to incremental savings from our 2003 restructuring actions of approximately $4,000,000, the impact in fiscal 2003 of increased legal costs of $24,600,000 related to the action entitled “Dubrow et al vs. The Pep Boys—Manny, Moe and Jack” and $5,613,000 for costs associated with the corporate restructuring. The decrease in employee benefits is due to savings in fiscal 2004 from our fiscal 2003 restructuring actions, along with the impact of a charge made in 2003 for the settlement of a retirement plan obligation. The increase in net media expense, as a percentage of total revenues, was due primarily to an increase in media expenditures resulting from a more aggressive circular advertising program in fiscal 2004, and a $5,421,000 decrease in cooperative advertising.
Interest expense decreased 6.0% or $2,290,000 due primarily to lower debt levels.
Loss from discontinued operations decreased from a loss of $16,265,000, net of tax, in fiscal 2003 to a loss of $2,087,000, net of tax, in fiscal 2004 due to the fact that the charges associated with the corporate restructuring occurred primarily in fiscal 2003.
Net earnings increased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales as a percentage of merchandise sales, a decrease in selling, general and administrative expenses and a decrease in interest expense as a percentage of total revenues coupled with a decrease in the loss from discontinued operations and the impact of a net charge for the cumulative effect of a change in accounting principle for the adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations” recorded in fiscal 2003.
Fiscal 2003 vs. Fiscal 2002
Total revenues for fiscal 2003 increased 1.7%. This increase was due primarily to an increase in comparable store revenues of 1.6%. Comparable store service revenue increased 1.3% while comparable store merchandise sales increased 1.7%.
Gross profit from merchandise sales decreased, as a percentage of merchandise sales, to 28.1% in fiscal 2003 from 30.0% in fiscal 2002. This decrease, as a percentage of merchandise sales, was due primarily to a $24,580,000
22
inventory write-down associated with the corporate restructuring, increased store occupancy costs, increased warehousing costs and an impairment charge of $1,371,000, offset by reduced product costs as a result of an increase of $18,634,000 in excess cooperative advertising reimbursements. The increase in store occupancy costs was due to higher rent and utilities expenses. The increase in warehousing costs was due to higher rent and delivery expenses.Gross profit from service revenue decreased, as a percentage of service revenue, to 23.3% in fiscal 2003 from 25.1% in fiscal 2002. This decrease, as a percentage of service revenue, was due primarily to an increase in workers’ compensation expense.
Selling, general and administrative expenses increased, as a percentage of total revenues, to 26.7% in fiscal 2003 from 24.0% in fiscal 2002. This was a $65,671,000 or 13.0% increase over the prior year. This increase, as a percentage of total revenues, was due primarily to an increase in general office costs, net media expense and employee benefits, as a percentage of total revenues. The increase in general office costs was due primarily to an increase in the Company’s legal reserves of approximately $24,600,000 related to the settlement of the action entitled “Dubrow et al vs. The Pep Boys—Manny, Moe and Jack” in the third quarter of fiscal 2003, a $13,164,000 impairment charge for a portion of the point-of-sale information system project, and $5,613,000 of costs associated with the corporate restructuring in 2003, offset by savings from our 2003 restructuring actions of $4,000,000. The increase in net media expense is due primarily to increased radio and circular advertising expense and a $5,473,000 decrease in cooperative advertising. The increase in employee benefits was due primarily to the settlement of retirement plan obligations and increased health benefits expense, offset by savings from our fiscal 2003 corporate restructuring actions.
Interest expense decreased 19.0% or $8,982,000 due primarily to lower debt levels coupled with lower average interest rates.
Earnings from discontinued operations decreased $16,852,000, net of tax, due primarily to the charges associated with the corporate restructuring.
Net earnings decreased, as a percentage of total revenues, due primarily to a decrease in gross profit from merchandise sales, as a percentage of merchandise sales, a decrease in gross profit from service revenue, as a percentage of service revenue, an increase in selling, general and administrative expenses, as a percentage of total revenues, a cumulative effect of change in accounting principle of $2,484,000, net of tax, and a decrease in earnings from discontinued operations offset, in part, by a decrease in interest expense.
Effects of Inflation
The Company uses the LIFO method of inventory valuation. Thus, the cost of merchandise sold approximates current cost. Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on revenues or results of operations during all fiscal years presented.
Industry Comparison
The Company operates in the U.S. automotive aftermarket, which as described in the industry overview section is split into two areas: the 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. The Company believes that its operation in both the DIY and DIFM areas of the business positively differentiates it from most of its competitors. Although the Company manages its store performance at a store level in aggregation, management believes that the following presentation shows the comparison against competitors within the two areas. The Company competes in the DIY area of the business through its retail sales floor and commercial sales business (Retail Business). The Company considers its Service Business (labor and installed merchandise and tires) to compete in the DIFM area of the industry. The following table presents the revenues and gross profit for each area of the business.
23
(dollar amounts in thousands)
| | | |
|---|
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
| Retail Revenues | | | | $ | 1,352,695 | | | $ | 1,195,757 | | | $ | 1,163,808 | |
| Service Business Revenues | | | | | 920,201 | | | | 938,513 | | | | 933,969 | |
| Total Revenues | | | | $ | 2,272,896 | | | $ | 2,134,270 | | | $ | 2,097,777 | |
Gross Profit from Retail Revenues(1) | | | | $ | 367,118 | | | $ | 309,214 | | | $ | 322,986 | |
Gross Profit from Service Business Revenues(1) | | | | | 255,340 | | | | 271,574 | | | | 286,980 | |
| Total Gross Profit | | | | $ | 622,458 | | | $ | 580,788 | | | $ | 609,966 | |
| (1) | | Gross Profit from Retail Revenues includes the cost of products sold, buying, warehousing and store occupancy costs. Gross Profit from Service Business Revenues 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. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States 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. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes that the following represent its more critical estimates and assumptions used in the preparation of the consolidated financial statements, although not inclusive:
| • | | The Company evaluates whether inventory is stated at the lower of cost or market based on historical experience with the carrying value and life of inventory. The assumptions used in this evaluation are based on current market conditions and the Company believes inventory is stated at the lower of cost or market in the consolidated financial statements. In addition, historically the Company has been able to return excess items to vendors for credit. Future changes in vendors, in their policies or in their willingness to accept returns of excess inventory could require a revision in the estimates. If our estimates regarding excess or obsolete inventory are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in these estimates at January 29, 2005 would have affected net earnings by approximately $795,000 for the fiscal year ended January 29, 2005. |
| • | | The Company has risk participation arrangements with respect to casualty and health care insurance. The amounts included in the Company’s costs related to these arrangements are estimated and can vary based on changes in assumptions, claims experience or the providers included in the associated insurance programs. A 10% change in our self-insurance liabilities at January 29, 2005 would have affected net earnings by approximately $3,750,000 for the fiscal year ended January 29, 2005. |
| • | | The Company records reserves for future product returns and warranty claims. The reserves are based on current sales of products and historical claims experience. If claims experience differs from historical levels, revisions in the Company’s estimates may be required. A 10% change in our reserve for future product returns and warranty claims at January 29, 2005 would have affected net earnings by approximately $394,000 for the fiscal year ended January 29, 2005. |
24
| • | | The Company has significant pension costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates and merit and promotion increases. The Company is required to consider current market conditions, including changes in interest rates, in selecting these assumptions. Changes in the related pension costs or liabilities may occur in the future due to changes in the assumptions. The following table highlights the sensitivity of our pension benefit obligations (PBO) and expense to changes in these assumptions, assuming all other assumptions remain constant: |
(dollar amounts in thousands)
| | | |
|---|
Change in Assumption
|
|
|
| Impact on Annual
Pension Expense
| Impact on PBO
|
|---|
| 0.25 percentage point decrease in discount rate | | | | | Increase $220 | | Increase $1,250 |
| 0.25 percentage point increase in discount rate | | | | | Decrease $220 | | Decrease $1,250 |
| 5% decrease in expected rate of return on assets | | | | | Increase $110 | | — |
| 5% increase in expected rate of return on assets | | | | | Decrease $115 | | — |
| • | | The Company periodically evaluates its long-lived assets for indicators of impairment. Management’s judgments are based on market and operational conditions at the time of evaluation. Future events could cause management’s conclusion on impairment to change, requiring an adjustment of these assets to their then current fair market value. |
| • | | The Company provides estimates of fair value for real estate assets and lease liabilities related to store closures when appropriate to do so based on accounting principles generally accepted in the United States of America. Future circumstances may result in the Company’s actual future costs or the amounts recognized upon the sale of the property to differ substantially from original estimates. A 10% change in our location closing liability at January 29, 2005 would have affected net earnings by approximately $1,187,000 for the fiscal year ended January 29, 2005. |
| • | | The Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This requires the Company to estimate its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment and valuation of inventories, for tax and accounting purposes. The Company determines its provision for income taxes based on federal and state tax laws and regulations currently in effect, some of which have been recently revised. Legislation changes currently proposed by certain of the states in which we operate, if enacted, could increase our transactions or activities subject to tax. Any such legislation that becomes law could result in an increase in our state income tax expense and our state income taxes paid, which could have an effect on our net income. |
| | | The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a future period, income tax expense will be impacted. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. Net deferred tax liabilities as of January 29, 2005 and January 31, 2004 totaled $45,374,000 and $9,150,000, respectively, representing approximately 3.7% and 0.8% of liabilities, respectively. |
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004) or SFAS No. 123R, “Share-Based Payment”, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supercedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and subsequently issued stock option related guidance. This statement establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods and services, primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or
25
that may be settled by the issuance of those equity instruments. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.The Company is required to apply SFAS No. 123R to all awards granted, modified or settled as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The statement also requires the Company to use either the modified-prospective method or modified retrospective method. Under the modified-prospective method, the Company must recognize compensation cost for all awards subsequent to adopting the standard and for the unvested portion of previously granted awards outstanding upon adoption. Under the modified retrospective method, the Company must restate its previously issued financial statements to recognize the amounts it previously calculated and reported on a pro-forma basis, as if the prior standard had been adopted. Under both methods, the statement permits the use of either the straight-line or an accelerated method to amortize the cost as an expense for awards with graded vesting. The standard permits and encourages early adoption.
The Company has commenced its analysis of the impact of SFAS No. 123R, but has not yet decided: (1) whether to elect early adoption, (2) the early adoption date, if elected, (3) the use of the modified-prospective or modified retrospective method and (4) the election to use straight-line or an accelerated method. Accordingly, the Company has not determined the impact that the adoption of SFAS No. 123R will have on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29”. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exemption for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provision is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have any impact on the Company’s current financial condition or results of operations.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4 ‘Inventory Pricing’.” The standard requires that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be excluded from the cost of inventory and expensed when incurred. The provision is effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.
In November 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations”. This consensus addresses how an ongoing entity should evaluate whether the operations and cash flows of a disposed component have been or will be eliminated from the ongoing operations of the entity. Additionally, it addresses the types of continuing involvement that constitute significant continuing involvement in the operations of the disposed component. The consensus should be applied in fiscal periods beginning after December 15, 2004. The Company does not expect the adoption of this consensus to have a material effect on its financial position, results of operations or cash flows.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2003, the FASB issued SFAS No. 132 (revised 2003) or (SFAS No. 132R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132R revises employers’ disclosures about pension plans and postretirement benefit plans. SFAS No. 132R does not change the measurement and recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” SFAS No. 132R retains the original disclosure requirements contained in SFAS No. 132 and requires additional expanded
26
annual and interim disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement benefit plans. Except for certain provisions, the adoption of this Statement is required for financial statements with fiscal years ending after December 15, 2003. The Company adopted the provisions of SFAS No. 132R in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements. The revised disclosure requirements are reflected in Note 10 of the consolidated financial statements included in Item 8 herein.
In December 2003, the FASB revised FIN 46 (revised 2002) (FIN 46R), “Consolidation of Variable Interest Entities.” FIN 46, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of any expected losses from the variable interest entity’s activities, is entitled to receive any expected residual returns of the variable interest entity, or both. The guidance contained in FIN 46R is effective no later than the end of the first reporting period that ends after March 15, 2004. If an entity has applied the original guidance in this Interpretation prior to the effective date of FIN 46R, the entity shall continue to apply FIN 46 until the effective date or apply this Interpretation at an earlier date. On August 1, 2003 the Company refinanced its real estate operating lease facility, which qualified as a variable interest entity, into a new entity. The Company evaluated this leasing transaction in accordance with the original guidance of FIN 46 and determined it does not have to consolidate this leasing entity. The Company adopted the revised guidance of FIN 46R for variable interest entities created prior to December 31, 2003 in the fourth quarter of 2003 with no material effect on its consolidated financial statements.
In November 2003, the Emerging Issues Task Force (EITF) reached a consensus on EITF 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers”. This consensus addresses whether a reseller should account for consideration received from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales incentives offered directly to consumers in accordance with the guidance in EITF Issue No. 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”. For purposes of this Issue, the “vendor’s sales incentive offered directly to consumers” is limited to a vendor’s incentive (i) that can be tendered by a consumer at resellers that accept manufacturer’s incentives in partial (or full) of the price charged by the reseller for the vendor’s product, (ii) for which the reseller receives a direct reimbursement from the vendor (or a clearinghouse authorized by the vendor) based on the face amount of the incentive, (iii) for which the terms of reimbursement to the reseller for the vendor’s sales incentive offered to the consumer must not be influenced by or negotiated in conjunction with any other incentive arrangements between the vendor and the reseller but, rather may only be determined by the terms of the incentive offered to consumers and (iv) whereby the reseller is subject to an agency relationship with the vendor, whether expressed or implied, in the sales incentive transaction between the vendor and the consumer. The consensus is that sales incentives that meet all of such criteria are not subject to the guidance in Issue No. 02-16. The provisions of EITF No. 03-10 are to be applied to new arrangements, including modifications to existing arrangements, entered into or redeemed in fiscal periods beginning after November 25, 2003. The Company adopted the provisions of EITF 03-10 in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 affects how an entity measures and reports financial instruments that have characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003 and for all other instruments for interim periods beginning after June 15, 2003. The FASB continues to address certain implementation issues associated with the application of SFAS No. 150, including those related to mandatory redeemable financial instruments representing non-controlling interests in subsidiaries’ consolidated financial statements. The Company will continue to monitor the actions of the FASB and assess the impact, if any, on its consolidated financial statements. The Company adopted the effective provisions of SFAS No. 150 in the third quarter of fiscal 2003 with no material effect on its consolidated financial statements.
In May 2003, the EITF reached a consensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” This consensus addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. The guidance in this EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The
27
Company elected early adoption for the provisions of this consensus prospectively in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, resulting primarily from decisions made by the FASB’s Derivatives Implementation Group following the issuance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and is effective for hedging relationships designated after June 30, 2003. The Company adopted this statement in the second quarter of fiscal 2003 with no material effect on its consolidated financial statements.
In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” As a result of rescinding FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, “Reporting the Results of Operations.” This statement also amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company adopted the provisions of SFAS No. 145 in the first quarter of fiscal 2003. Accordingly, reclassifications of gains and losses from extinguishment of debt have been made for fiscal 2002 and 2001 to maintain comparability for the reported periods.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company adopted the provisions of SFAS No. 143 in the first quarter of fiscal 2003 and has recognized an initial asset of $2,844, accumulated depreciation of $2,247, a liability of $4,540 and a cumulative effect of a change in accounting principle before taxes of $3,943 ($2,484 net of tax) on its consolidated financial statements.
| ITEM 7A | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company’s primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement, changes in the lenders’ LIBOR could affect the rates at which the Company could borrow funds thereunder. At January 29, 2005, the Company had outstanding borrowings of $8,152,000 against these credit facilities. Additionally, the Company has $132,000,000 of real estate operating leases and $18,172,000 of equipment operating leases which vary based on changes in LIBOR. The table below summarizes the fair value and contract terms of fixed rate debt instruments held by the Company at January 29, 2005:
(dollar amounts in thousands)
|
|
|
| Amount
|
| Average
Interest Rate
|
|---|
| Fair value at January 29, 2005 | | | | $ | 512,170 | | | | | |
| Expected maturities:
| | | | | | | | | | |
| 2005 | | | | $ | 40,444 | | | | 7.0 | % |
| 2006 | | | | | 43,000 | | | | 6.9 | |
| 2007 | | | | | 119,215 | | | | 4.3 | |
| 2008 | | | | | — | | | | — | |
| 2009 | | | | | — | | | | — | |
| Thereafter | | | | | 300,000 | | | | 7.3 | |
| | | | | $ | 502,659 | | | | | |
28
At January 31, 2004, the Company had outstanding $501,215,000 of fixed rate notes with an aggregate fair market value of $534,459,000.
On June 3, 2003, the Company entered into an interest rate swap for a notional amount of $130,000,000. The Company has designated the swap as a cash flow hedge of the Company’s real estate operating lease payments. The interest rate swap converts the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. As of January 29, 2005, the fair value of the interest rate swap was $3,721,000 ($2,344,000, net of tax) and this increase in value reduced our accumulated other comprehensive loss on the consolidated balance sheets.
