UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
(Mark One)
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 1, 2004
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from to
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Commission File No. 1-3381
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The Pep Boys - Manny, Moe & Jack
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0962915
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(State or other jurisdiction of (I.R.S. Employer ID number)
incorporation or organization)
3111 W. Allegheny Ave. Philadelphia, PA 19132
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(Address of principal executive offices) (Zip code)
215-430-9000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days. Yes ( x ) No ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes ( x ) No ( )
As of May 29, 2004, there were 57,836,136 shares of the registrant's Common
Stock outstanding.
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EXPLANATORY NOTE
As previously disclosed, on January 30, 2005, our Board of Directors, including
our Audit Committee, concluded to restate the Company's financial statements
for the three year period ended January 31, 2004 and for the first three
quarters of fiscal 2004.
Historically, when accounting for leases with renewal options, we depreciated
our leasehold improvements on those leased properties over a period that
included both the initial lease term and all option periods (or the useful
lives of the assets, if shorter). We previously recorded rent expense on a
straight-line basis over the initial lease term commencing when actual rent
payments began. We, in consultation with our independent registered public
accounting firm, Deloitte and Touche, LLP, have now determined to use a
consistent lease period (generally, the initial lease term) when calculating
depreciation of leasehold improvements on leased properties and straight-line
rent expense. Straight-line rent expense will commence on the date when we
become legally obligated under the lease.
These non-cash adjustments, which are similar to those recently announced by
several restaurant and retail companies, will not have any impact on our
previously reported cash flows, sales, comparable sales or our compliance with
any financial covenant under our revolving credit facility or other debt
instruments.
This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to our Quarterly Report on
Form 10-Q for the quarterly period ended May 1, 2004, initially filed with the
Securities and Exchange Commission (the "SEC") on June 10, 2004
(the "Original Filing"), is being filed to reflect restatements of (i) the
Company's consolidated balance sheets at May 1, 2004 and January 31, 2004 and
(ii) the Company's consolidated statements of operations, stockholders'
equity and cash flows for the quarters ended May 1, 2004 and May 3, 2003, and
the notes related thereto. For a more detailed description of these
restatements, see Note 2, "Restatement of Financial Statements," to the
accompanying consolidated financial statements and the section entitled
"Restatement" in Management's Discussion and Analysis of Financial Condition
and Results of Operations in this Form 10-Q/A.
For the convenience of the reader, this Form 10-Q/A sets forth the Original
Filing in its entirety. However, this Form 10-Q/A only amends and restates
Items 1,2 and 4 of Part I and Exhibit 12 of Item 6 of Part II of the Original
Filing, in each case, solely as a result of, and to reflect, the Restatement,
and no other information in the original filing is amended hereby. The
foregoing items have not been updated to reflect other events occurring after
the Original Filing or to modify or update those disclosures affected by
subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of
Part II of the Original Filing has been amended to contain currently-dated
certifications from our Chief Executive Officer and Chief Financial Officer, as
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The
certifications of our Chief Executive Officer and Chief Financial Officer are
attached to this Form 10-Q/A as exhibits 31.1, 31.2, 32.1 and 32.2
respectively.
Except for the foregoing amended information, this Form 10-Q/A continues to
describe conditions as of the date of the Original Filing, and we have not
updated the disclosures contained herein to reflect events that occurred at a
later date. Other events occurring after the filing of the Original Filing or
other disclosures necessary to reflect subsequent events have been or will be
addressed in our amended Quarterly Report on Form 10-Q/A for the quarterly
periods ended July 31, 2004 and October 31, 2004 which are being filed
concurrently with the filing of this Form 10-Q/A and any reports filed with the
SEC subsequent to the date of this filing.
We have not amended and do not intend to amend our previously-filed Annual
Reports on Form 10-k or our Quarterly Reports on Form 10-Q for the periods
affected by the Restatement that ended prior to January 31, 2004. For this
reason, the consolidated financial statements, auditors' reports and related
financial information for the affected periods contained in such reports
should no longer be relied upon.