29
| ITEM 8 | | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Pep Boys—Manny, Moe & Jack
We have audited the accompanying consolidated balance sheets of The Pep Boys—Manny, Moe & Jack and subsidiaries (the “Company”) as of January 29, 2005 and January 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended January 29, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Pep Boys—Manny, Moe & Jack and subsidiaries as of January 29, 2005 and January 31, 2004, and the results of their operations and their cash flows for each of the three years in the period ended January 29, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 29, 2005, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 13, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Deloitte & Touche, LLP
Philadelphia, Pennsylvania
April 13, 2005
30
|
| CONSOLIDATED BALANCE SHEETS | The Pep Boys—Manny, Moe & Jack and Subsidiaries |
| (dollar amounts in thousands, except share data) | |
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
ASSETS
| | | | | | | | | | |
Current Assets:
| | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 82,758 | | | $ | 60,984 | |
Accounts receivable, less allowance for uncollectible accounts of
$1,030 and $739 | | | | | 30,994 | | | | 30,562 | |
| Merchandise inventories | | | | | 602,760 | | | | 553,562 | |
| Prepaid expenses | | | | | 45,349 | | | | 39,480 | |
| Deferred income taxes | | | | | — | | | | 20,826 | |
| Other | | | | | 96,065 | | | | 81,096 | |
| Assets held for disposal | | | | | 665 | | | | 16,929 | |
| Total Current Assets | | | | | 858,591 | | | | 803,439 | |
Property and Equipment—at cost:
| | | | | | | | | | |
| Land | | | | | 261,985 | | | | 263,907 | |
| Buildings and improvements | | | | | 916,099 | | | | 899,114 | |
| Furniture, fixtures and equipment | | | | | 633,098 | | | | 586,607 | |
| Construction in progress | | | | | 40,426 | | | | 12,800 | |
| | | | | | 1,851,608 | | | | 1,762,428 | |
| Less accumulated depreciation and amortization | | | | | 906,577 | | | | 839,219 | |
| Total Property and Equipment—Net | | | | | 945,031 | | | | 923,209 | |
| Other | | | | | 63,401 | | | | 51,398 | |
| Total Assets | | | | $ | 1,867,023 | | | $ | 1,778,046 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | | | | | |
Current Liabilities:
| | | | | | | | | | |
| Accounts payable | | | | $ | 310,981 | | | $ | 342,584 | |
| Accrued expenses | | | | | 306,671 | | | | 267,565 | |
| Deferred income taxes | | | | | 19,406 | | | | — | |
| Current maturities of long-term debt and obligations under capital lease | | | | | 40,882 | | | | 117,063 | |
| Total Current Liabilities | | | | | 677,940 | | | | 727,212 | |
| Long-term debt and obligations under capital leases, less current maturities | | | | | 352,682 | | | | 258,016 | |
| Convertible long-term debt | | | | | 119,000 | | | | 150,000 | |
| Other long-term liabilities | | | | | 37,977 | | | | 43,108 | |
| Deferred income taxes | | | | | 25,968 | | | | 29,976 | |
| Commitments and Contingencies | | | | | | | | | | |
Stockholders’ Equity:
| | | | | | | | | | |
Common stock, par value $1 per share: Authorized 500,000,000 shares;
Issued 68,557,041 and 63,910,577 shares | | | | | 68,557 | | | | 63,911 | |
| Additional paid-in capital | | | | | 284,966 | | | | 177,317 | |
| Retained earnings | | | | | 536,780 | | | | 531,933 | |
| Common stock subscriptions receivable | | | | | (167 | ) | | | — | |
| Accumulated other comprehensive loss | | | | | (4,852 | ) | | | (15 | ) |
| | | | | | 885,284 | | | | 773,146 | |
| Less cost of shares in treasury—11,305,130 shares and 8,928,159 shares | | | | | 172,564 | | | | 144,148 | |
| Less cost of shares in benefits trust—2,195,270 shares | | | | | 59,264 | | | | 59,264 | |
| Total Stockholders’ Equity | | | | | 653,456 | | | | 569,734 | |
| Total Liabilities and Stockholders’ Equity | | | | $ | 1,867,023 | | | $ | 1,778,046 | |
See notes to the consolidated financial statements
31
|
| CONSOLIDATED STATEMENTS OF OPERATIONS | The Pep Boys—Manny, Moe & Jack and Subsidiaries |
| (dollar amounts in thousands, except per share amounts) | |
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
| Merchandise Sales | | | | $ | 1,863,015 | | | $ | 1,728,386 | | | $ | 1,697,628 | |
| Service Revenue | | | | | 409,881 | | | | 405,884 | | | | 400,149 | |
| Total Revenues | | | | | 2,272,896 | | | | 2,134,270 | | | | 2,097,777 | |
| Costs of Merchandise Sales | | | | | 1,333,296 | | | | 1,242,360 | | | | 1,188,017 | |
| Costs of Service Revenue | | | | | 317,142 | | | | 311,122 | | | | 299,794 | |
| Total Costs of Revenues | | | | | 1,650,438 | | | | 1,553,482 | | | | 1,487,811 | |
| Gross Profit from Merchandise Sales | | | | | 529,719 | | | | 486,026 | | | | 509,611 | |
| Gross Profit from Service Revenue | | | | | 92,739 | | | | 94,762 | | | | 100,355 | |
| Total Gross Profit | | | | | 622,458 | | | | 580,788 | | | | 609,966 | |
| Selling, General and Administrative Expenses | | | | | 547,336 | | | | 569,834 | | | | 504,163 | |
| Operating Profit | | | | | 75,122 | | | | 10,954 | | | | 105,803 | |
| Non-operating Income | | | | | 1,824 | | | | 3,340 | | | | 3,097 | |
| Interest Expense | | | | | 35,965 | | | | 38,255 | | | | 47,237 | |
Earnings (Loss) from Continuing Operations Before
Income Taxes and Cumulative Effect of Change
in Accounting Principle | | | | | 40,981 | | | | (23,961 | ) | | | 61,663 | |
| Income Tax Expense (Benefit) | | | | | 15,315 | | | | (8,816 | ) | | | 22,782 | |
| Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle | | | | | 25,666 | | | | (15,145 | ) | | | 38,881 | |
(Loss) Earnings from Discontinued Operations,
Net of Tax of $(1,245), $(9,410) and $345 | | | | | (2,087 | ) | | | (16,265 | ) | | | 587 | |
Cumulative Effect of Change in Accounting Principle,
Net of Tax | | | | | — | | | | (2,484 | ) | | | — | |
| Net Earnings (Loss) | | | | $ | 23,579 | | | $ | (33,894 | ) | | $ | 39,468 | |
Basic Earnings (Loss) per Share:
| | | | | | | | | | | | | | |
| Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle | | | | $ | 0.46 | | | $ | (0.29 | ) | | $ | 0.75 | |
| (Loss) Earnings from Discontinued Operations, Net of Tax | | | | | (0.04 | ) | | | (0.31 | ) | | | 0.02 | |
Cumulative Effect of Change in Accounting Principle,
Net of Tax | | | | | — | | | | (0.05 | ) | | | — | |
| Basic Earnings (Loss) per Share | | | | $ | 0.42 | | | $ | (0.65 | ) | | $ | 0.77 | |
Diluted Earnings (Loss) per Share:
| | | | | | | | | | | | | | |
| Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle | | | | $ | 0.45 | | | $ | (0.29 | ) | | $ | 0.73 | |
| (Loss) Earnings from Discontinued Operations, Net of Tax | | | | | (0.04 | ) | | | (0.31 | ) | | | 0.01 | |
Cumulative Effect of Change in Accounting Principle,
Net of Tax | | | | | — | | | | (0.05 | ) | | | — | |
| Diluted Earnings (Loss) per Share | | | | $ | 0.41 | | | $ | (0.65 | ) | | $ | 0.74 | |
See notes to the consolidated financial statements
32
|
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | The Pep Boys—Manny, Moe & Jack and Subsidiaries |
| (dollar amounts in thousands, except share data) | |
| | Common Stock
| |
Additional
Paid-in
Capital | |
Retained
Earnings | | Treasury Stock
| |
Accumulated
Other
Comprehensive
Income (Loss) | |
Common Stock
Subscriptions
Receivable | |
Benefits
Trust | | Total
Stockholders’
Equity |
|---|
| | Shares | | Amount | | | | Shares | | Amount | | | | |
|---|
|
| Balance, February 2, 2002 | | 63,910,577 | | $ | 63,911 | | $ | 177,244 | | | $ | 562,164 | | | | (10,284,446 | ) | | $ | (166,045 | ) | | $ | — | | | $ | — | | | $ | (59,264 | ) | | $578,010 | |
Comprehensive income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net earnings | | | | | | | | | | | | 39,468 | | | | | | | | | | | | | | | | | | | | | | | | |
| Minimum pension liability adjustment, net of tax | | | | | | | | | | | | | | | | | | | | | | | | (151 | ) | | | | | | | | | | | |
| Total Comprehensive Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 39,317 | |
| Cash dividends ($.27 per share) | | | | | | | | | | | | (13,911 | ) | | | | | | | | | | | | | | | | | | | | | | (13,911) | |
Effect of stock options and
related tax benefits | | | | | | | | (21 | ) | | | (632 | ) | | | 111,000 | | | | 1,792 | | | | | | | | | | | | | | | 1,139 | |
| Dividend reinvestment plan | | | | | | | | 21 | | | | (354 | ) | | | 102,717 | | | | 1,658 | | | | | | | | | | | | | | | 1,325 | |
| Balance, February 1, 2003 | | 63,910,577 | | | 63,911 | | | 177,244 | | | | 586,735 | | | | (10,070,729 | ) | | | (162,595 | ) | | | (151 | ) | | | — | | | | (59,264 | ) | | 605,880 | |
Comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | (33,894 | ) | | | | | | | | | | | | | | | | | | | | | | | |
| Minimum pension liability adjustment, net of tax | | | | | | | | | | | | | | | | | | | | | | | | (1,253 | ) | | | | | | | | | | | |
Fair market value adjustment
on derivatives, net of tax | | | | | | | | | | | | | | | | | | | | | | | | 1,389 | | | | | | | | | | | | |
| Total Comprehensive Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (33,758) | |
| Cash dividends ($.27 per share) | | | | | | | | | | | | (14,089 | ) | | | | | | | | | | | | | | | | | | | | | | (14,089) | |
Effect of stock options and
related tax benefits | | | | | | | | (39 | ) | | | (6,499 | ) | | | 1,054,250 | | | | 17,021 | | | | | | | | | | | | | | | 10,483 | |
| Dividend reinvestment plan | | | | | | | | 112 | | | | (320 | ) | | | 88,320 | | | | 1,426 | | | | | | | | | | | | | | | 1,218 | |
| Balance, January 31, 2004 | | 63,910,577 | | | 63,911 | | | 177,317 | | | | 531.933 | | | | (8,928,159 | ) | | | (144,148 | ) | | | (15 | ) | | | — | | | | (59,264 | ) | | 569,734 | |
Comprehensive income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | 23,579 | | | | | | | | | | | | | | | | | | | | | | | | |
| Minimum pension liability adjustment, net of tax | | | | | | | | | | | | | | | | | | | | | | | | (5,799 | ) | | | | | | | | | | | |
Fair market value adjustment
on derivatives, net of tax | | | | | | | | | | | | | | | | | | | | | | | | 962 | | | | | | | | | | | | |
| Total Comprehensive Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18,742 | |
| Issuance of Common Stock | | 4,646,464 | | | 4,646 | | | 104,208 | | | | | | | | | | | | | | | | | | | | | | | | | | | 108,854 | |
| Cash dividends ($.27 per share) | | | | | | | | | | | | (15,676 | ) | | | | | | | | | | | | | | | | | | | | | | (15,676) | |
Effect of stock options and
related tax benefits | | | | | | | | 2,064 | | | | (2,984 | ) | | | 638,210 | | | | 10,304 | | | | | | | | (167 | ) | | | | | | 9,217 | |
| Stock compensation expense | | | | | | | | 1,184 | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,184 | |
| Repurchase of Common Stock | | | | | | | | | | | | | | | | (3,077,000 | ) | | | (39,718 | ) | | | | | | | | | | | | | | (39,718 | ) |
| Dividend reinvestment plan | | | | | | | | 193 | | | | (72 | ) | | | 61,819 | | | | 998 | | | | | | | | | | | | | | | 1,119 | |
| Balance, January 29, 2005 | | 68,557,041 | | $ | 68,557 | | $ | 284,966 | | | $ | 536,780 | | | | (11,305,130 | ) | | $ | (172,564 | ) | | $ | (4,852 | ) | | $ | (167 | ) | | $ | (59,264 | ) | | $653,456 | |
See notes to the consolidated financial statements
33
|
| CONSOLIDATED STATEMENTS OF CASH FLOWS | The Pep Boys—Manny, Moe & Jack and Subsidiaries |
| (dollar amounts in thousands, except share data) | |
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
Cash Flows from Operating Activities:
| | | | | | | | | | | | | | |
| Net Earnings (Loss) | | | | $ | 23,579 | | | $ | (33,894 | ) | | $ | 39,468 | |
| Net (Loss) Earnings from discontinued operations | | | | | (2,087 | ) | | | (16,265 | ) | | | 587 | |
| Net Earnings (Loss) from continuing operations | | | | | 25,666 | | | | (17,629 | ) | | | 38,881 | |
Adjustments to Reconcile Net Earnings (Loss) From Continuing
Operations to Net Cash Provided by Continuing Operations:
| | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 76,620 | | | | 78,275 | | | | 83,649 | |
| Cumulative effect of change in accounting principle, net of tax | | | | | — | | | | 2,484 | | | | — | |
| Accretion of asset disposal obligation | | | | | 135 | | | | 163 | | | | — | |
| Stock compensation expense | | | | | 1,184 | | | | — | | | | — | |
| Deferred income taxes | | | | | 26,853 | | | | (1,402 | ) | | | (3,775 | ) |
| Deferred gain on sale leaseback | | | | | (130 | ) | | | (425 | ) | | | (112 | ) |
| Loss on assets held for disposal | | | | | — | | | | — | | | | 826 | |
| Loss on asset impairments | | | | | — | | | | 14,535 | | | | — | |
| (Gain) loss from sale of assets | | | | | (11,848 | ) | | | 61 | | | | (1,909 | ) |
Changes in operating assets and liabilities:
| | | | | | | | | | | | | | |
| Increase in accounts receivable, prepaid expenses and other | | | | | (23,071 | ) | | | (33,197 | ) | | | (12,901 | ) |
| (Increase) decrease in merchandise inventories | | | | | (49,198 | ) | | | (64,680 | ) | | | 30,591 | |
| (Decrease) increase in accounts payable | | | | | (24,387 | ) | | | 142,531 | | | | (16,032 | ) |
| Increase in accrued expenses | | | | | 25,853 | | | | 25,765 | | | | 11,661 | |
| (Decrease) increase in other long-term liabilities | | | | | (1,272 | ) | | | 1,726 | | | | 92 | |
| Net Cash Provided by Continuing Operations | | | | | 46,405 | | | | 148,207 | | | | 130,971 | |
| Net Cash (Used in) Provided by Discontinued Operations | | | | | (2,732 | ) | | | 2,448 | | | | 4,945 | |
| Net Cash Provided by Operating Activities | | | | | 43,673 | | | | 150,655 | | | | 135,916 | |
Cash Flows from Investing Activities:
| | | | | | | | | | | | | | |
| Capital expenditures | | | | | (88,068 | ) | | | (41,847 | ) | | | (39,405 | ) |
| Capital expenditures from discontinued operations | | | | | — | | | | — | | | | (2,022 | ) |
| Proceeds from sales of assets | | | | | 18,021 | | | | 3,316 | | | | 2,636 | |
| Proceeds from sales of assets held for disposal | | | | | 13,327 | | | | 13,214 | | | | 8,422 | |
| Net Cash Used in Investing Activities | | | | | (56,720 | ) | | | (25,317 | ) | | | (30,369 | ) |
Cash Flows from Financing Activities:
| | | | | | | | | | | | | | |
| Net borrowings (payments) under line of credit agreements | | | | | 8,102 | | | | (497 | ) | | | (70,295 | ) |
| Repayment of life insurance loan | | | | | — | | | | — | | | | (20,686 | ) |
| Payments for finance issuance costs | | | | | (5,500 | ) | | | (2,356 | ) | | | (3,750 | ) |
| Payments on short term borrowings | | | | | (7,216 | ) | | | — | | | | — | |
| Payments on capital lease obligations | | | | | (1,040 | ) | | | (700 | ) | | | (642 | ) |
| Reduction of long-term debt | | | | | (189,991 | ) | | | (101,183 | ) | | | (121,938 | ) |
| Reduction of convertible debt | | | | | (31,000 | ) | | | — | | | | — | |
| Proceeds from issuance of notes | | | | | 200,000 | | | | — | | | | 150,000 | |
| Dividends paid | | | | | (15,676 | ) | | | (14,089 | ) | | | (13,911 | ) |
| Repurchase of common stock | | | | | (39,718 | ) | | | — | | | | — | |
| Proceeds from issuance of common stock | | | | | 108,854 | | | | — | | | | — | |
| Proceeds from exercise of stock options | | | | | 6,887 | | | | 10,483 | | | | 1,139 | |
| Proceeds from dividend reinvestment plan | | | | | 1,119 | | | | 1,218 | | | | 1,325 | |
| Net Cash Provided by (Used in) Financing Activities | | | | | 34,821 | | | | (107,124 | ) | | | (78,758 | ) |
| Net Increase in Cash | | | | | 21,774 | | | | 18,214 | | | | 26,789 | |
| Cash and Cash Equivalents at Beginning of Year | | | | | 60,984 | | | | 42,770 | | | | 15,981 | |
| Cash and Cash Equivalents at End of Year | | | | $ | 82,758 | | | $ | 60,984 | | | $ | 42,770 | |
| Supplemental Disclosure of Cash Flow Information: | | | | | | | | | | | | | | |
Cash Paid during the year for:
| | | | | | | | | | | | | | |
| Income taxes | | | | $ | (25,442 | ) | | $ | 6,553 | | | $ | 22,856 | |
| Interest, net of amounts capitalized | | | | | 30,019 | | | | 35,048 | | | | 44,840 | |
Non-cash investing activities:
| | | | | | | | | | | | | | |
| Accrued purchases of property and equipment | | | | | 15,698 | | | | 1,415 | | | | 2,484 | |
| Non-cash financing activities: | | | | | | | | | | | | | | |
| Equipment capital leases | | | | | 1,414 | | | | — | | | | 1,301 | |
See notes to the consolidated financial statements
34
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Pep Boys—Manny, Moe & Jack and subsidiaries (the “Company”) is engaged principally in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores. The Company currently operates stores in 36 states and Puerto Rico.
FISCAL YEAR END The Company’s fiscal year ends on the Saturday nearest to January 31. Fiscal years 2004, 2003, and 2002 were comprised of 52 weeks.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.
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. If the first-in, first-out (FIFO) method of costing inventory had been used by the Company, inventory would have been $588,301 and $531,830 as of January 29, 2005 and January 31, 2004, respectively. The Company’s FIFO cost approximates replacement cost.
The Company also establishes 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 on a quarterly basis against historical data for adequacy. The Company’s reserves against inventory for these matters were $12,676 and $21,732 at January 29, 2005 and January 31, 2004, respectively.
CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments with a maturity of three months or less when purchased.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 to 40 years, and furniture, fixtures and equipment, 3 to 10 years. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination of net income. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
SOFTWARE CAPITALIZATION The Company, in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, capitalizes certain direct development costs associated with internal-use software, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.
CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection with the construction of certain long-term assets. Capitalized interest was immaterial in fiscal years 2004 and 2003.
REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold. Service revenues are recognized upon completion of the service. The Company records revenue net of an allowance for estimated future returns. The Company establishes reserves for sales returns and allowances based on current sales levels and historical return rates. Return activity is immaterial to revenue and results of operations in all periods presented.
35
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTS RECEIVABLE Accounts Receivable are primarily comprised of amounts due from commercial customers. The Company records an allowance for doubtful accounts based on percentage of sales. The allowance is revised on a monthly basis against historical data for adequacy. Specific accounts are written off against the allowance when management determines the account is uncollectible.
FINANCED VENDOR ACCOUNTS PAYABLE In the third quarter of fiscal 2004, the Company entered into a vendor financing program. Under this program, the Company’s factor makes accelerated and discounted payments to the Company’s vendors and the Company, in turn, makes its regularly-scheduled full vendor payments to the factor. As of January 29, 2005, there was no outstanding balance under the program.
VENDOR SUPPORT FUNDS The Company receives various incentives in the form of discounts and allowances from its vendors based on the volume of purchases or for services that the Company provides to the vendors. These incentives received from vendors include rebates, allowances and promotional funds. Typically, these funds are dependent on purchase volumes and advertising activities. The amounts received are subject to changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for the Company.
The Company accounts for vendor support funds in accordance with Emerging Issues Task Force (EITF) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor.” Rebates and other miscellaneous incentives are earned based on purchases or product sales. These incentives are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold. Certain vendor allowances are used exclusively for promotions and to partially or fully offset certain other direct expenses. These allowances are netted against the appropriate expenses they offset, once the Company determines the allowances are for specific, identifiable and incremental expenses.
Prior to the Company’s prospective adoption of EITF No. 02-16 in fiscal 2003, all cooperative advertising allowances received from a vendor were used to reduce advertising expense. The Company’s advertising costs were in excess of the allowance received for fiscal 2003 and 2002. The pro-forma impact of the adoption of this standard on fiscal 2002 was immaterial.
WARRANTY RESERVE The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by its vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions.
Components of the reserve for warranty costs for fiscal years ending January 29, 2005 and January 31, 2004, are as follows:
| |
| Ending Balance at February 1, 2003 | | | | $ | 911 | |
| Additions related to fiscal 2003 sales | | | | | 6,677 | |
| Warranty costs incurred in fiscal 2003 | | | | | (6,974 | ) |
| Adjustments to accruals related to prior year sales | | | | | — | |
| Ending Balance at January 31, 2004 | | | | $ | 614 | |
| Additions related to fiscal 2004 sales | | | | | 7,684 | |
| Warranty costs incurred in fiscal 2004 | | | | | (6,974 | ) |
| Adjustments to accruals related to prior year sales | | | | | — | |
| Ending Balance at January 29, 2005 | | | | $ | 1,324 | |
36
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LEASES The Company’s policy is to amortize leasehold improvements over the lesser of the lease term or the economic life of those assets. Generally, for the stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain renewal option periods for which renewal is reasonably assured and failure to exercise the renewal option would result in an economic penalty. The calculation for straight-line rent expense is based on the same lease term with consideration for step rent provisions, escalation clauses, rent holidays and other lease concessions. The Company expenses rent during the construction or build-out phase of the lease.
SERVICE REVENUE Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.
COSTS OF REVENUES 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.
PENSION EXPENSE The Company reports all information on its pension and savings plan benefits in accordance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’ Disclosure about Pensions and Other Postretirement Benefits (revised 2003)” (SFAS 132R).
INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under the liability method, deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities.
ADVERTISING The Company expenses the production costs of advertising the first time the advertising takes place. Gross advertising expense for fiscal years 2004, 2003 and 2002 was $73,996, $61,714 and $59,206, respectively. No advertising costs were recorded as assets as of January 29, 2005 or January 31, 2004.
The Company receives funds from vendors in the normal course of business for a variety of reasons, including cooperative advertising. Contracts for cooperative advertising typically have a duration of one year. There were 244, 320 and 329 vendors participating in such contracts during fiscal years 2004, 2003 and 2002, respectively. The Company’s level of advertising expense would not be impacted in the absence of these contracts.
Certain cooperative advertising reimbursements are netted against specific, incremental, identifiable costs incurred in connection with the selling of the vendor’s product. Cooperative advertising reimbursements of $36,579, $42,000 and $47,473 in 2004, 2003 and 2002, respectively, were recorded as a reduction of advertising expense with the net amount included in selling, general and administrative expenses in the consolidated statement of operations. Any excess reimbursements over these costs are characterized as a reduction of inventory and are recognized as a reduction of cost of sales as the inventories are sold, in accordance with EITF 02-16 (see further discussion of cooperative advertising and the impact of the implementation of EITF 02-16 in Vendor Support Funds). The amounts of excess reimbursements recognized as a reduction of costs of sales were $48,950, $18,634 and $0 for fiscal 2004, 2003 and 2002, respectively.
STORE OPENING COSTS The costs of opening new stores are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are both held and used or to be disposed of. The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds the fair value. In addition, the Company reports assets to be disposed of at the lower of the carrying amount or the fair market value less selling costs.
37
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
During the second quarter of fiscal 2003, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that their carrying value may not be fully recoverable. An impairment charge of $1,371 was recorded for these stores in costs of merchandise sales on the consolidated statement of operations. The charge reflects the difference between these stores’ carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. Management’s judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates.
In November 2001, the Company began developing a fully integrated point-of-sale information system for all of its stores. Due to concerns about the ability of the base software’s architecture to support a chain-wide roll-out, the Company decided to identify an alternative base software as the basis for our customized system. Consequently, the Company took a $13,164 impairment charge against a portion of the system’s assets in fiscal 2003. This charge was recorded in selling, general and administrative expenses on the consolidated statement of operations.
EARNINGS PER SHARE Earnings per share for all periods have been computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing earnings plus the interest on the convertible senior notes by the weighted average number of common shares outstanding during the year plus the assumed conversion of dilutive convertible debt and incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options.
ACCOUNTING FOR STOCK-BASED COMPENSATION At January 29, 2005, the Company has three stock-based employee compensation plans, which are described in full in Note 12, “Equity Compensation Plans.” The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net earnings (loss), as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
Net earnings (loss):
| | | | | | | | | | | | | | |
| As reported | | | | $ | 23,579 | | | $ | (33,894 | ) | | $ | 39,468 | |
| Less: Total stock-based compensation expense determined under fair value-based method, net of tax | | | | | (2,117 | ) | | | (2,839 | ) | | | (3,510 | ) |
| Pro forma | | | | $ | 21,462 | | | $ | (36,733 | ) | | $ | 35,958 | |
| Net earnings (loss) per share:
| | | | | | | | | | | | | | |
Basic:
| | | | | | | | | | | | | | |
| As reported | | | | $ | 0.42 | | | $ | (0.65 | ) | | $ | 0.77 | |
| Pro forma | | | | $ | 0.38 | | | $ | (0.70 | ) | | $ | 0.70 | |
Diluted:
| | | | | | | | | | | | | | |
| As reported | | | | $ | 0.41 | | | $ | (0.65 | ) | | $ | 0.74 | |
| Pro forma | | | �� | $ | 0.38 | | | $ | (0.70 | ) | | $ | 0.67 | |
38
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The fair value of each option granted during fiscal years 2004, 2003 and 2002 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
| Dividend yield | | | | | 1.67 | % | | | 1.57 | % | | | 1.44 | % |
| Expected volatility | | | | | 41 | % | | | 41 | % | | | 41 | % |
| Risk-free interest rate range:
| | | | | | | | | | | | | | |
| High | | | | | 4.8 | % | | | 4.6 | % | | | 5.4 | % |
| Low | | | | | 2.0 | % | | | 1.5 | % | | | 2.3 | % |
| | Ranges of expected lives in years | | | | | 3–8 | | | | 4–8 | | | | 4–8 | |
COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is reported in accordance with SFAS No. 130, “Reporting Comprehensive Income.” Other comprehensive income (loss) includes minimum pension liability and fair market value of cash flow hedge.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company reports derivatives and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.
SEGMENT INFORMATION The Company reports segment information in accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.” The Company operates in one industry, the automotive aftermarket. In accordance with SFAS No. 131, the Company aggregates all of its stores and reports one operating segment. Sales by major product categories are as follows:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
| Parts and Accessories | | | | $ | 1,539,513 | | | $ | 1,392,179 | | | $ | 1,362,112 | |
| | Tires | | | | | 323,502 | | | | 336,207 | | | | 335,516 | |
| Total Merchandise Sales | | | | | 1,863,015 | | | | 1,728,386 | | | | 1,697,628 | |
| Service | | | | | 409,881 | | | | 405,884 | | | | 400,149 | |
| Total Revenues | | | | $ | 2,272,896 | | | $ | 2,134,270 | | | $ | 2,097,777 | |
The Company’s automotive product line includes: tires; batteries; new and remanufactured parts for domestic and import vehicles; chemicals and maintenance items; fashion, electronic, and performance accessories; personal transportation merchandise; and garage and repair shop merchandise. Service consists of the labor charge for installing merchandise or maintaining or repairing vehicles.
NEW ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (revised 2004) or SFAS No. 123R, “Share-Based Payment”, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supercedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and subsequently issued stock option related guidance. This statement establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods and services, primarily on accounting for transactions in which an entity
39
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.
The Company is required to apply SFAS No. 123R to all awards granted, modified or settled as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The statement also requires the Company to use either the modified-prospective method or modified retrospective method in the transition to the new standard. Under the modified-prospective method, the Company must recognize compensation cost for all awards subsequent to adopting the standard and for the unvested portion of previously granted awards outstanding upon adoption. Under the modified retrospective method, the Company must restate its previously issued financial statements to recognize the amounts it previously calculated and reported on a pro-forma basis, as if the prior standard had been adopted. Under both methods, the statement permits the use of either the straight-line or an accelerated method to amortize the cost as an expense for awards with graded vesting. The standard permits and encourages early adoption.
The Company has commenced its analysis of the impact of its SFAS No. 123R, but has not yet decided: (1) whether to elect early adoption, (2) the early adoption date, if elected, (3) the use of the modified-prospective or modified retrospective method and (4) the election to use straight-line or an accelerated method. Accordingly, the Company has not determined the impact that the adoption of SFAS No. 123R will have on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29”. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exemption for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provision is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have any impact on the Company’s current financial condition or results of operations.
In November 2004, the FASB issued SFAS No. 151, “ Inventory Costs, an Amendment of ARB No. 43, Chapter 4 ‘Inventory Pricing’.” The standard requires that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be excluded from the cost of inventory and expensed when incurred. The provision is effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows.
In November 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations”. This consensus addresses how an ongoing entity should evaluate whether the operations and cash flows of a disposed component have been or will be eliminated from the ongoing operations of the entity. Additionally, it addresses the types of continuing involvement that constitute significant continuing involvement in the operations of the disposed component. The consensus should be applied in fiscal periods beginning after December 15, 2004. The Company does not expect the adoption of this consensus to have a material effect on its financial position, results of operations or cash flows.
40
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2003, the FASB issued SFAS No. 132 (revised 2003) (SFAS No. 132R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132R revises employers’ disclosures about pension plans and postretirement benefit plans. SFAS No. 132R does not change the measurement and recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” SFAS No. 132R retains the original disclosure requirements contained in SFAS No. 132 and requires additional expanded annual and interim disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement benefit plans. Except for certain provisions, the adoption of this Statement is required for financial statements with fiscal years ending after December 15, 2003. The Company adopted the provisions of SFAS No. 132R in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements. The revised disclosure requirements are reflected in Note 10 of the consolidated financial statements included in Item 8 herein.
In December 2003, the FASB revised FIN 46 (revised 2002) (FIN 46R), “Consolidation of Variable Interest Entities.” FIN 46, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of any expected losses from the variable interest entity’s activities, is entitled to receive any expected residual returns of the variable interest entity, or both. The guidance contained in FIN 46R is effective no later than the end of the first reporting period that ends after March 15, 2004. If an entity has applied the original guidance in this Interpretation prior to the effective date of FIN 46R, the entity, shall continue to apply FIN 46 until the effective date or apply this Interpretation at an earlier date. On August 1, 2003 the Company refinanced its real estate operating lease facility, which qualified as a variable interest entity into a new entity. The Company evaluated this leasing transaction in accordance with the original guidance of FIN 46 and determined it does not have to consolidate this leasing entity. The Company adopted the revised guidance of FIN 46R for variable interest entities created prior to December 31, 2003 in the fourth quarter of 2003 with no material effect on its consolidated financial statements.
In November 2003, the EITF reached a consensus on EITF 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers”. This consensus addresses whether a reseller should account for consideration received from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales incentives offered directly to consumers in accordance with the guidance in EITF Issue No. 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”. For purposes of this Issue, the “vendor’s sales incentive offered directly to consumers” is limited to a vendor’s incentive (i) that can be tendered by a consumer at resellers that accept manufacturer’s incentives in partial (or full) of the price charged by the reseller for the vendor’s product, (ii) for which the reseller receives a direct reimbursement from the vendor (or a clearinghouse authorized by the vendor) based on the face amount of the incentive, (iii) for which the terms of reimbursement to the reseller for the vendor’s sales incentive offered to the consumer must not be influenced by or negotiated in conjunction with any other incentive arrangements between the vendor and the reseller but, rather may only be determined by the terms of the incentive offered to consumers and (iv) whereby the reseller is subject to an agency relationship with the vendor, whether expressed or implied, in the sales incentive transaction between the vendor and the consumer. The consensus is that sales incentives that meet all of such criteria are not subject to the guidance in Issue No. 02-16. The provisions of EITF No. 03-10 are to be applied to new arrangements, including modifications to existing arrangements, entered into or redeemed in fiscal periods beginning after November 25, 2003. The Company adopted the provisions of EITF 03-10 in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.
41
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 affects how an entity measures and reports financial instruments that have characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003 and for all other instruments for interim periods beginning after June 15, 2003. The FASB continues to address certain implementation issues associated with the application of SFAS No. 150, including those related to mandatory redeemable financial instruments representing non-controlling interests in subsidiaries’ consolidated financial statements. The Company will continue to monitor the actions of the FASB and assess the impact, if any, on its consolidated financial statements. The Company adopted the effective provisions of SFAS No. 150 in the third quarter of fiscal 2003 with no material effect on its consolidated financial statements.
In May 2003, the EITF reached a consensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” This consensus addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. The guidance in this EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company elected early adoption for the provisions of this consensus prospectively in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, resulting primarily from decisions made by the FASB’s Derivatives Implementation Group following the issuance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and is effective for hedging relationships designated after June 30, 2003. The Company adopted this statement in the second quarter of fiscal 2003 with no material effect on its consolidated financial statements.
In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” As a result of rescinding FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, “Reporting the Results of Operations.” This statement also amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company adopted the provisions of SFAS No. 145 in the first quarter of fiscal 2003. Accordingly, reclassifications of gains and losses from extinguishment of debt have been made for fiscal 2002 and 2001 to maintain comparability for the reported periods.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company adopted the provisions of SFAS No. 143 in the first quarter of fiscal 2003 and has recognized an initial asset of $2,844, accumulated depreciation of $2,247, a liability of $4,540 and a cumulative effect of a change in accounting principle before taxes of $3,943 ($2,484 net of tax) on its consolidated financial statements.
RECLASSIFICATIONS Certain reclassifications have been made to the prior years’ consolidated financial statements to provide comparability with the current year’s presentation.
42
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 2—DEBT
LONG-TERM DEBT
|
|
|---|
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
Medium-Term Notes, 6.7% to 6.9%, due March 2004
through March 2006 | | | | $ | 43,000 | | | $ | 100,000 | |
| 7.0% Senior Notes due June 2005 | | | | | 40,444 | | | | 100,000 | |
| 6.92% Term Enhanced ReMarketable Securities, due July 2016 | | | | | 100,000 | | | | 100,000 | |
| 7.5% Senior Subordinated Notes due December 2014 | | | | | 200,000 | | | | — | |
Medium-Term Notes, 6.4% to 6.52%, due July 2007
through September 2007 | | | | | 215 | | | | 51,215 | |
| Senior Secured Credit Facility, payable through July 2006 | | | | | — | | | | 22,419 | |
| Other notes payable, 3.8% to 8.0% | | | | | 1,331 | | | | 1,347 | |
| Capital lease obligations, payable through July 2005 | | | | | 422 | | | | 48 | |
| Line of credit agreement | | | | | 8,152 | | | | 50 | |
| | | | | | 393,564 | | | | 375,079 | |
| Less current maturities | | | | | 40,882 | | | | 117,063 | |
| Total Long-term Debt | | | | $ | 352,682 | | | $ | 258,016 | |
On December 14, 2004, the Company issued $200,000 aggregate principal amount of 7.5% Senior Subordinated Notes due December 15, 2014. The Notes are unsecured and jointly and severally guaranteed by the Company’s wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny, Moe and Jack of California, Pep Boys—Manny, Moe and Jack of Delaware, Inc. and Pep Boys—Manny, Moe and Jack of Puerto Rico, Inc. and PBY Corporation. Interest on the Notes is payable by the Company on June 15 and December 15 starting on June 15, 2005.
On December 2, 2004, the Company further amended its amended and restated line of credit agreement. The amendment increased the amount available for borrowings to $357,500, with an ability, upon satisfaction of certain conditions, to increase such amount to $400,000. The amendment also reduced the interest rate under the agreement to the London Interbank Offered Rate (LIBOR) plus 1.75% (after June 1, 2005, the rate reduces to LIBOR plus 1.50%, subject to 0.25% incremental increases as excess availability falls below $50,000). The amendment also provided the flexibility, upon satisfaction of certain conditions, to release up to $99,000 of reserves currently required as of December 2, 2004 under the line of credit agreement to support certain operating leases. This reserve was reduced to $76,401 on December 2, 2004. Finally, the amendment extended the term of the agreement through December 2009. The weighted average interest rate on borrowings under the line of credit agreement was 4.1% and 3.4% at January 29, 2005 and January 31, 2004, respectively.
In December 2004, the Company repurchased, through a tender offer, $59,556 aggregate principal amount of its 7.00% Senior Notes due June 1, 2005. In the second quarter of 2004, the Company reclassified the $100,000 aggregate principal amount of the 7.00% Senior Notes then outstanding to current liabilities on the consolidated balance sheet.
Upon maturity on November 5, 2004, the Company retired the remaining $16,000 aggregate principal amount of its 6.67% Medium-Term Notes. In the fourth quarter of fiscal 2003, the Company reclassified the $16,000 aggregate principal amount of the 6.67% Medium-Term Notes then outstanding to current liabilities on the balance sheet.
Upon maturity on November 3, 2004, the Company retired the remaining $30,000 aggregate principal amount of its 6.71% Medium-Term Notes. In the second quarter of fiscal 2004, the Company repurchased, on the open
43
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 2—DEBT (Continued)
market, $5,000 aggregate principal amount of the 6.71% Medium-Term Notes. In the fourth quarter of 2003, the Company reclassified the $35,000 aggregate principal amount of the 6.71% Medium-Term Notes then outstanding to current liabilities on the balance sheet.
On April 1, 2004, the Company prepaid the $22,419 aggregate principal amount of Senior Secured Credit Facility (equipment and real estate) then outstanding .
In the first quarter of fiscal 2004, the Company repurchased, on the open market, $32,000 aggregate principal amount of 6.75% Medium-Term Notes due March 10, 2004 and $25,000 aggregate principal amount of 6.65% Medium-Term Notes due March 3, 2004. In the first quarter of fiscal 2003, the Company reclassified the $32,000 aggregate principal amount of the 6.75% Medium-Term Notes and the $25,000 aggregate principal amount of the 6.65% Medium-Term Notes to current liabilities on the consolidated balance sheet.
In the first quarter of fiscal 2004, the Company entered into arrangements with certain of its vendors and banks to extend payment terms on certain merchandise purchases. Under this program, the bank makes payments to the vendor based upon a negotiated discount rate between the parties and the Company makes its payment of the full payable to the bank at the extended payment term. As of July 31, 2004, all obligations under these arrangements were fully satisfied and the agreement was terminated.
In February 1998, the Company established a Medium-Term Note program which permitted the Company to issue up to $200,000 of Medium-Term Notes. Under this program the Company sold $100,000 principal amount of Senior Notes, ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006. Additionally, in July 1998, under this note program, the Company sold $100,000 of Term Enhanced ReMarketable Securities with a stated maturity date of July 2016. The Company also sold a call option with the securities, which allows the securities to be remarketed to the public in July 2006 under certain circumstances. If the securities are not remarketed, the Company will be obligated to repay the principal amount in full in July 2016. The level yield to maturity on the securities is approximately 6.85% and the coupon rate is 6.92%.
The other notes payable have a weighted average interest rate of 4.8% at January 29, 2005 and 5.1% at January 31, 2004, and mature at various times through August 2016. Certain of these notes are collateralized by land and buildings with an aggregate carrying value of approximately $6,766 and $6,995 at January 29, 2005 and January 31, 2004, respectively.
CONVERTIBLE DEBT
|
|
|---|
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
| 4.25% Senior convertible notes, due June 2007 | | | | $ | 119,000 | | | $ | 150,000 | |
| | Less current maturities | | | | | — | | | | — | |
| Total Long-term Convertible Debt | | | | $ | 119,000 | | | $ | 150,000 | |
On May 21, 2002, the Company issued $150,000 aggregate principal amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company’s wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California, Pep Boys—Manny, Moe & Jack of Delaware, Inc. and Pep Boys—Manny, Moe & Jack of Puerto Rico, Inc. PBY Corporation was added as a subsidiary guarantor on January 6, 2005. The notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes is payable by the Company on June 1 and December 1 of each year. In January 2005, the Company repurchased, in private transactions, $31,000 aggregate principal amount of these notes.
44
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 2—DEBT (Continued)
Several of the Company’s debt agreements require the maintenance of certain financial ratios and compliance with covenants. The most restrictive of these covenants, an EBITDA restriction, is triggered if the Company’s availability under its line of credit agreement drops below $50,000. As of January 29, 2005 the Company was in compliance with such EBITDA restriction and all other covenants contained in its debt agreements.
The annual maturities of all long-term debt and capital lease commitments for the next five years are:
Year
|
|
|
| Long-Term
Debt
|
| Capital
Leases
|
| Total
|
|---|
| 2005 | | | | $ | 40,460 | | | $ | 422 | | | $ | 40,882 | |
| 2006 | | | | | 44,031 | | | | — | | | | 44,031 | |
| 2007 | | | | | 119,215 | | | | — | | | | 119,215 | |
| 2008 | | | | | 8,152 | | | | — | | | | 8,152 | |
| 2009 | | | | | — | | | | — | | | | — | |
| Thereafter | | | | | 300,284 | | | | — | | | | 300,284 | |
| Total | | | | $ | 512,142 | | | $ | 422 | | | $ | 512,564 | |
The Company was contingently liable for outstanding letters of credit in the amount of approximately $35,493 and $40,886 at January 29, 2005 and January 31, 2004, respectively. The Company was also contingently liable for surety bonds in the amount of approximately $4,442 and $7,724 at January 29, 2005 and January 31, 2004, respectively.
NOTE 3—ACCRUED EXPENSES
The Company’s accrued expenses as of January 29, 2005 and January 31, 2004, were as follows:
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
| Casualty and medical risk insurance | | | | $ | 164,065 | | | $ | 136,599 | |
| Accrued compensation and related taxes | | | | | 45,899 | | | | 51,043 | |
| Legal reserves | | | | | 1,877 | | | | 26,576 | |
| Other | | | | | 94,830 | | | | 53,347 | |
| Total | | | | $ | 306,671 | | | $ | 267,565 | |
NOTE 4—OTHER CURRENT ASSETS
The Company’s other current assets as of January 29, 2005 and January 31, 2004, were as follows:
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
| Reinsurance premiums receivable | | | | $ | 80,397 | | | $ | 67,326 | |
| Income taxes receivable | | | | | 15,404 | | | | 13,517 | |
| Other | | | | | 264 | | | | 253 | |
| Total | | | | $ | 96,065 | | | $ | 81,096 | |
NOTE 5—LEASE AND OTHER COMMITMENTS
On October 18, 2004, the Company entered into a Master Lease agreement providing for the lease of up to $35,000 of new point-of-sale hardware for the Company’s stores. This Master Lease will be reflected in the Company’s consolidated financial statements as an operating lease. The Company has evaluated this transaction in accordance with the guidance of FIN 46R and has determined that it is not required to consolidate the leasing entity. The Company has drawn approximately $18,172 on this operating lease facility as of January 29, 2005.
45
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 5—LEASE AND OTHER COMMITMENTS (Continued)
On August 1, 2003, the Company refinanced $132,000 in operating leases. These leases, which expire on August 1, 2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in accordance with the original guidance of FIN 46 and has determined that it is not required to consolidate the leasing entity. The leases include a residual value guarantee with a maximum value of approximately $105,000. The Company expects the fair market value of the leased real estate to substantially reduce or eliminate the Company’s payment under the residual guarantee at the end of the lease term.
In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee related to this operating lease. As of January 29, 2005 and January 31, 2004, the current value of this liability was $3,491 and $4,488, respectively, which is recorded in other long-term liabilities on the consolidated balance sheets.
In May 2001, the Company sold certain operating assets for $14,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease was accounted for as an operating lease and the gain of $3,817 from the sale of certain operating assets was deferred at the time of sale. In May 2004, the Company repurchased these assets for $5,468. The remaining deferred gain of $3,729 was netted against the purchase price of the repurchased assets resulting in a net book value of $1,739 recorded on the consolidated balance sheet as of July 31, 2004 for the repurchased assets.
The Company leases certain property and equipment under operating leases and capital leases which contain renewal and escalation clauses, step rent provisions, capital improvements funding and other lease concessions. These provisions are considered in the Company’s calculation of the Company’s minimum lease payments which are recognized as expense on a straight-line basis over the applicable lease term. In accordance with SFAS No. 13, as amended by SFAS No. 29, any lease payments that are based upon an existing index or rate are included in the Company’s minimum lease payment calculations. Future minimum rental payments for noncancelable operating leases and capital leases in effect as of January 29, 2005 are shown in the table below. All amounts are exclusive of lease obligations and sublease rentals applicable to stores for which reserves, in conjunction with the restructuring, have previously been established. The aggregate minimum rental payments for such leases having initial terms of more than one year are approximately:
Year
|
|
|
| Operating
Leases
|
| Capital
Leases
|
|---|
| 2005 | | | | $ | 59,039 | | | $ | 422 | |
| 2006 | | | | | 57,137 | | | | — | |
| 2007 | | | | | 54,884 | | | | — | |
| 2008 | | | | | 46,878 | | | | — | |
| 2009 | | | | | 33,646 | | | | — | |
| Thereafter | | | | | 219,444 | | | | — | |
| Aggregate minimum lease payments | | | | $ | 471,028 | | | $ | 422 | |
| Less: interest on capital leases | | | | | | | | | — | |
| Present Value of Net Minimum Lease Payments | | | | | | | | $ | 422 | |
Rental expenses incurred for operating leases in fiscal years 2004, 2003 and 2002 were $60,941, $63,806 and $61,282, respectively.
In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773 over four years. During the second quarter of fiscal 2004, it was determined that the Company would be unable to meet its obligation for the 2004 contract year which ended on November 30, 2004. As a result, the Company recorded a $1,579 charge to selling, general and administrative
46
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 5—LEASE AND OTHER COMMITMENTS (Continued)
expenses in the quarter ending July 31, 2004 related to the anticipated shortfall in this purchase commitment. The minimum required purchases for 2005 (the remaining year of this commitment) is $7,009, which the Company expects to meet.
NOTE 6—STOCKHOLDERS’ EQUITY
SHARE REPURCHASE—TREASURY STOCK In the third quarter of fiscal 2004, the Company announced a share repurchase program for up to $100,000 of the Company’s shares. Under the program, the Company may repurchase its shares of common stock in the open market or in privately negotiated transactions, from time to time prior to September 8, 2005. As of January 29, 2005, the Company had repurchased a total of 3,077,000 shares at an average cost of $12.91 per share ($39,718).
All of these repurchased shares were placed into the Company’s treasury. A portion of the treasury shares will be used by the Company to provide benefits to employees under its compensation plans and in conjunction with the Company’s dividend reinvestment program. As of January 29, 2005, the Company has reflected 11,305,130 shares of its common stock at a cost of $172,564 as “cost of shares in treasury” on the Company’s consolidated balance sheet.
SALE OF COMMON STOCK On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share) at a price of $24.75 per share for net proceeds of $108,854.
RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend one common share purchase right on each of its common shares. The rights will not be exercisable or transferable apart from the Company’s common stock until a person or group, as defined in the rights agreement (dated December 5, 1997), without the proper consent of the Company’s Board of Directors, acquires 15% or more, or makes an offer to acquire 15% or more of the Company’s outstanding stock. When exercisable, the rights entitle the holder to purchase one share of the Company’s common stock for $125. Under certain circumstances, including the acquisition of 15% of the Company’s stock by a person or group, the rights entitle the holder to purchase common stock of the Company or common stock of an acquiring company having a market value of twice the exercise price of the right.
The rights do not have voting power and are subject to redemption by the Company’s Board of Directors for $.01 per right anytime before a 15% position has been acquired and for 10 days thereafter, at which time the rights become non-redeemable. The rights expire on December 31, 2007.
BENEFITS TRUST On April 29, 1994, the Company established a flexible employee benefits trust with the intention of purchasing up to $75,000 worth of the Company’s common shares. The repurchased shares will be held in the trust and will be used to fund the Company’s existing benefit plan obligations including healthcare programs, savings and retirement plans and other benefit obligations. The trust will allocate or sell the repurchased shares through 2023 to fund these benefit programs. As shares are released from the trust, the Company will charge or credit additional paid-in capital for the difference between the fair value of shares released and the original cost of the shares to the trust. For financial reporting purposes, the trust is consolidated with the accounts of the Company. All dividend and interest transactions between the trust and the Company are eliminated. In connection with the Dutch Auction self-tender offer, 37,230 shares were tendered at a price of $16.00 per share in fiscal 1999. At January 29, 2005, the Company has reflected 2,195,270 shares of its common stock at a cost of $59,264 as “cost of shares in benefits trust” on the Company’s consolidated balance sheet.
47
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 7—RESTRUCTURING
Building upon the Profit Enhancement Plan launched in October 2000, the Company, during fiscal 2003, conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon the Company’s profitability. These actions, including the disposal and sublease of the Company’s real properties, were substantially completed by January 31, 2004 with net costs of approximately $65,986. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. These initiatives included:
Closure of 33 under-performing stores on July 31, 2003
The charges related to these closures included a $31,237 write-down of fixed assets, $424 in long-term lease and other related obligations, net of subleases, $980 in workforce reduction costs, store breakdown costs of $2,031 and inventory transfer costs of $862. These charges are included in discontinued operations in the consolidated statement of operations. The write-down of fixed assets includes the adjustment to the market value of those owned stores that are now classified as assets held for disposal in accordance with SFAS No. 144 and the write-down of leasehold improvements. The assets held for disposal have been valued at the lower of their carrying amount or their estimated fair value, net of disposal costs. The long-term lease and other related obligations represent the fair value of such obligations less the estimated net sublease income. The workforce reduction costs represent the involuntary termination benefits payable to approximately 900 store employees, all of whom were notified on or prior to July 31, 2003. Severance for these employees was accrued in accordance with SFAS No. 146. Approximately 61% of these employees were terminated as of November 1, 2003. The remaining employees accepted other positions within the Company subsequent to the July 31, 2003 notification date. The accrued severance of $557 related to employees that accepted other positions was reversed in the third quarter of fiscal 2003. An additional $187 in accrued severance was reversed in the fourth quarter of fiscal 2003 due to a change in the estimate of severance payable. These reversals were recorded in discontinued operations on the consolidated statement of operations.
Discontinuation of certain merchandise offerings
In the second quarter of fiscal 2003, the Company recorded a $24,580 write-down of inventory as a result of a decision to discontinue certain merchandising offerings. This write-down was recorded in cost of merchandise sales on the consolidated statement of operations.
Corporate realignment
The charges related to this fiscal 2003 realignment included $3,070 in workforce reduction costs, $2,543 of expenses incurred in the development of the restructuring plan, a $536 write-down of certain assets and $467 in costs related to two warehouse lease terminations. The workforce reduction costs represent the involuntary termination benefits payable to 150 Store Support Center employees and field managers. All of these employees were terminated as of November 1, 2003. The realignment charges were recorded in selling, general and administrative expenses and cost of merchandise sales on the consolidated statement of operations.
48
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 7—RESTRUCTURING (Continued)
Reserve Summary
The following chart details the reserve balances through January 29, 2005. The reserve includes remaining rent on leases net of sublease income, other contractual obligations associated with leased properties and employee severance.
|
|
|
| Severance
|
| Lease
Expenses
|
| Contractual
Obligations
|
| Total
|
|---|
| Reserve balance at Feb. 1, 2003 | | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Original reserve | | | | | 4,050 | | | | 2,332 | | | | 887 | | | | 7,269 | |
| Provision for present value of liabilities | | | | | — | | | | 92 | | | | 25 | | | | 117 | |
| Changes in assumptions about future sublease income, lease termination, contractual obligations and severance | | | | | (744 | ) | | | 2,098 | | | | (44 | ) | | | 1,310 | |
| Cash payments | | | | | (2,933 | ) | | | (2,154 | ) | | | (405 | ) | | | (5,492 | ) |
| Reserve balance at Jan. 31, 2004 | | | | | 373 | | | | 2,368 | | | | 463 | | | | 3,204 | |
| Provision for present value of liabilities | | | | | — | | | | 160 | | | | 256 | | | | 416 | |
| Changes in assumptions about future sublease income, lease termination, contractual obligations and severance | | | | | (158 | ) | | | 82 | | | | — | | | | (76 | ) |
| Cash payments | | | | | (215 | ) | | | (855 | ) | | | (578 | ) | | | (1,648 | ) |
| Reserve balance at Jan. 29, 2005 | | | | $ | — | | | $ | 1,755 | | | $ | 141 | | | $ | 1,896 | |
NOTE 8—DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, the Company’s discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company’s corporate restructuring. The results for the fiscal years ended January 31, 2004 and February 1, 2003 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
| Total Revenues | | | | $ | 1 | | | $ | 37,722 | | | $ | 74,711 | |
| Total Gross (Loss) Profit | | | | | (3,342 | ) | | | (15,695 | ) | | | 17,215 | |
| Selling, General, and Administrative Expenses | | | | | (10 | ) | | | 9,981 | | | | 16,283 | |
(Loss) Earnings from Discontinued Operations
Before Income Taxes | | | | | (3,332 | ) | | | (25,676 | ) | | | 932 | |
| (Loss) Earnings from Discontinued Operations, Net of Tax | | | | $ | (2,087 | ) | | $ | (16,265 | ) | | $ | 587 | |
49
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 8—DISCONTINUED OPERATIONS (Continued)
Additionally, the Company has made certain reclassifications to its consolidated balance sheets to reflect the assets held for disposal and assets from discontinued operations associated with the 33 stores closed on July 31, 2003. As of January 29, 2005 and January 31, 2004, the balances reclassified to assets held for disposal were as follows:
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
| Land | | | | $ | 543 | | | $ | 8,954 | |
| Building and improvements | | | | | 122 | | | | 7,975 | |
| | | | | $ | 665 | | | $ | 16,929 | |
Two of the Company’s closed stores remained unsold as of January 29, 2005. One of the properties is without an executed agreement of sale and was reclassified in the second quarter of fiscal 2004 to assets held for use at market value, which is lower than cost adjusted for depreciation. The other property is the subject of an executed agreement of sale as of January 29, 2005 and therefore will remain in assets held for disposal until the completion of sale.
During fiscal 2004, the Company sold assets held for disposal for proceeds of $13,327 resulting in a loss of $91 which was recorded in discontinued operations on the consolidated statement of operations.
During fiscal 2003, the Company sold assets held for disposal for proceeds of $12,068, resulting in a gain of $7,097 which was recorded in discontinued operations on the consolidated statement of operations.
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION
On December 14, 2004, the Company issued $200,000 aggregate principal amount of 7.50% Senior Subordinated Notes due December 15, 2014, and on May 21, 2002, the Company issued $150,000 aggregate principal amount of 4.25% Convertible Senior Notes. Both issuances are unsecured and jointly and severally guaranteed by the Company’s wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny, Moe and Jack of California, Pep Boys—Manny, Moe and Jack of Delaware, Inc. and Pep Boys—Manny, Moe and Jack of Puerto Rico, Inc. PBY Corporation was added as a subsidiary guarantor of both issuances on January 6, 2005.
The following are consolidating balance sheets of the Company as of January 29, 2005 and January 31, 2004 and the related consolidating statements of operations and consolidating statements of cash flows for the fiscal years ended January 29, 2005, January 31, 2004 and February 1, 2003. The consolidating balance sheet as of January 31, 2004 and the related consolidating statements of operations and cash flows for the fiscal years ended January 31, 2004 and February 1, 2003 have been reclassified to show PBY Corporation as a subsidiary guarantor for comparative purposes.
50
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
CONSOLIDATING BALANCE SHEET
As of January 29, 2005
|
|
|
| Pep Boys
|
| Subsidiary
Guarantors
|
| Non-
Guarantor
Subsidiaries
|
| Consolidation/
Elimination
|
| Consolidated
|
|---|
ASSETS
| | | | | | | | | | | | | | | | | | | | | | |
Current Assets:
| | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 59,032 | | | $ | 8,474 | | | $ | 15,252 | | | $ | — | | | $ | 82,758 | |
| Accounts receivable, net | | | | | 14,150 | | | | 16,844 | | | | — | | | | — | | | | 30,994 | |
| Merchandise inventories | | | | | 205,908 | | | | 396,852 | | | | — | | | | — | | | | 602,760 | |
| Prepaid expenses | | | | | 28,535 | | | | 17,450 | | | | 21,499 | | | | (22,135 | ) | | | 45,349 | |
| Deferred income taxes | | | | | 3,140 | | | | (28,192 | ) | | | 5,645 | | | | 19,407 | | | | — | |
| Other | | | | | 19,170 | | | | 12,097 | | | | 64,798 | | | | — | | | | 96,065 | |
| Assets held for disposal | | | | | — | | | | 665 | | | | — | | | | — | | | | 665 | |
| Total Current Assets | | | | | 329,935 | | | | 424,190 | | | | 107,194 | | | | (2,728 | ) | | | 858,591 | |
Property and Equipment—at cost:
| | | | | | | | | | | | | | | | | | | | | | |
| Land | | | | | 87,314 | | | | 174,671 | | | | — | | | | — | | | | 261,985 | |
| Buildings and improvements | | | | | 315,170 | | | | 600,929 | | | | — | | | | — | | | | 916,099 | |
| Furniture, fixtures and equipment | | | | | 296,732 | | | | 336,366 | | | | — | | | | — | | | | 633,098 | |
| Construction in progress | | | | | 38,240 | | | | 2,186 | | | | — | | | | — | | | | 40,426 | |
| | | | | | 737,456 | | | | 1,114,152 | | | | — | | | | — | | | | 1,851,608 | |
| Less accumulated depreciation and amortization | | | | | 390,331 | | | | 516,246 | | | | — | | | | — | | | | 906,577 | |
| Total Property and Equipment—Net | | | | | 347,125 | | | | 597,906 | | | | — | | | | — | | | | 945,031 | |
| Investment in subsidiaries | | | | | 1,585,211 | | | | 1,130,247 | | | | — | | | | (2,715,458 | ) | | | — | |
| Intercompany receivable | | | | | — | | | | 845,384 | | | | 85,881 | | | | (931,265 | ) | | | — | |
| Other | | | | | 59,900 | | | | 3,501 | | | | — | | | | — | | | | 63,401 | |
| Total Assets | | | | $ | 2,322,171 | | | $ | 3,001,228 | | | $ | 193,075 | | | $ | (3,649,451 | ) | | $ | 1,867,023 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | |
Current Liabilities:
| | | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | | | $ | 310,972 | | | $ | 9 | | | $ | — | | | $ | — | | | $ | 310,981 | |
| Accrued expenses | | | | | 60,178 | | | | 90,014 | | | | 178,614 | | | | (22,135 | ) | | | 306,671 | |
| Current deferred taxes | | | | | — | | | | — | | | | — | | | | 19,406 | | | | 19,406 | |
Current maturities of long-term debt and
obligations under capital leases | | | | | 40,882 | | | | — | | | | — | | | | — | | | | 40,882 | |
| Total Current Liabilities | | | | | 412,032 | | | | 90,023 | | | | 178,614 | | | | (2,729 | ) | | | 677,940 | |
| Long-term debt and obligations under capital leases, less current maturities | | | | | 347,315 | | | | 5,367 | | | | — | | | | — | | | | 352,682 | |
| Convertible long-term debt, less current maturities | | | | | 119,000 | | | | — | | | | — | | | | — | | | | 119,000 | |
| Other long-term liabilities | | | | | 11,416 | | | | 26,561 | | | | — | | | | — | | | | 37,977 | |
| Intercompany liabilities | | | | | 765,068 | | | | 166,196 | | | | — | | | | (931,264 | ) | | | — | |
| Deferred income taxes | | | | | 13,884 | | | | 12,084 | | | | — | | | | — | | | | 25,968 | |
Stockholders’ Equity:
| | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | | | | 68,557 | | | | 1,502 | | | | 100 | | | | (1,602 | ) | | | 68,557 | |
| Additional paid-in capital | | | | | 284,966 | | | | 436,858 | | | | 3,900 | | | | (440,758 | ) | | | 284,966 | |
| Retained earnings | | | | | 536,780 | | | | 2,262,637 | | | | 10,461 | | | | (2,273,098 | ) | | | 536,780 | |
| Common stock subscriptions receivable | | | | | (167 | ) | | | — | | | | — | | | | — | | | | (167 | ) |
| Accumulated other comprehensive loss | | | | | (4,852 | ) | | | — | | | | — | | | | — | | | | (4,852 | ) |
| | | | | | 885,284 | | | | 2,700,997 | | | | 14,461 | | | | (2,715,458 | ) | | | 885,284 | |
Less:
| | | | | | | | | | | | | | | | | | | | | | |
| Cost of shares in treasury | | | | | 172,564 | | | | — | | | | — | | | | — | | | | 172,564 | |
| Cost of shares in benefits trust | | | | | 59,264 | | | | — | | | | — | | | | — | | | | 59,264 | |
| Total Stockholders’ Equity | | | | | 653,456 | | | | 2,700,997 | | | | 14,461 | | | | (2,715,458 | ) | | | 653,456 | |
| Total Liabilities and Stockholders’ Equity | | | | $ | 2,322,171 | | | $ | 3,001,228 | | | $ | 193,075 | | | $ | (3,649,451 | ) | | $ | 1,867,023 | |
51
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
CONSOLIDATING BALANCE SHEET
As of January 31, 2004
|
|
|
| Pep Boys
|
| Subsidiary
Guarantors
|
| Non-
Guarantor
Subsidiaries
|
| Consolidation/
Elimination
|
| Consolidated
|
|---|
ASSETS
| | | | | | | | | | | | | | | | | | | | | | |
Current Assets:
| | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 43,929 | | | $ | 9,072 | | | $ | 7,983 | | | $ | — | | | $ | 60,984 | |
| Accounts receivable, net | | | | | 14,573 | | | | 15,989 | | | | — | | | | — | | | | 30,562 | |
| Merchandise inventories | | | | | 191,111 | | | | 362,451 | | | | — | | | | — | | | | 553,562 | |
| Prepaid expenses | | | | | 25,860 | | | | 16,714 | | | | 17,656 | | | | (20,750 | ) | | | 39,480 | |
| Deferred income taxes | | | | | 7,224 | | | | 8,354 | | | | 5,248 | | | | — | | | | 20,826 | |
| Other | | | | | 17,891 | | | | 7,494 | | | | 55,711 | | | | — | | | | 81,096 | |
| Assets held for disposal | | | | | 8,083 | | | | 8,846 | | | | — | | | | — | | | | 16,929 | |
| Total Current Assets | | | | | 308,671 | | | | 428,920 | | | | 86,598 | | | | (20,750 | ) | | | 803,439 | |
Property and Equipment—at cost:
| | | | | | | | | | | | | | | | | | | | | | |
| Land | | | | | 87,484 | | | | 176,423 | | | | — | | | | — | | | | 263,907 | |
| Buildings and improvements | | | | | 308,066 | | | | 591,048 | | | | — | | | | — | | | | 899,114 | |
| Furniture, fixtures and equipment | | | | | 286,472 | | | | 300,135 | | | | — | | | | — | | | | 586,607 | |
| Construction in progress | | | | | 12,800 | | | | — | | | | — | | | | — | | | | 12,800 | |
| | | | | | 694,822 | | | | 1,067,606 | | | | — | | | | — | | | | 1,762,428 | |
| Less accumulated depreciation and amortization | | | | | 363,652 | | | | 475,567 | | | | — | | | | — | | | | 839,219 | |
| Total Property and Equipment—Net | | | | | 331,170 | | | | 592,039 | | | | — | | | | — | | | | 923,209 | |
| Investment in subsidiaries | | | | | 1,440,412 | | | | 1,162,965 | | | | — | | | | (2,603,377 | ) | | | — | |
| Intercompany receivable | | | | | — | | | | 667,856 | | | | 98,633 | | | | (766,489 | ) | | | — | |
| Other | | | | | 48,240 | | | | 3,158 | | | | — | | | | — | | | | 51,398 | |
| Total Assets | | | | $ | 2,128,493 | | | $ | 2,854,938 | | | $ | 185,231 | | | $ | (3,390,616 | ) | | $ | 1,778,046 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | |
Current Liabilities:
| | | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | | | $ | 342,575 | | | $ | 9 | | | $ | — | | | $ | — | | | $ | 342,584 | |
| Accrued expenses | | | | | 43,670 | | | | 91,564 | | | | 153,081 | | | | (20,750 | ) | | | 267,565 | |
Current maturities of long-term debt and
obligations under capital leases | | | | | 117,063 | | | | — | | | | — | | | | — | | | | 117,063 | |
| Total Current Liabilities | | | | | 503,308 | | | | 91,573 | | | | 153,081 | | | | (20,750 | ) | | | 727,212 | |
| Long-term debt and obligations under capital leases, less current maturities | | | | | 257,983 | | | | 33 | | | | — | | | | — | | | | 258,016 | |
| Convertible long-term debt, less current maturities | | | | | 150,000 | | | | — | | | | — | | | | — | | | | 150,000 | |
| Other long-term liabilities | | | | | 13,444 | | | | 29,664 | | | | — | | | | — | | | | 43,108 | |
| Intercompany liabilities | | | | | 607,168 | | | | 159,321 | | | | — | | | | (766,489 | ) | | | — | |
| Deferred income taxes | | | | | 26,856 | | | | 3,120 | | | | — | | | | — | | | | 29,976 | |
Stockholders’ Equity:
| | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | | | | 63,911 | | | | 1,502 | | | | 100 | | | | (1,602 | ) | | | 63,911 | |
| Additional paid-in capital | | | | | 177,317 | | | | 436,857 | | | | 3,900 | | | | (440,757 | ) | | | 177,317 | |
| Retained earnings | | | | | 531,933 | | | | 2,132,868 | | | | 28,150 | | | | (2,161,018 | ) | | | 531,933 | |
| Accumulated other comprehensive loss | | | | | (15 | ) | | | — | | | | — | | | | — | | | | (15 | ) |
| | | | | | 773,146 | | | | 2,571,227 | | | | 32,150 | | | | (2,603,377 | ) | | | 773,146 | |
Less:
| | | | | | | | | | | | | | | | | | | | | | |
| Cost of shares in treasury | | | | | 144,148 | | | | — | | | | — | | | | — | | | | 144,148 | |
| Cost of shares in benefits trust | | | | | 59,264 | | | | — | | | | — | | | | — | | | | 59,264 | |
| Total Stockholders’ Equity | | | | | 569,734 | | | | 2,571,227 | | | | 32,150 | | | | (2,603,377 | ) | | | 569,734 | |
| Total Liabilities and Stockholders’ Equity | | | | $ | 2,128,493 | | | $ | 2,854,938 | | | $ | 185,231 | | | $ | (3,390,616 | ) | | $ | 1,778,046 | |
52
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Year ended January 29, 2005
|
|
|
| Pep Boys
|
| Subsidiary
Guarantors
|
| Non-
Guarantor
Subsidiaries
|
| Consolidation/
Elimination
|
| Consolidated
|
|---|
| Merchandise Sales | | | | $ | 647,135 | | | $ | 1,215,880 | | | $ | — | | | $ | — | | | $ | 1,863,015 | |
| Service Revenue | | | | | 141,915 | | | | 267,966 | | | | — | | | | — | | | | 409,881 | |
| Other Revenue | | | | | — | | | | — | | | | 28,432 | | | | (28,432 | ) | | | — | |
| Total Revenues | | | | | 789,050 | | | | 1,483,846 | | | | 28,432 | | | | (28,432 | ) | | | 2,272,896 | |
| Costs of Merchandise Sales | | | | | 469,421 | | | | 863,875 | | | | — | | | | — | | | | 1,333,296 | |
| Costs of Service Revenue | | | | | 108,554 | | | | 208,588 | | | | — | | | | — | | | | 317,142 | |
| Costs of Other Revenue | | | | | — | | | | — | | | | 35,693 | | | | (35,693 | ) | | | — | |
| Total Costs of Revenues | | | | | 577,975 | | | | 1,072,463 | | | | 35,693 | | | | (35,693 | ) | | | 1,650,438 | |
| Gross Profit from Merchandise Sales | | | | | 177,714 | | | | 352,005 | | | | — | | | | — | | | | 529,719 | |
| Gross Profit from Service Revenue | | | | | 33,361 | | | | 59,378 | | | | — | | | | — | | | | 92,739 | |
| Gross Loss from Other Revenue | | | | | — | | | | — | | | | (7,261 | ) | | | 7,261 | | | | — | |
| Total Gross Profit (Loss) | | | | | 211,075 | | | | 411,383 | | | | (7,261 | ) | | | 7,261 | | | | 622,458 | |
| Selling, General and Administrative Expenses | | | | | 189,161 | | | | 350,598 | | | | 316 | | | | 7,261 | | | | 547,336 | |
| Operating Profit (Loss) | | | | | 21,914 | | | | 60,785 | | | | (7,577 | ) | | | — | | | | 75,122 | |
| Equity in Earnings of Subsidiaries | | | | | 62,122 | | | | 64,958 | | | | — | | | | (127,080 | ) | | | — | |
| Non-Operating (Expense) Income | | | | | (18,317 | ) | | | 71,679 | | | | 3,397 | | | | (54,935 | ) | | | 1,824 | |
| Interest Expense | | | | | 64,268 | | | | 26,632 | | | | — | | | | (54,935 | ) | | | 35,965 | |
| (Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle | | | | | 1,451 | | | | 170,790 | | | | (4,180 | ) | | | (127,080 | ) | | | 40,981 | |
| Income Tax (Benefit) Expense | | | | | (22,515 | ) | | | 39,320 | | | | (1,490 | ) | | | — | | | | 15,315 | |
| Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle | | | | | 23,966 | | | | 131,470 | | | | (2,690 | ) | | | (127,080 | ) | | | 25,666 | |
Loss from Discontinued Operations,
Net of Tax | | | | | (387 | ) | | | (1,700 | ) | | | — | | | | — | | | | (2,087 | ) |
| Net (Loss) Earnings | | | | $ | 23,579 | | | $ | 129,770 | | | $ | (2,690 | ) | | $ | (127,080 | ) | | $ | 23,579 | |
53
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Year ended January 31, 2004
|
|
|
| Pep Boys
|
| Subsidiary
Guarantors
|
| Non-
Guarantor
Subsidiaries
|
| Consolidation/
Elimination
|
| Consolidated
|
|---|
| Merchandise Sales | | | | $ | 591,505 | | | $ | 1,136,881 | | | $ | — | | | $ | — | | | $ | 1,728,386 | |
| Service Revenue | | | | | 141,304 | | | | 264,580 | | | | — | | | | — | | | | 405,884 | |
| Other Revenue | | | | | — | | | | — | | | | 26,825 | | | | (26,825 | ) | | | — | |
| Total Revenues | | | | | 732,809 | | | | 1,401,461 | | | | 26,825 | | | | (26,825 | ) | | | 2,134,270 | |
| Costs of Merchandise Sales | | | | | 426,260 | | | | 816,100 | | | | — | | | | — | | | | 1,242,360 | |
| Costs of Service Revenue | | | | | 105,940 | | | | 205,182 | | | | — | | | | — | | | | 311,122 | |
| Costs of Other Revenue | | | | | — | | | | — | | | | 31,636 | | | | (31,636 | ) | | | — | |
| Total Costs of Revenues | | | | | 532,200 | | | | 1,021,282 | | | | 31,636 | | | | (31,636 | ) | | | 1,553,482 | |
| Gross Profit from Merchandise Sales | | | | | 165,245 | | | | 320,781 | | | | — | | | | — | | | | 486,026 | |
| Gross Profit from Service Revenue | | | | | 35,364 | | | | 59,398 | | | | — | | | | — | | | | 94,762 | |
| Gross Loss from Other Revenue | | | | | — | | | | — | | | | (4,811 | ) | | | 4,811 | | | | — | |
| Total Gross Profit (Loss) | | | | | 200,609 | | | | 380,179 | | | | (4,811 | ) | | | 4,811 | | | | 580,788 | |
| Selling, General and Administrative Expenses | | | | | 192,228 | | | | 372,481 | | | | 314 | | | | 4,811 | | | | 569,834 | |
| Operating Profit (Loss) | | | | | 8,381 | | | | 7,698 | | | | (5,125 | ) | | | — | | | | 10,954 | |
| Equity in Earnings of Subsidiaries | | | | | 16,070 | | | | 41,666 | | | | — | | | | (57,736 | ) | | | — | |
| Non-Operating (Expense) Income | | | | | (17,055 | ) | | | 65,075 | | | | 3,390 | | | | (48,070 | ) | | | 3,340 | |
| Interest Expense | | | | | 61,675 | | | | 24,650 | | | | — | | | | (48,070 | ) | | | 38,255 | |
| (Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle | | | | | (54,279 | ) | | | 89,789 | | | | (1,735 | ) | | | (57,736 | ) | | | (23,961 | ) |
| Income Tax (Benefit) Expense | | | | | (24,920 | ) | | | 16,728 | | | | (624 | ) | | | — | | | | (8,816 | ) |
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect
of Change in Accounting Principle | | | | | (29,359 | ) | | | 73,061 | | | | (1,111 | ) | | | (57,736 | ) | | | (15,145 | ) |
Loss from Discontinued Operations,
Net of Tax | | | | | (3,636 | ) | | | (12,629 | ) | | | — | | | | — | | | | (16,265 | ) |
| Cumulative Effect of Change in Accounting Principle, Net of Tax | | | | | (899 | ) | | | (1,585 | ) | | | — | | | | — | | | | (2,484 | ) |
| Net (Loss) Earnings | | | | $ | (33,894 | ) | | $ | 58,847 | | | $ | (1,111 | ) | | $ | (57,736 | ) | | $ | (33,894 | ) |
54
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Year ended February 1, 2003
|
|
|
| Pep Boys
|
| Subsidiary
Guarantors
|
| Non-
Guarantor
Subsidiaries
|
| Consolidation/
Elimination
|
| Consolidated
|
|---|
| Merchandise Sales | | | | $ | 585,819 | | | $ | 1,111,809 | | | $ | — | | | $ | — | | | $ | 1,697,628 | |
| Service Revenue | | | | | 140,419 | | | | 259,730 | | | | — | | | | — | | | | 400,149 | |
| Other Revenue | | | | | — | | | | — | | | | 26,075 | | | | (26,075 | ) | | | — | |
| Total Revenues | | | | | 726,238 | | | | 1,371,539 | | | | 26,075 | | | | (26,075 | ) | | | 2,097,777 | |
| Costs of Merchandise Sales | | | | | 407,538 | | | | 780,479 | | | | — | | | | — | | | | 1,188,017 | |
| Costs of Service Revenue | | | | | 101,894 | | | | 197,900 | | | | — | | | | — | | | | 299,794 | |
| Costs of Other Revenue | | | | | — | | | | — | | | | 29,498 | | | | (29,498 | ) | | | — | |
| Total Costs of Revenues | | | | | 509,432 | | | | 978,379 | | | | 29,498 | | | | (29,498 | ) | | | 1,487,811 | |
| Gross Profit from Merchandise Sales | | | | | 178,281 | | | | 331,330 | | | | — | | | | — | | | | 509,611 | |
| Gross Profit from Service Revenue | | | | | 38,525 | | | | 61,830 | | | | — | | | | — | | | | 100,355 | |
| Gross Loss from Other Revenue | | | | | — | | | | — | | | | (3,423 | ) | | | 3,423 | | | | — | |
| Total Gross Profit (Loss) | | | | | 216,806 | | | | 393,160 | | | | (3,423 | ) | | | 3,423 | | | | 609,966 | |
| Selling, General and Administrative Expenses | | | | | 168,327 | | | | 332,120 | | | | 293 | | | | 3,423 | | | | 504,163 | |
| Operating Profit (Loss) | | | | | 48,479 | | | | 61,040 | | | | (3,716 | ) | | | — | | | | 105,803 | |
| Equity in Earnings of Subsidiaries | | | | | 63,983 | | | | 70,805 | | | | — | | | | (134,788 | ) | | | — | |
| Non-Operating (Expense) Income | | | | | (16,977 | ) | | | 64,362 | | | | 4,083 | | | | (48,371 | ) | | | 3,097 | |
| Interest Expense | | | | | 70,099 | | | | 25,509 | | | | — | | | | (48,371 | ) | | | 47,237 | |
| Earnings from Continuing Operations Before Income Taxes | | | | | 25,386 | | | | 170,698 | | | | 367 | | | | (134,788 | ) | | | 61,663 | |
| Income Tax (Benefit) Expense | | | | | (13,502 | ) | | | 36,170 | | | | 114 | | | | — | | | | 22,782 | |
| Net Earnings from Continuing Operations | | | | | 38,888 | | | | 134,528 | | | | 253 | | | | (134,788 | ) | | | 38,881 | |
Earnings from Discontinued Operations,
Net of Tax | | | | | 580 | | | | 7 | | | | — | | | | — | | | | 587 | |
| Net Earnings | | | | $ | 39,468 | | | $ | 134,535 | | | $ | 253 | | | $ | (134,788 | ) | | $ | 39,468 | |
55
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended January 29, 2005
|
|
|
| Pep Boys
|
| Subsidiary
Guarantors
|
| Non-
Guarantor
Subsidiaries
|
| Consolidation/
Elimination
|
| Consolidated
|
|---|
Cash Flows from Operating Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Net Earnings (Loss) | | | | $ | 23,579 | | | $ | 129,770 | | | $ | (2,690 | ) | | $ | (127,080 | ) | | $ | 23,579 | |
| Net Loss from Discontinued Operations | | | | | (387 | ) | | | (1,700 | ) | | | — | | | | — | | | | (2,087 | ) |
| Net Earnings (Loss) from Continuing Operations | | | | | 23,966 | | | | 131,470 | | | | (2,690 | ) | | | (127,080 | ) | | | 25,666 | |
Adjustments to Reconcile Net Earnings (Loss) to Net Cash (Used in) Provided By Continuing Operations:
| | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 29,261 | | | | 47,359 | | | | — | | | | — | | | | 76,620 | |
| Accretion of asset disposal obligation | | | | | 29 | | | | 106 | | | | — | | | | — | | | | 135 | |
| Equity in earnings of subsidiaries | | | | | (144,798 | ) | | | 32,718 | | | | — | | | | 112,080 | | | | — | |
| Stock compensation expense | | | | | 1,184 | | | | — | | | | — | | | | — | | | | 1,184 | |
| Deferred income taxes | | | | | (18,584 | ) | | | 45,835 | | | | (398 | ) | | | — | | | | 26,853 | |
| Deferred gain on sale leaseback | | | | | (34 | ) | | | (96 | ) | | | — | | | | — | | | | (130 | ) |
| Gain from sale of assets | | | | | (199 | ) | | | (11,649 | ) | | | — | | | | — | | | | (11,848 | ) |
Changes in operating assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | |
(Increase) decrease in accounts receivable,
prepaid expenses and other | | | | | (5,677 | ) | | | (5,849 | ) | | | (12,930 | ) | | | 1,385 | | | | (23,071 | ) |
| Increase in merchandise inventories | | | | | (14,797 | ) | | | (34,401 | ) | | | — | | | | — | | | | (49,198 | ) |
| Increase in accounts payable | | | | | (24,387 | ) | | | — | | | | — | | | | — | | | | (24,387 | ) |
| Increase (increase) in accrued expenses | | | | | 15,624 | | | | (13,920 | ) | | | 25,534 | | | | (1,385 | ) | | | 25,853 | |
| (Decrease) increase in other long-term liabilities | | | | | (887 | ) | | | (385 | ) | | | — | | | | — | | | | (1,272 | ) |
| Net Cash (Used in) Provided by Continuing Operations | | | | | (139,299 | ) | | | 191,188 | | | | 9,516 | | | | (15,000 | ) | | | 46,405 | |
| Net Cash Provided by Discontinued Operations | | | | | (479 | ) | | | (2,253 | ) | | | — | | | | — | | | | (2,732 | ) |
| Net Cash (Used in) Provided by Operating Activities | | | | | (139,778 | ) | | | 188,935 | | | | 9,516 | | | | (15,000 | ) | | | 43,673 | |
Cash Flows from Investing Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | | | | (43,975 | ) | | | (44,093 | ) | | | — | | | | — | | | | (88,068 | ) |
| Proceeds from sales of assets | | | | | 331 | | | | 17,690 | | | | — | | | | — | | | | 18,021 | |
| Proceeds from sales of assets held for disposal | | | | | 7,826 | | | | 5,501 | | | | — | | | | — | | | | 13,327 | |
| Net Cash (Used in) Provided by Investing Activities | | | | | (35,818 | ) | | | (20,902 | ) | | | — | | | | — | | | | (56,720 | ) |
Cash Flows from Financing Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Net payments under line of credit agreements | | | | | 2,768 | | | | 5,334 | | | | — | | | | — | | | | 8,102 | |
| Payments for finance issuance costs | | | | | (5,500 | ) | | | — | | | | — | | | | — | | | | (5,500 | ) |
| Payments on short term borrowing | | | | | (7,216 | ) | | | — | | | | — | | | | — | | | | (7,216 | ) |
| Payments on capital lease obligations | | | | | (1,040 | ) | | | — | | | | — | | | | — | | | | (1,040 | ) |
| Reduction of long-term debt | | | | | (189,991 | ) | | | — | | | | — | | | | — | | | | (189,991 | ) |
| Reduction of convertible debt | | | | | (31,000 | ) | | | — | | | | — | | | | — | | | | (31,000 | ) |
| Proceeds from issuance of notes | | | | | 200,000 | | | | — | | | | — | | | | — | | | | 200,000 | |
| Intercompany Loan | | | | | 161,212 | | | | (173,965 | ) | | | 12,753 | | | | — | | | | — | |
| Dividends paid | | | | | (15,676 | ) | | | — | | | | (15,000 | ) | | | 15,000 | | | | (15,676 | ) |
| Repurchase of common stock | | | | | (39,718 | ) | | | — | | | | — | | | | — | | | | (39,718 | ) |
| Proceeds from issuance of common stock | | | | | 108,854 | | | | — | | | | — | | | | — | | | | 108,854 | |
| Proceeds from exercise of stock options | | | | | 6,887 | | | | — | | | | — | | | | — | | | | 6,887 | |
| Proceeds from dividend reinvestment plan | | | | | 1,119 | | | | — | | | | — | | | | — | | | | 1,119 | |
| Net Cash Provided by Financing Activities | | | | | 190,699 | | | | (168,631 | ) | | | (2,247 | ) | | | 15,000 | | | | 34,821 | |
| Net Increase (Decrease) in Cash | | | | | 15,103 | | | | (598 | ) | | | 7,269 | | | | — | | | | 21,774 | |
| Cash and Cash Equivalents at Beginning of Year | | | | | 43,929 | | | | 9,072 | | | | 7,983 | | | | — | | | | 60,984 | |
| Cash and Cash Equivalents at End of Year | | | | $ | 59,032 | | | $ | 8,474 | | | $ | 15,252 | | | $ | — | | | $ | 82,758 | |
56
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended January 31, 2004
|
|
|
| Pep Boys
|
| Subsidiary
Guarantors
|
| Non-
Guarantor
Subsidiaries
|
| Consolidation/
Elimination
|
| Consolidated
|
|---|
Cash Flows from Operating Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Net (Loss) Earnings | | | | $ | (33,894 | ) | | $ | 58,849 | | | $ | (1,111 | ) | | $ | (57,738 | ) | | $ | (33,894 | ) |
| Net Loss from Discontinued Operations | | | | | (3,351 | ) | | | (12,914 | ) | | | — | | | | — | | | | (16,265 | ) |
| Net (Loss) Earnings from Continuing Operations | | | | | (30,543 | ) | | | 71,763 | | | | (1,111 | ) | | | (57,738 | ) | | | (17,629 | ) |
Adjustments to Reconcile Net (Loss) Earnings to
Net Cash Provided By Continuing Operations:
| | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 31,312 | | | | 46,963 | | | | — | | | | — | | | | 78,275 | |
| Cumulative effect of change in accounting principle, net of tax | | | | | 899 | | | | 1,585 | | | | — | | | | — | | | | 2,484 | |
| Accretion of asset disposal obligation | | | | | 38 | | | | 125 | | | | — | | | | — | | | | 163 | |
| Equity in earnings of subsidiaries | | | | | (16,072 | ) | | | (41,666 | ) | | | — | | | | 57,738 | | | | — | |
| Deferred income taxes | | | | | 2,838 | | | | (6,722 | ) | | | 2,482 | | | | — | | | | (1,402 | ) |
| Deferred gain on sale leaseback | | | | | (149 | ) | | | (276 | ) | | | — | | | | — | | | | (425 | ) |
| Loss on asset impairments | | | | | 13,164 | | | | 1,371 | | | | — | | | | — | | | | 14,535 | |
| (Gain) loss from sale of assets | | | | | (7 | ) | | | 68 | | | | — | | | | — | | | | 61 | |
Changes in operating assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | |
(Increase) decrease in accounts receivable,
prepaid expenses and other | | | | | (22,786 | ) | | | (12,614 | ) | | | 828 | | | | 1,375 | | | | (33,197 | ) |
| Increase in merchandise inventories | | | | | (24,945 | ) | | | (39,735 | ) | | | — | | | | — | | | | (64,680 | ) |
| Increase in accounts payable | | | | | 142,531 | | | | — | | | | — | | | | — | | | | 142,531 | |
| (Decrease) increase in accrued expenses | | | | | (21,104 | ) | | | 37,652 | | | | 10,592 | | | | (1,375 | ) | | | 25,765 | |
| Increase (decrease) in other long-term liabilities | | | | | 3,610 | | | | (1,884 | ) | | | — | | | | — | | | | 1,726 | |
| Net Cash Provided by Continuing Operations | | | | | 78,786 | | | | 56,630 | | | | 12,791 | | | | — | | | | 148,207 | |
| Net Cash Provided by Discontinued Operations | | | | | 768 | | | | 1,680 | | | | — | | | | — | | | | 2,448 | |
| Net Cash Provided by Operating Activities | | | | | 79,554 | | | | 58,310 | | | | 12,791 | | | | — | | | | 150,655 | |
Cash Flows from Investing Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures from continuing operations | | | | | (26,309 | ) | | | (15,538 | ) | | | — | | | | — | | | | (41,847 | ) |
| Proceeds from sales of assets | | | | | 870 | | | | 2,446 | | | | — | | | | — | | | | 3,316 | |
| Proceeds from sales of assets held for disposal | | | | | — | | | | 13,214 | | | | — | | | | — | | | | 13,214 | �� |
| Net Cash (Used in) Provided by Investing Activities | | | | | (25,439 | ) | | | 122 | | | | — | | | | — | | | | (25,317 | ) |
Cash Flows from Financing Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Net payments under line of credit agreements | | | | | (169 | ) | | | (328 | ) | | | — | | | | — | | | | (497 | ) |
| Payments for finance issuance costs | | | | | (2,356 | ) | | | — | | | | — | | | | — | | | | (2,356 | ) |
| Payments on capital lease obligations | | | | | (700 | ) | | | — | | | | — | | | | — | | | | (700 | ) |
| Reduction of long-term debt | | | | | (101,183 | ) | | | — | | | | — | | | | — | | | | (101,183 | ) |
| Intercompany loan | | | | | 63,956 | | | | (58,752 | ) | | | (5,204 | ) | | | — | | | | — | |
| Dividends paid | | | | | (14,089 | ) | | | — | | | | — | | | | — | | | | (14,089 | ) |
| Proceeds from exercise of stock options | | | | | 10,483 | | | | — | | | | — | | | | — | | | | 10,483 | |
| Proceeds from dividend reinvestment plan | | | | | 1,218 | | | | — | | | | — | | | | — | | | | 1,218 | |
| Net Cash Used In Financing Activities | | | | | (42,840 | ) | | | (59,080 | ) | | | (5,204 | ) | | | — | | | | (107,124 | ) |
| Net Increase (Decrease) in Cash | | | | | 11,275 | | | | (648 | ) | | | 7,587 | | | | — | | | | 18,214 | |
| Cash and Cash Equivalents at Beginning of Year | | | | | 32,654 | | | | 9,720 | | | | 396 | | | | — | | | | 42,770 | |
| Cash and Cash Equivalents at End of Year | | | | $ | 43,929 | | | $ | 9,072 | | | $ | 7,983 | | | $ | — | | | $ | 60,984 | |
57
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended February 1, 2003
|
|
|
| Pep Boys
|
| Subsidiary
Guarantors
|
| Non-
Guarantor
Subsidiaries
|
| Consolidation/
Elimination
|
| Consolidated
|
|---|
Cash Flows from Operating Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Net Earnings | | | | $ | 39,468 | | | $ | 134,535 | | | $ | 253 | | | $ | (134,788 | ) | | $ | 39,468 | |
| Net Earnings from Discontinued Operations | | | | | 557 | | | | 30 | | | | — | | | | — | | | | 587 | |
| Net Earnings from Continuing Operations | | | | | 38,911 | | | | 134,505 | | | | 253 | | | | (134,788 | ) | | | 38,881 | |
Adjustments to Reconcile Net Earnings to
Net Cash Provided By Continuing Operations:
| | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | | | 34,986 | | | | 48,663 | | | | — | | | | — | | | | 83,649 | |
| Deferred income taxes | | | | | 2,126 | | | | (5,113 | ) | | | (788 | ) | | | — | | | | (3,775 | ) |
| Deferred gain on sale leaseback | | | | | (11 | ) | | | (101 | ) | | | — | | | | — | | | | (112 | ) |
| Equity in earnings of subsidiaries | | | | | (63,983 | ) | | | (70,805 | ) | | | — | | | | 134,788 | | | | — | |
| Loss on assets held for disposal | | | | | 11 | | | | 815 | | | | — | | | | — | | | | 826 | |
| Gain from sale of assets | | | | | (216 | ) | | | (1,693 | ) | | | — | | | | — | | | | (1,909 | ) |
Changes in operating assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | |
Decrease (increase) in accounts receivable,
prepaid expenses and other | | | | | 15,170 | | | | (41,131 | ) | | | 10,935 | | | | 2,125 | | | | (12,901 | ) |
| Decrease in merchandise inventories | | | | | 10,530 | | | | 20,061 | | | | — | | | | — | | | | 30,591 | |
| Decrease in accounts payable | | | | | (16,032 | ) | | | — | | | | — | | | | — | | | | (16,032 | ) |
| Increase in accrued expenses | | | | | 472 | | | | 269 | | | | 13,045 | | | | (2,125 | ) | | | 11,661 | |
| (Decrease) increase in other long-term liabilities | | | | | (652 | ) | | | 744 | | | | — | | | | — | | | | 92 | |
| Net Cash Provided by Continuing Operations | | | | | 21,312 | | | | 86,214 | | | | 23,445 | | | | — | | | | 130,971 | |
| Net Cash Provided by Discontinued Operations | | | | | 1,895 | | | | 3,050 | | | | — | | | | — | | | | 4,945 | |
| Net Cash Provided by Operating Activities | | | | | 23,207 | | | | 89,264 | | | | 23,445 | | | | — | | | | 135,916 | |
Cash Flows from Investing Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures from continuing operations | | | | | (24,521 | ) | | | (14,884 | ) | | | — | | | | — | | | | (39,405 | ) |
| Capital expenditures from discontinued operations | | | | | (163 | ) | | | (1,859 | ) | | | — | | | | — | | | | (2,022 | ) |
| Proceeds from sales of assets | | | | | 816 | | | | 1,820 | | | | — | | | | — | | | | 2,636 | |
| Proceeds from assets held for disposal | | | | | 1,234 | | | | 7,188 | | | | — | | | | — | | | | 8,422 | |
| Net Cash Used in Investing Activities | | | | | (22,634 | ) | | | (7,735 | ) | | | — | | | | — | | | | (30,369 | ) |
Cash Flows from Financing Activities:
| | | | | | | | | | | | | | | | | | | | | | |
| Net payments under line of credit agreements | | | | | (23,841 | ) | | | (46,454 | ) | | | — | | | | — | | | | (70,295 | ) |
| Payments for finance issuance costs | | | | | (3,750 | ) | | | — | | | | — | | | | — | | | | (3,750 | ) |
| Repayment of life insurance policy loan | | | | | (17,908 | ) | | | (2,778 | ) | | | — | | | | — | | | | (20,686 | ) |
| Payments on capital lease obligations | | | | | (642 | ) | | | — | | | | — | | | | — | | | | (642 | ) |
| Reduction of long-term debt | | | | | (121,938 | ) | | | — | | | | — | | | | — | | | | (121,938 | ) |
| Net proceeds from issuance of notes | | | | | 150,000 | | | | — | | | | — | | | | — | | | | 150,000 | |
| Intercompany loan | | | | | 56,811 | | | | (33,445 | ) | | | (23,366 | ) | | | — | | | | — | |
| Dividends paid | | | | | (13,911 | ) | | | — | | | | — | | | | — | | | | (13,911 | ) |
| Proceeds from exercise of stock options | | | | | 1,139 | | | | — | | | | — | | | | — | | | | 1,139 | |
| Proceeds from dividend reinvestment plan | | | | | 1,325 | | | | — | | | | — | | | | — | | | | 1,325 | |
| Net Cash Provided by (Used in) Financing Activities | | | | | 27,285 | | | | (82,677 | ) | | | (23,366 | ) | | | — | | | | (78,758 | ) |
| Net Increase (Decrease) in Cash | | | | | 27,858 | | | | (1,148 | ) | | | 79 | | | | — | | | | 26,789 | |
| Cash and Cash Equivalents at Beginning of Year | | | | | 4,796 | | | | 10,867 | | | | 318 | | | | — | | | | 15,981 | |
| Cash and Cash Equivalents at End of Year | | | | $ | 32,654 | | | $ | 9,719 | | | $ | 397 | | | $ | — | | | $ | 42,770 | |
58
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 10—BENEFIT PLANS
DEFINED BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all of its full-time employees hired on or before February 1, 1992. Normal retirement age is 65. Pension benefits are based on salary and years of service. The Company’s policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA.
The actuarial computations are made using the “projected unit credit method.” Variances between actual experience and assumptions for costs and returns on assets are amortized over the remaining service lives of employees under the plan.
As of December 31, 1996, the Company froze the accrued benefits under the plan and active participants became fully vested. The plan’s trustee will continue to maintain and invest plan assets and will administer benefit payments.
The Company also has a Supplemental Executive Retirement Plan (SERP). This unfunded plan has a defined benefit component that provides key employees designated by the Board of Directors with retirement and death benefits. Retirement benefits are based on salary and bonuses; death benefits are based on salary. Benefits paid to a participant under the defined pension plan are deducted from the benefits otherwise payable under the defined benefit portion of the SERP.
Effective March 25, 2002, the Company modified the defined benefit formula of the SERP. These modifications resulted in a $2,101 change in benefit obligation in fiscal 2002.
On January 31, 2004, the Company amended and restated its SERP. This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants, and resulted in an expense under SFAS No. 88 of approximately $2,191. All vested participants under the defined benefits portion will continue to accrue benefits according to the previous defined benefit formula.
In fiscal 2004, the Company settled several obligations related to the benefits under the defined benefit SERP. These obligations totaled $2,065. These obligations resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” of approximately $774 in fiscal 2004.
In fiscal 2003, the Company settled an obligation of $12,620 related to the defined benefits SERP obligation for the former Chairman and CEO. That obligation resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” of approximately $5,231.
Pension expense includes the following:
Year ended
|
|
|
| Jan. 29,
2005
|
| Jan. 31,
2004
|
| Feb. 1,
2003
|
|---|
| Service cost | | | | $ | 438 | | | $ | 611 | | | $ | 587 | |
| Interest cost | | | | | 2,903 | | | | 3,056 | | | | 2,934 | |
| Expected return on plan assets | | | | | (2,299 | ) | | | (2,064 | ) | | | (2,300 | ) |
| Amortization of transitional obligation | | | | | 163 | | | | 274 | | | | 274 | |
| Amortization of prior service cost | | | | | 364 | | | | 615 | | | | 297 | |
| Recognized actuarial loss | | | | | 1,733 | | | | 1,723 | | | | 1,451 | |
| Net periodic benefit cost | | | | | 3,302 | | | | 4,215 | | | | 3,243 | |
| FAS 88 curtailment charge | | | | | — | | | | 2,191 | | | | — | |
| FAS 88 settlement charge | | | | | 774 | | | | 5,231 | | | | — | |
| FAS 88 special termination benefits | | | | | — | | | | 300 | | | | — | |
| Total Pension Expense | | | | $ | 4,076 | | | $ | 11,937 | | | $ | 3,243 | |
59
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 10—BENEFIT PLANS (Continued)
The following table sets forth the reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company’s defined benefit plans:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
Change in Benefit Obligation:
| | | | | | | | | | |
| | Benefit obligation at beginning of year | | | | $ | 47,197 | | | $ | 46,587 | |
| Service cost | | | | | 438 | | | | 611 | |
| Interest cost | | | | | 2,903 | | | | 3,056 | |
| Plan amendments | | | | | — | | | | 2,282 | |
| Curtailment gain | | | | | — | | | | (505 | ) |
| Settlement loss | | | | | 2,316 | | | | 5,576 | |
| Special termination benefits | | | | | — | | | | 300 | |
| Liability transfer | | | | | — | | | | (671 | ) |
| Actuarial loss | | | | | 2,383 | | | | 4,201 | |
| Benefits paid | | | | | (2,853 | ) | | | (14,240 | ) |
| Benefit Obligation at End of Year | | | | $ | 52,384 | | | $ | 47,197 | |
Change in Plan Assets:
| | | | | | | | | | |
| | Fair value of plan assets at beginning of year | | | | $ | 34,730 | | | $ | 31,087 | |
| Actual return on plan assets (net of expenses) | | | | | 2,055 | | | | 4,732 | |
| Employer contributions | | | | | 1,576 | | | | 13,151 | |
| Benefits paid | | | | | (2,853 | ) | | | (14,240 | ) |
| Fair Value of Plan Assets at End of Year | | | | $ | 35,508 | | | $ | 34,730 | |
Reconciliation of the Funded Status:
| | | | | | | | | | |
| | Funded status | | | | $ | (16,876 | ) | | $ | (12,468 | ) |
| Unrecognized transition obligation | | | | | 980 | | | | 1,143 | |
| Unrecognized prior service cost | | | | | 1,718 | | | | 2,083 | |
| Unrecognized actuarial loss | | | | | 14,024 | | | | 10,937 | |
| Amount contributed after measurement date | | | | | 1,140 | | | | 897 | |
| Net Amount Recognized at Year-End | | | | $ | 986 | | | $ | 2,592 | |
Amounts Recognized on Consolidated Balance Sheets Consist of:
| | | | | | | | | | |
| | Prepaid benefit cost | | | | $ | — | | | $ | 8,411 | |
| Accrued benefit liability | | | | | (13,137 | ) | | | (11,266 | ) |
| Intangible asset | | | | | 2,698 | | | | 3,226 | |
| Accumulated other comprehensive loss | | | | | 11,425 | | | | 2,221 | |
| Net Amount Recognized at Year End | | | | $ | 986 | | | $ | 2,592 | |
Other comprehensive loss attributable to change in additional
minimum liability recognition | | | | $ | 9,204 | | | $ | 1,979 | |
| Accumulated Benefit Obligation at End of Year | | | | $ | 48,646 | | | $ | 44,112 | |
Cash Flows
| | | | | | | | | | |
| Employer contributions expected during fiscal 2005 | | | | $ | 1,090 | | | | — | |
60
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 10—BENEFIT PLANS (Continued)
The following table sets forth additional fiscal year-end information for the defined benefit portion of the Company’s SERP for which the accumulated benefit obligation is in excess of plan assets:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
| Projected benefit obligation | | | | $ | 16,624 | | | $ | 14,352 | |
| Accumulated benefit obligation | | | | | 12,885 | | | | 11,266 | |
The following actuarial assumptions were used by the Company to determine pension expense and to present disclosure benefit obligations:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
Weighted-Average Assumptions as of December 31:
| | | | | | | | | | |
| Discount rate | | | | | 5.75 | % | | | 6.25 | % |
| Rate of compensation increase | | | | | 4.0 | %(1) | | | 4.0 | % |
| Weighted-Average Assumptions for Net Periodic
Benefit Cost Development:
| | | | | | | | | | |
| Discount rate | | | | | 6.25 | % | | | 6.75 | % |
| Expected return on plan assets | | | | | 6.75 | % | | | 6.75 | % |
| Rate of compensation expense | | | | | 4.0 | %(1) | | | 4.0 | % |
| Measurement Date | | | | | December 31 | | | | December 31 | |
| (1) | | In addition, bonuses are assumed to be 25% of base pay for the SERP. |
To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 6.75% long-term rate of return on assets assumption.
Pension plan assets are stated at fair market value and are composed primarily of money market funds, stock index funds, fixed income investments with maturities of less than five years, and the Company’s common stock.
Weighted average asset allocations by asset category are as follows:
Plan Assets
|
|
|
| As of
12/31/2004
|
| As of
12/31/2003
|
|---|
| Equity securities | | | | | 57 | % | | | 53 | % |
| Debt securities | | | | | — | | | | — | |
| Fixed income | | | | | 43 | % | | | 47 | % |
| Total | | | | | 100 | % | | | 100 | % |
Equity securities include Pep Boys common stock in the amounts of $900 (2.6% of total plan assets) and $1,300 (3.6% of total plan assets) at December 31, 2004 and December 31, 2003, respectively.
61
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 10—BENEFIT PLANS (Continued)
Benefit payments, including amounts to be paid from Company assets, and reflecting expected future service, as appropriate, are expected to be paid as follows:
| 2005 | | | | $ | 2,530 | |
| 2006 | | | | | 2,474 | |
| 2007 | | | | | 2,633 | |
| 2008 | | | | | 2,651 | |
| 2009 | | | | | 3,441 | |
| 2010 – 2014 | | | | | 17,148 | |
DEFINED CONTRIBUTION PLAN
On January 31, 2004, the Company amended and restated its SERP. This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants, and resulted in an expense under SFAS No. 88 of approximately $2,191. All vested participants under the defined benefits portion will continue to accrue benefits according to the previous defined benefit formula. The Company’s contribution expense for the defined contribution portion of the plan was $678 for the fiscal year ending January 29, 2005.
The Company has 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 $3,463, $4,073, and $4,417 in fiscal 2004, 2003 and 2002, respectively.
DEFERRED COMPENSATION PLAN
In the first quarter of 2004, the Company adopted a non-qualified deferred compensation plan that allows its officers and certain other employees to defer up to 20% of their annual salary and 100% of their annual bonus. Additionally, the first 20% of an officer’s bonus deferred into the Company’s stock is matched by the Company on a one-for-one basis with the Company’s stock that vests over three years. The shares required to satisfy distributions of voluntary bonus deferrals and the accompanying match in the Company’s stock are issued under the Stock Incentive Plans.
The Company has accounted for the non-qualified deferred compensation plan in accordance with EITF 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested.” The Company establishes and maintains a deferred compensation liability for this plan. The Company plans to fund this liability by remitting the officers’ deferrals to a Rabbi Trust where these deferrals are invested in various securities. Accordingly, all gains and losses on these underlying investments, which are held in the Rabbi Trust to fund the deferred compensation liability, are recognized in the Company’s consolidated statement of operations. At January 29, 2005 there was a liability of $446 under this plan.
NOTE 11—NET EARNINGS PER SHARE
For fiscal years 2004, 2003 and 2002, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. Diluted earnings per share assume conversion of convertible senior notes and the dilutive effects of stock options and purchase rights. Adjustments for the convertible senior notes and stock options were anti-dilutive in fiscal 2003 and therefore excluded from the calculation due to the Company’s Net Loss for the year. Additionally, adjustments for the convertible senior notes and purchase rights were anti-dilutive in fiscal 2004 and all periods presented, respectively. Options to purchase 1,950,980, 4,313,020 and 4,588,670 shares of common stock were outstanding at January 29, 2005, January 31, 2004 and February 1, 2003, respectively, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market prices of the common shares on such dates.
62
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 11—NET EARNINGS PER SHARE (Continued)
The following schedule presents the calculation of basic and diluted earnings per share for net earnings (loss) from continuing operations:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
Earnings (loss) from Continuing Operations:
| | | | | | | | | | | | | | |
Basic earnings (loss) from continuing operations available
to common stockholders | | | | $ | 25,666 | | | $ | (15,145 | ) | | $ | 38,881 | |
| Adjustment for interest on convertible senior notes, net of tax | | | | | — | | | | — | | | | 2,807 | |
Diluted earnings (loss) from continuing operations available
to common stockholders | | | | $ | 29,607 | | | $ | (15,145 | ) | | $ | 41,688 | |
Shares:
| | | | | | | | | | | | | | |
| Basic average number of common shares outstanding | | | | | 56,353 | | | | 52,185 | | | | 51,517 | |
Common shares assumed issued upon conversion
of convertible senior notes | | | | | — | | | | — | | | | 4,729 | |
Common shares assumed issued upon exercise
of dilutive stock options | | | | | 1,296 | | | | — | | | | 953 | |
Diluted average number of common shares outstanding
assuming conversion | | | | | 57,649 | | | | 52,185 | | | | 57,199 | |
Per Share:
| | | | | | | | | | | | | | |
| Basic earnings (loss) from continuing operations per share | | | | $ | 0.46 | | | $ | (0.29 | ) | | $ | 0.75 | |
| Diluted earnings (loss) from continuing operations per share | | | | $ | 0.45 | | | $ | (0.29 | ) | | $ | 0.73 | |
On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share). Refer to NOTE 6—STOCKHOLDER’S EQUITY for details on this transaction.
In the third quarter of fiscal 2004, the Company announced a share repurchase program for up to $100,000 of our common shares. Under the program, the Company may repurchase its shares of common stock in the open market or in privately negotiated transactions, from time to time prior to September 8, 2005. As of January 29, 2005, the Company had repurchased a total of 3,077,000 shares at an average cost of $12.91 ($39,718).
NOTE 12—EQUITY COMPENSATION PLANS
Options to purchase the Company’s common stock have been granted to key employees and members of the Board of Directors. The option prices are at least 100% of the fair market value of the common stock on the grant date.
On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan, which authorized the issuance of restricted stock and/or options to purchase up to 1,000,000 shares of the Company’s common stock. Additional shares in the amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by stockholders on June 4, 1997, May 31, 1995 and June 1, 1993, respectively. In April 2001, the Board of Directors amended the 1990 Stock Incentive Plan to extend the expiration date for the grant of non-qualified stock options and restricted stock thereunder to directors, officers and employees until March 31, 2005. Under this plan, both incentive and non-qualified stock options may be granted to eligible participants. Incentive stock options are fully exercisable on the second or third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Non-qualified
63
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 12—EQUITY COMPENSATION PLANS (Continued)
options are fully exercisable on the third anniversary of their grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of January 29, 2005, there are 614,979 shares remaining available for grant.
On June 2, 1999 the stockholders approved the 1999 Stock Incentive Plan (the 1999 Plan), which authorized the issuance of restricted stock units (RSU’s) and/or options to purchase up to 2,000,000 shares of the Company’s common stock. Additional shares in the amount of 2,500,000 were authorized by stockholders on May 29, 2002. Under this plan, both incentive and non-qualified stock options may be granted to eligible participants. The incentive stock options and non-qualified stock options are fully exercisable on the third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. In fiscal 2004, certain employees were granted approximately 148,000 RSU’s to reflect their individual performances in fiscal 2003. All of the RSU’s vest in 20% increments over four years beginning on the date of grant. Options cannot be exercised more than ten years after the grant date. As of January 29, 2005, there are 1,450,149 shares remaining available for grant as options or RSU’s.
On April 28, 2003, the Company adopted a stand alone inducement stock option plan, which authorized the issuance of options to purchase up to 174,540 shares of the Company’s common stock to the Chief Executive Officer in connection with his hire. The non-qualified stock options are exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of January 29, 2005, there are no shares remaining available for grant.
|
|
|
| Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
|
| Weighted-average price
of outstanding options
(excluding securities
reflected in column (a))
(b)
|
| Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
|
|---|
Equity compensation plans approved
by security holders | | | | | 5,541,961 | | | $ | 16.98 | | | | 2,065,128 | |
| Equity compensation plans not approved by security holders | | | | | 174,540 | (1) | | $ | 8.70 | | | | — | |
| Total | | | | | 5,716,501 | | | $ | 16.72 | | | | 2,065,128 | |
| (1) | | Inducement options granted to the current CEO in connection with his hire. |
64
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 12—EQUITY COMPENSATION PLANS (Continued)
Stock option transactions for the Company’s stock option plans are summarized as follows:
| | | | Fiscal 2004
| | Fiscal 2003
| | Fiscal 2002
| |
|---|
|
|
|
| Shares
|
| Weighted
Average
Exercise
Price
|
| Shares
|
| Weighted
Average
Exercise
Price
|
| Shares
|
| Weighted
Average
Exercise
Price
|
|---|
| Outstanding—beginning of year | | | | | 6,910,610 | | | $ | 16.31 | | | | 6,898,170 | | | $ | 16.57 | | | | 6,316,787 | | | $ | 16.48 | |
| Granted | | | | | 412,666 | | | | 13.74 | | | | 1,624,790 | | | | 10.38 | | | | 1,213,300 | | | | 16.27 | |
| Exercised | | | | | (632,985 | ) | | | 11.05 | | | | (1,048,200 | ) | | | 7.52 | | | | (108,880 | ) | | | 8.10 | |
| Canceled | | | | | (973,790 | ) | | | 16.23 | | | | (564,150 | ) | | | 18.79 | | | | (523,037 | ) | | | 16.45 | |
| Outstanding—end of year | | | | | 5,716,501 | | | $ | 16.72 | | | | 6,910,610 | | | $ | 16.31 | | | | 6,898,170 | | | $ | 16.57 | |
| Options exercisable at year end | | | | | 3,997,545 | | | | 18.56 | | | | 4,210,678 | | | | 19.55 | | | | 4,148,570 | | | | 20.54 | |
| | Weighted average estimated fair value of options granted | | | | | | | | | 13.60 | | | | | | | | 4.17 | | | | | | | | 7.20 | |
The following table summarizes information about stock options outstanding at January 29, 2005:
| | | | Options Outstanding
| | Options Exercisable
| |
|---|
Range of
Exercise Prices
|
|
|
| Number
Outstanding
at Jan. 29, 2005
|
| Weighted
Average
Remaining
Contractual
Life
|
| Weighted
Average
Exercise
Price
|
| Number
Exercisable
at Jan. 29, 2005
|
| Weighted
Average
Exercise
Price
|
|---|
| $0.00 to $13.00 | | | | | 1,950,621 | | | | 7 | Years | | $ | 7.38 | | | | 1,074,515 | | | $ | 7.33 | |
| $13.01 to $21.00 | | | | | 1,822,650 | | | | 6 | Years | | | 15.94 | | | | 1,144,400 | | | | 15.79 | |
| $21.01 to $29.00 | | | | | 1,081,128 | | | | 4 | Years | | | 23.09 | | | | 916,528 | | | | 23.03 | |
| $29.01 to $33.88 | | | | | 862,102 | | | | 1 | Year | | | 31.53 | | | | 862,102 | | | | 31.53 | |
| $0.00 to $33.88 | | | | | 5,716,501 | | | | | | | | | | | | 3,997,545 | | | | | |
NOTE 13—ASSET RETIREMENT OBLIGATION
The Company has adopted the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations”, in the first quarter of fiscal 2003. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 143 also requires the capitalization of any retirement obligation costs as part of the carrying amount of the long-lived asset and the subsequent allocation of the total expense to future periods using a systematic and rational method. Upon adoption, the Company recorded a non-cash charge to earnings of $3,943 ($2,484 net of tax) for the cumulative effect of this accounting change. This charge was related to retirement obligations associated with estimated environmental clean up costs associated with the future removal of the Company’s remaining underground hydraulic lifts. Such estimates are based upon the average of the Company’s historical cleanup costs for underground hydraulic lifts previously removed. In addition, the Company initially recognized an asset of $2,844, accumulated depreciation of $2,247 and a liability of $4,540 on its consolidated balance sheet.
65
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 13—ASSET RETIREMENT OBLIGATION (Continued)
At January 29, 2005, the Company has a liability pertaining to the asset retirement obligation in accrued expenses on its consolidated balance sheet. The following is a reconciliation of the beginning and ending carrying amount of the Company’s asset retirement obligation as of January 29, 2005:
| |
| Asset retirement obligation, January 31, 2004 | | | | $ | 4,901 | |
| Asset retirement obligation incurred during the period | | | | | 142 | |
| Asset retirement obligation settled during the period | | | | | (121 | ) |
| Accretion expense | | | | | 135 | |
| Asset retirement obligation, January 29, 2005 | | | | $ | 5,057 | |
Had the Company adopted the provisions of SFAS No. 143 prior to February 2, 2003, the amount of the asset retirement obligations on a pro forma basis would have been $4,540 as of February 1, 2003.
The following table summarizes the pro forma net earnings and earnings per share for the fiscal period ended February 1, 2003, had the Company adopted the provisions of SFAS No. 143 prior to February 2, 2003:
Year ended
|
|
|
| February 1,
2003
|
|
|---|
Net Earnings:
| | | | | | | |
| As reported | | | | $ | 39,468 | | |
| Pro Forma | | | | $ | 38,858 | | |
Net earnings per share:
| | | | | | | |
| | Basic: | | | | | | | |
| As reported | | | | $ | 0.77 | | |
Pro Forma
| | | | $ | 0.75 | | |
| | Diluted: | | | | | | | |
| As reported | | | | $ | 0.74 | | |
| Pro Forma | | | | $ | 0.73 | | |
NOTE 14—INCOME TAXES
The provision for income taxes includes the following:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
Current:
| | | | | | | | | | | | | | |
| Federal | | | | $ | (21,639 | ) | | $ | (8,109 | ) | | $ | 24,502 | |
| State | | | | | (1,268 | ) | | | 1,856 | | | | 1,903 | |
Deferred:
| | | | | | | | | | | | | | |
| Federal | | | | | 35,379 | | | | (289 | ) | | | (3,512 | ) |
| State | | | | | 2,843 | | | | (2,274 | ) | | | (111 | ) |
| | | | | $ | 15,315 | | | $ | (8,816 | ) | | $ | 22,782 | |
66
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 14—INCOME TAXES (Continued)
A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows:
Year ended
|
|
|
| January 29,
2005
|
| January 31,
2004
|
| February 1,
2003
|
|---|
| Statutory tax rate | | | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
| State income taxes, net of federal tax benefits | | | | | 2.8 | | | | 0.7 | | | | 1.9 | |
| Job credits | | | | | (1.0 | ) | | | 0.5 | | | | (0.3 | ) |
| Other, net | | | | | 0.6 | | | | 0.5 | | | | 0.3 | |
| | | | | | 37.4 | % | | | 36.7 | % | | | 36.9 | % |
Items that gave rise to significant portions of the deferred tax accounts are as follows:
|
|
|
| January 29,
2005
|
| January 31,
2004
|
|---|
Deferred tax assets:
| | | | | | | | | | |
| Inventories | | | | $ | — | | | $ | 5,380 | |
| Employee compensation | | | | | 5,915 | | | | 4,919 | |
| Store closing reserves | | | | | 995 | | | | 1,508 | |
| Legal | | | | | 704 | | | | 10,491 | |
| Insurance | | | | | — | | | | 5,146 | |
| Net operating loss carryforwards | | | | | 8,260 | | | | — | |
| Tax credit carryforwards | | | | | 9,089 | | | | 2,749 | |
| Accrued leases | | | | | 13,067 | | | | 12,326 | |
| Other | | | | | 2,484 | | | | 1,483 | |
| Gross deferred tax assets | | | | | 40,514 | | | | 44,002 | |
| Valuation allowance | | | | | (1,558 | ) | | | (902 | ) |
| | | | | $ | 38,956 | | | $ | 43,100 | |
Deferred tax liabilities:
| | | | | | | | | | |
| Depreciation | | | | $ | 57,677 | | | $ | 43,643 | |
| Inventories | | | | | 17,802 | | | | — | |
| Real estate tax | | | | | 2,434 | | | | — | |
| State taxes | | | | | — | | | | 2,366 | |
| Insurance | | | | | 3,840 | | | | — | |
| Benefit accruals | | | | | 1,189 | | | | 5,418 | |
| Interest rate swap | | | | | 1,388 | | | | 823 | |
| | | | | $ | 84,330 | | | $ | 52,250 | |
| Net deferred tax liability | | | | $ | 45,374 | | | $ | 9,150 | |
As of January 29, 2005 and January 30, 2004, the Company had available tax net operating losses that can be carried forward to future years. The $45,200 net operating loss carryforward in 2005 consists of $20,000 of federal losses and $25,200 of state losses. The federal net operating loss begins to expire in 2023 while the state net operating losses will expire in various years beginning in 2008. Due to the uncertainty of the Company’s ability to realize certain state tax attributes, valuation allowances of $1,558 and $902 were recorded at January 29, 2005 and January 31, 2004, respectively.
67
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 14—INCOME TAXES (Continued)
The tax credit carryforward in 2005 consists of $4,400 of Alternative Minimum Tax credits, which can be carried forward indefinitely, and $1,700 of work opportunity credits. The tax credit carryforward in 2004 related to work opportunity credits.
NOTE 15—CONTINGENCIES
An action entitled “Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys” was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company’s motion for summary judgment was granted and the case was dismissed. The plaintiff has appealed.
The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.
NOTE 16—INTEREST RATE SWAP AGREEMENT
On June 3, 2003, the Company entered into an interest rate swap for a notional amount of $130,000. The Company has designated the swap as a cash flow hedge of the Company’s real estate operating lease payments. The interest rate swap converts the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. As of January 29, 2005 and January 31, 2004, the fair value of the interest rate swap was $3,721 ($2,344, net of tax) and $2,195 ($1,389, net of tax) and these increases in value were included in accumulated other comprehensive loss on the consolidated balance sheet.
NOTE 17—FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company’s financial instruments are as follows:
| | | | January 29, 2005
| | January 31, 2004
| |
|---|
|
|
|
| Carrying
Amount
|
| Estimated
Fair Value
|
| Carrying
Amount
|
| Estimated
Fair Value
|
|---|
| Assets: | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 82,758 | | | $ | 82,758 | | | $ | 60,984 | | | $ | 60,984 | |
| Accounts receivable | | | | | 30,994 | | | | 30,994 | | | | 30,562 | | | | 30,562 | |
| Cash flow hedge derivative | | | | | 3,721 | | | | 3,721 | | | | 2,195 | | | | 2,195 | |
| Liabilities: | | | | | | | | | | | | | | | | | | |
| Accounts payable | | | | | 310,981 | | | | 310,981 | | | | 342,584 | | | | 342,584 | |
| Long-term debt including current maturities | | | | | 393,564 | | | | 401,527 | | | | 375,079 | | | | 383,723 | |
| Senior convertible notes | | | | | 119,000 | | | | 120,549 | | | | 150,000 | | | | 174,600 | |
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts approximate fair value because of the short maturity of these items.
68
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2005, January 31, 2004 and February 1, 2003
(dollar amounts in thousands, except per share amounts)
NOTE 17—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
CASH FLOW HEDGE DERIVATIVE
The fair value of the interest rate swap designated by the Company as a cash flow hedge is obtained from dealer quotes. This value represents the estimated amount the Company would receive or pay to terminate agreements, taking into consideration current interest rates and the creditworthiness of the counterparties.
LONG-TERM DEBT INCLUDING CURRENT MATURITIES AND SENIOR CONVERTIBLE NOTES
Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange.
The fair value estimates presented herein are based on pertinent information available to management as of January 29, 2005 and January 31, 2004. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from amounts presented herein.
QUARTERLY FINANCIAL DATA (UNAUDITED) | | The Pep Boys—Manny, Moe & Jack and Subsidiaries |
| | | |
Total
Revenues
| |
Gross
Profit
| |
Operating
(Loss)
Profit
| |
Net
Earnings
(Loss) From
Continuing
Operations
Before
Cumulative
Effect of
Change in
Accounting
Principle
| |
Net
(Loss)
Earnings
| | Net Earnings
(Loss) Per Share
From Continuing
Operations Before
Cumulative Effect
of Change in
Accounting
Principle
| | Net
Earnings
(Loss)
Per Share
| |
Cash
Dividends
Per Share
| | | | | | | Market Price
Per Share
| | | |
|---|
Year Ended
Jan. 29, 2005
| | | | | | | | | Basic
| | Diluted
| | Basic
| | Diluted
| | | High
| | Low
|
|---|
| 1st Quarter | | | | $ | 566,133 | | | $ | 162,208 | | | $ | 32,646 | | | $ | 15,082 | | | $ | 14,551 | | | $ | 0.27 | | | $ | 0.25 | | | $ | 0.26 | | | $ | 0.24 | | | $ | 0.0675 | | | $ | 29.37 | | | $ | 21.29 | |
| 2nd Quarter | | | | | 593,426 | | | | 165,476 | | | | 28,782 | | | | 13,515 | | | | 12,663 | | | | 0.23 | | | | 0.22 | | | | 0.22 | | | | 0.21 | | | | 0.0675 | | | | 28.10 | | | | 20.36 | |
| 3rd Quarter | | | | | 559,198 | | | | 150,183 | | | | 17,659 | | | | 6,736 | | | | 6,500 | | | | 0.12 | | | | 0.11 | | | | 0.12 | | | | 0.11 | | | | 0.0675 | | | | 20.70 | | | | 11.83 | |
| 4th Quarter | | | | | 554,139 | | | | 144,591 | | | | (3,965 | ) | | | (9,667 | ) | | | (10,135 | ) | | | (0.17 | ) | | | (0.17 | ) | | | (0.18 | ) | | | (0.18 | ) | | | 0.0675 | | | | 17.24 | | | | 13.06 | |
Year Ended
Jan. 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1st Quarter1 | | | | $ | 510,910 | | | $ | 144,131 | | | $ | (3,646 | ) | | $ | (8,368 | ) | | $ | (10,314 | ) | | $ | (0.16 | ) | | $ | (0.16 | ) | | $ | (0.20 | ) | | $ | (0.20 | ) | | $ | 0.0675 | | | $ | 10.69 | | | $ | 6.00 | |
2nd Quarter2 | | | | | 556,030 | | | | 129,314 | | | | (13,735 | ) | | | (14,178 | ) | | | (34,935 | ) | | | (0.27 | ) | | | (0.27 | ) | | | (0.67 | ) | | | (0.67 | ) | | | 0.0675 | | | | 15.90 | | | | 8.54 | |
| 3rd Quarter | | | | | 537,691 | | | | 157,903 | | | | 27,869 | | | | 12,416 | | | | 13,710 | | | | 0.24 | | | | 0.22 | | | | 0.26 | | | | 0.24 | | | | 0.0675 | | | | 19.94 | | | | 14.05 | |
4th Quarter3 | | | | | 529,639 | | | | 149,440 | | | | 466 | | | | (5,015 | ) | | | (2,355 | ) | | | (0.09 | ) | | | (0.09 | ) | | | (0.04 | ) | | | (0.04 | ) | | | 0.0675 | | | | 23.99 | | | | 18.53 | |
| 1 | | Includes pretax charges of $25,132 related to corporate restructuring and other one-time events all of which was included in selling, general and administrative expenses. |
| 2 | | Includes pretax charges of $47,895 related to corporate restructuring and other one-time events of which $29,308 reduced gross profit from merchandise sales, $3,278 reduced gross profit from service revenue and $15,308 was included in selling, general and administrative expenses. |
| 3 | | Includes pretax charges of $15,953 related to corporate restructuring and other one-time events all of which was included in selling, general and administrative expenses. |
Under the Company’s present accounting system, actual gross profit from merchandise sales can be determined only at the time of physical inventory, which is taken at the end of the fiscal year. Gross profit from merchandise sales for the first, second and third quarters is estimated by the Company based upon recent historical gross profit experience and other appropriate factors. Any variation between estimated and actual gross profit from merchandise sales for the first three quarters is reflected in the fourth quarter’s results.
69
| ITEM 9 | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A | | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures The Company’s management evaluated, with the participation of its principal executive officer and principal financial officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s principal executive officer and its principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. Disclosure controls and procedures mean the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in its reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports that the Company communicated to its management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended January 29, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management of The Pep Boys—Manny, Moe and Jack (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.
As of January 29, 2005, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of January 29, 2005 is effective.
Deloitte & Touche LLP, the Company’s independent registered public accounting firm who audited the Company’s consolidated financial statements, has issued a report on management’s assessment of the Company’s internal control over financial reporting as of January 29, 2005 and is included on page 71 herein.
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Pep Boys—Manny, Moe & Jack
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that The Pep Boys—Manny, Moe & Jack and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 29, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 29, 2005, is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 29, 2005, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 29, 2005 of the Company and our report, dated April 13, 2005, expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche, LLP
Philadelphia, Pennsylvania
April 13, 2005
71
| ITEM 9B | | OTHER INFORMATION |
None.
PART III
| ITEM 10 | | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The material contained in the registrant’s definitive proxy statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the Company’s fiscal year (the “Proxy Statement”), under the captions “(ITEM 1) ELECTION OF DIRECTORS,” other than “—Report of the Audit Committee of the Board of Directors,” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” is hereby incorporated herein by reference. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G (3) to Form 10-K. The Company had adopted a Code of Ethics applicable to all of its associates including its executive officers. The Code of Ethics is posted on the Company’s website www.pepboys.com under the About Pep Boys—Corporate Governance section.
| ITEM 11 | | EXECUTIVE COMPENSATION |
The material in the Proxy Statement under the caption “EXECUTIVE COMPENSATION,” other than the material under “—Report of the Compensation Committee of the Board of Directors on Executive Compensation” and “—Performance Graph,” is hereby incorporated herein by reference.
| ITEM 12 | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
The material in the Proxy Statement under the caption “SHARE OWNERSHIP” is hereby incorporated herein by reference.
| ITEM 13 | | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The material in the Proxy Statement under the caption “EXECUTIVE COMPENSATION—Certain Relationships and Related Transactions” is hereby incorporated herein by reference.
| ITEM 14 | | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The material in the Proxy Statement under the caption “(ITEM 1) ELECTION OF DIRECTORS— Independent Auditor’s Fees” is hereby incorporated herein by reference.
72
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
| (a) | | | | | | | | | Page | |
| | | | | 1. | | The following consolidated financial statements of The Pep Boys—Manny, Moe & Jack are included in Item 8. | | | | |
| | | | | | | Report of Independent Registered Public Accounting Firm | | | 30 | |
| | | | | | | Consolidated Balance Sheets—January 29, 2005 and January 31, 2004 | | | 31 | |
| | | | | | | Consolidated Statements of Operations—Years ended January 29, 2005,
January 31, 2004 and February 1, 2003 | | | 32 | |
| | | | | | | Consolidated Statements of Stockholders’ Equity—Years ended January 29, 2005,
January 31, 2004 and February 1, 2003 | | | 33 | |
| | | | | | | Consolidated Statements of Cash Flows —Years ended January 29, 2005,
January 31, 2004 and February 1, 2003 | | | 34 | |
| | | | | | | Notes to Consolidated Financial Statements | | | 35 | |
| | | | | 2. | | The following consolidated financial statement schedule of
The Pep Boys—Manny, Moe & Jack is included. | | | | |
| | | | | | | Schedule II Valuation and Qualifying Accounts and Reserves | | | 79 | |
| | | | | | | All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. | | | | |
| | | | | 3. | | Exhibits | | | | |
| | | | | (3.1) | | Articles of Incorporation, as amended | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 30, 1988. |
| | | | | (3.2) | | By-Laws, as amended | | Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-39225). |
| | | | | (3.3) | | Amendment to By-Laws (Declassification of Board of Directors) | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 29, 2000. |
| | | | | (4.1) | | Indenture, dated as of June 12, 1995, between the Company and First Fidelity Bank, National Association as Trustee, including form of security. | | Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-59859). |
| | | | | (4.2) | | Supplemental Indenture, dated as of December 10, 2004 (to Indenture dated as of June 12, 1995), between the Company and Wachovia Bank, National Association, as trustee, including form of security. | | Incorporated by reference from the Company’s Form 8-K dated December 15, 2004. |
| | | | | (4.3) | | Indenture, dated as of July 15, 1997, between the Company and PNC Bank, National Association, as Trustee, including form of security. | | Incorporated by reference from the Registration Statement on Form S-3 (File No. 333-30295). |
| | | | | (4.4) | | Indenture, dated as of February 18, 1998 between the Company and PNC Bank, National Association, as Trustee, including form of security. | | Incorporated by reference from the Registration Statement on Form S-3/A (File No. 333-45793). |
73
| | | | | (4.5) | | Indenture dated May 21, 2002, between the Company and Wachovia Bank, National Association, as Trustee, including form of security. | | Incorporated by reference from the Registration Statement on Form S-3 (File No. 333-98255). |
| | | | | (4.6) | | Indenture, dated December 14, 2004, between the Company and Wachovia Bank, National Association, as trustee, including form of security. | | Incorporated by reference from the Company’s Form 8-K dated December 15, 2004. |
| | | | | (4.7) | | Supplemental Indenture, dated December 14, 2004, between the Company and Wachovia Bank, National Association, as trustee. | | Incorporated by reference from the Company’s Form 8-K dated December 15, 2004. |
| | | | | (4.8) | | Rights Agreement dated as of December 5, 1997 between the Company and First Union National Bank | | Incorporated by reference from the Company’s Form 8-K dated December 8, 1997. |
| | | | | (4.9) | | Dividend Reinvestment and Stock Purchase Plan dated January 4, 1990 | | Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-32857). |
| | | | | (10.1)* | | Medical Reimbursement Plan of the Company | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 1982. |
| | | | | (10.2)* | | Directors’ Deferred Compensation Plan, as amended | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 30, 1988. |
| | | | | (10.3)* | | Form of Employment Agreement dated as of June 1998 between the Company and certain officers of the Company. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended October 31, 1998. |
| | | | | (10.4)* | | The Pep Boys—Manny, Moe and Jack 1999 Stock Incentive Plan—amended and restated as of August 31, 1999. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended October 30, 1999. |
| | | | | (10.5)* | | Amendment Number One to The Pep Boys—Manny, Moe & Jack 1999 Stock Incentive Plan. | | Incorporated by reference from the Company’s Form 10-Q for the Quarter ended November 2, 2002. |
| | | | | (10.6)* | | Amendment Number Two to The Pep Boys— Manny, Moe & Jack 1999 Stock Incentive Plan. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003. |
| | | | | (10.7)* | | The Pep Boys—Manny, Moe and Jack 1990 Stock Incentive Plan—Amended and Restated as of March 26, 2001. | | Incorporated by reference from the Company’s Form 10-K for the year ended February 1, 2003. |
| | | | | (10.8)* | | The Pep Boys—Manny, Moe & Jack Pension Plan—Amended and Restated as of September 10, 2001. | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended February 1, 2003 |
| | | | | (10.9)* | | Long-Term Disability Salary Continuation Plan amended and restated as of March 26, 2002. | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended February 1, 2003. |
| | | | | (10.10)* | | Amendment and restatement as of September 3, 2002 of The Pep Boys Savings Plan. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 2, 2002. |
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| | | | | (10.11)* | | The Pep Boys Savings Plan Amendment 2004-1 | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 2004. |
| | | | | (10.12)* | | Amendment and restatement as of September 3, 2002 of The Pep Boys Savings Plan—Puerto Rico. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 2, 2002. |
| | | | | (10.13)* | | Employment Agreement between Lawrence N. Stevenson and the Company dated as of April 28, 2003. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended May 3, 2003. |
| | | | | (10.14)* | | Employment Agreement, dated June 1, 2003, between the Company and Harry Yanowitz. | | Incorporated by reference from The Company’s Form 10-Q for the quarter ended November 1, 2003. |
| | | | | (10.15)* | | The Pep Boys Deferred Compensation Plan | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 2004. |
| | | | | (10.16)* | | The Pep Boys Annual Incentive Bonus Plan (amended and restated as of December 9, 2003) | | Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 2004. |
| | | | | (10.17)* | | Amendment to and Restatement of the Executive Supplemental Pension Plan, effective as of January 31, 2004. | | Incorporated by reference from The Company’s Form 10-Q for the quarter ended May 1, 2004. |
| | | | | (10.18) | | Flexible Employee Benefits Trust | | Incorporated by reference from the Company’s Form 8-K dated May 6, 1994. |
| | | | | (10.19) | | Amended and Restated Loan and Security Agreement, dated August 1, 2003, by and among the Company, Congress Financial Corporation, as Agent, The CIT Group/Business Credit, Inc. and General Electric Capital Corporation, as Co-Documentation Agents, and the Lenders from time to time party thereto. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003. |
| | | | | (10.20) | | Amendment No. 1, dated October 24, 2003, to the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as Agent, and the other parties thereto | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 1, 2003. |
| | | | | (10.21) | | Amendment No. 3, dated December 2, 2004, to the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as Agent, and the other parties thereto. | | Incorporated by reference from the Company’s Form 8-K dated December 3, 2004. |
| | | | | (10.22) | | Participation Agreement, dated as of August 1, 2003, among the Company, Wachovia Development Corporation, as the Borrower and the Lessor, the Lenders and Wachovia Bank, National Association, as Agent for the Lenders and the Secured Parties. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003. |
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| | | | | (10.23) | | Amended and Restated Lease Agreement, dated as of August 1, 2003, between Wachovia Development Corporation, as Lessor, and the Company. | | Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003. |
| | | | | (10.24) | | Trade Agreement, dated October 18, 2004, between the Company and GMAC Commercial Finance, LLC. | | Incorporated by reference from the Company’s Form 8-K dated October 19, 2004. |
| | | | | (10.25) | | Master Lease Agreement, dated October 18, 2004, between the Company and with RBS Lombard, Inc. | | Incorporated by reference from the Company’s Form 8-K dated October 19, 2004. |
| | | | | (12) | | Computation of Ratio of Earnings to Fixed Charges | | | | |
| | | | | (21) | | Subsidiaries of the Company | | | | |
| | | | | (23) | | Consent of Independent Registered Public Accounting Firm | | | | |
| | | | | (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 | | | | |
| * | | Management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | THE PEP BOYS—MANNY, MOE & JACK
(Registrant) |
| Dated:April 14, 2005 | | | | by:/s/ HARRY F. YANOWITZ
Harry F. Yanowitz
Senior Vice President and
Chief Financial Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE | | | | CAPACITY | | DATE |
| /s/ LAWRENCE N. STEVENSON
Lawrence N. Stevenson | | | | Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) | | April 14, 2005 |
/s/ HARRY F. YANOWITZ
Harry F. Yanowitz | | | | Senior Vice President and
Chief Financial Officer
(Principal Financial Officer) | | April 14, 2005 |
/s/ BERNARD K. MCELROY
Bernard K. McElroy | | | | Chief Accounting Officer
and Treasurer (Principal
Accounting Officer) | | April 14, 2005 |
/s/ M. SHAN ATKINS
M. Shan Atkins | | | | Director | | April 14, 2005 |
/s/ PETER A. BASSI
Peter A. Bassi | | | | Director | | April 14, 2005 |
/s/ J. RICHARD LEAMAN, Jr.
J. Richard Leaman, Jr. | | | | Director | | April 14, 2005 |
/s/ WILLIAM LEONARD
William Leonard | | | | Director | | April 14, 2005 |
/s/ MALCOLMN D. PRYOR
Malcolmn D. Pryor | | | | Director | | April 14, 2005 |
/s/ JANE SCACCETTI
Jane Scaccetti | | | | Director | | April 14, 2005 |
/s/ BENJAMIN STRAUSS
Benjamin Strauss | | | | Director | | April 14, 2005 |
/s/ JOHN T. SWEETWOOD
John T. Sweetwood | | | | Director | | April 14, 2005 |
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FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K
| THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES | | | | | SCHEDULE II—VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES | |
(in thousands)
| | | |
|---|
Column A
|
|
|
| Column B
|
| Column C
|
| Column D
|
| Column E
|
|
|---|
Description
|
|
|
| Balance at
Beginning of
Period
|
| Additions
Charged to
Costs and
Expenses
|
| Additions
Charged to
Other
Accounts
|
| Deductions1
|
| Balance at
End of
Period
|
|---|
ALLOWANCE FOR DOUBTFUL ACCOUNTS: |
| Year Ended January 29, 2005 | | | | $ | 739 | | | $ | 1,831 | | | $ | — | | | $ | 1,540 | | | $ | 1,030 | |
| Year Ended January 31, 2004 | | | | $ | 422 | | | $ | 1,768 | | | $ | — | | | $ | 1,451 | | | $ | 739 | |
| Year Ended February 1, 2003 | | | | $ | 725 | | | $ | 1,643 | | | $ | — | | | $ | 1,946 | | | $ | 422 | |
| 1 | | Uncollectible accounts written off. |
| | | |
|---|
Column A
|
|
|
| Column B
|
| Column C
|
| Column D
|
| Column E
|
|
|---|
Description
|
|
|
| Balance at
Beginning of
Period
|
| Additions
Charged to
Costs and
Expenses
|
| Additions
Charged to
Other
Accounts2
|
| Deductions3
|
| Balance at
End of
Period
|
|---|
SALES RESERVE: | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended January 29, 2005 | | | | $ | 1,217 | | | $ | — | | | $ | 104,767 | | | $ | 104,525 | | | $ | 1,459 | |
| Year Ended January 31, 2004 | | | | $ | 959 | | | $ | — | | | $ | 93,699 | | | $ | 93,441 | | | $ | 1,217 | |
| Year Ended February 1, 2003 | | | | $ | 723 | | | $ | — | | | $ | 92,160 | | | $ | 91,924 | | | $ | 959 | |
| 2 | | Additions charged to merchandise sales. |
| 3 | | Actual returns and allowances. |
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