1
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Index Page
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PART I - FINANCIAL INFORMATION
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Item 1. Condensed Consolidated
Financial Statements (Unaudited)
Consolidated Balance Sheets (As restated) -
May 1, 2004 and January 31, 2004 3
Consolidated Statements of Operations (As
Restated) - Thirteen weeks ended May 1, 2004
and May 3, 2003 4
Consolidated Statements of
Cash Flows (As Restated) - Thirteen weeks
ended May 1, 2004 and May 3, 2003 5
Notes to Condensed Consolidated
Financial Statements 6-21
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 22-29
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 30
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of
Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
INDEX TO EXHIBITS 34
2
PART I - FINANCIAL INFORMATION
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Item 1. Condensed Consolidated Financial Statements (Unaudited)
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (As Restated, See Note 2)
(dollar amounts in thousands, except per share amounts)
UNAUDITED
May 1, 2004 Jan.31, 2004*
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ASSETS
Current Assets:
Cash and cash equivalents $ 98,766 $ 60,984
Accounts receivable, net 33,989 30,562
Merchandise inventories 601,415 553,562
Prepaid expenses 38,277 39,480
Deferred income taxes 11,175 20,826
Other 79,950 81,096
Assets held for disposal 10,350 16,929
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Total Current Assets 873,922 803,439
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Property and Equipment-at cost:
Land 263,199 263,907
Buildings and improvements 900,159 899,114
Furniture, fixtures and equipment 592,218 586,607
Construction in progress 11,641 12,800
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1,767,217 1,762,428
Less accumulated depreciation and amortization 856,994 839,219
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Property and Equipment - Net 910,223 923,209
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Other 52,286 51,398
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Total Assets $1,836,431 $1,778,046
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 366,360 $ 342,584
Accrued expenses 244,549 267,565
Short-term borrowings 4,505 -
Current maturities of long-term debt and obligations
under capital leases 51,023 117,063
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Total Current Liabilities 666,437 727,212
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Long-term debt and obligations under capital leases,
less current maturities 244,552 258,016
Convertible long-term debt 150,000 150,000
Other long-term liabilities 38,851 39,201
Deferred income taxes 35,309 29,976
Deferred gain on sale leaseback 3,805 3,907
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $1 per share:
Authorized 500,000,000 shares; Issued 68,557,041 shares
and 63,910,577 shares 68,557 63,911
Additional paid-in capital 283,912 177,317
Retained earnings 541,203 531,933
Accumulated other comprehensive income (loss) 1,045 (15)
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894,717 773,146
Less cost of shares in treasury - 8,545,885 shares
and 8,928,159 shares 137,976 144,148
Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264
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Total Stockholders' Equity 697,477 569,734
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Total Liabilities and Stockholders' Equity $1,836,431 $1,778,046
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See notes to condensed consolidated financial statements.
* Taken from restated audited financial statements as of January 31, 2004 as
filed on Form 10-K/A
3
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (As Restated, See Note 2)
(dollar amounts in thousands, except per share amounts)
UNAUDITED
Thirteen weeks ended
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May 1, 2004 May 3, 2003
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Merchandise Sales $ 460,881 $ 411,132
Service Revenue 105,252 99,778
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Total Revenues 566,133 510,910
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Costs of Merchandise Sales 325,374 291,575
Costs of Service Revenue 78,551 75,204
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Total Costs of Revenues 403,925 366,779
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Gross Profit from Merchandise Sales 135,507 119,557
Gross Profit from Service Revenue 26,701 24,574
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Total Gross Profit 162,208 144,131
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Selling, General and Administrative Expenses 129,562 147,777
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Operating Profit (Loss) 32,646 (3,646)
Non-operating Income 592 1,050
Interest Expense 9,298 10,701
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Earnings (Loss) from Continuing Operations
Before Income Taxes and Cumulative Effect
of Change in Accounting Principle 23,940 (13,297)
Income Tax Expense (Benefit) 8,858 (4,929)
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Net Earnings (Loss) from Continuing Operations
Before Cumulative Effect of Change
in Accounting Principle 15,082 (8,368)
(Loss) Earnings from Discontinued
Operations, Net of Tax (531) 538
Cumulative Effect of Change in Accounting
Principle, Net of Tax - (2,484)
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Net Earnings (Loss) 14,551 (10,314)
Retained Earnings, beginning of period 531,933 586,735
Cash Dividends (3,898) (3,487)
Effect of Stock Options (1,383) (71)
Dividend Reinvestment Plan - (274)
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Retained Earnings, end of period $ 541,203 $ 572,589
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Basic Earnings (Loss) Per Share:
Net Earnings (Loss) from Continuing Operations
Before Cumulative Effect of Change in
Accounting Principle $ 0.27 $ (0.16)
(Loss) Earnings From Discontinued
Operations, Net of Tax (0.01) .01
Cumulative Effect of Change in Accounting
Principle, Net of Tax - (0.05)
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Basic Earnings (Loss) Per Share $ 0.26 $ (0.20)
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Diluted Earnings (Loss) Per Share:
Net Earnings (Loss) From Continuing Operations
Before Cumulative Effect of Change in
Accounting Principle $ 0.25 $ (0.16)
(Loss) Earnings From Discontinued
Operations, Net of Tax (0.01) 0.01
Cumulative Effect of Change in Accounting
Principle, Net of Tax - (0.05)
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Diluted Earnings (Loss) Per Share $ 0.24 $ (0.20)
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Cash Dividends Per Share $ .0675 $ .0675
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See notes to condensed consolidated financial statements.
4
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (As Restated, See Note 2)
(dollar amounts in thousands)
UNAUDITED
Thirteen Weeks Ended May 1, 2004 May 3, 2003
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Cash Flows from Operating Activities:
Net earnings (loss) $ 14,551 $ (10,314)
Net (loss) earnings from discontinued operations (531) 538
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Net Earnings (Loss) from continuing operations 15,082 (10,852)
Adjustments to Reconcile Net Earnings (Loss) From Continuing
Operations to Net Cash Provided by Continuing Operations:
Depreciation and amortization 18,796 19,802
Cumulative effect of change in accounting principle, net of tax - 2,484
Accretion of asset disposal obligation 35 49
Stock compensation expense 698 -
Deferred income taxes 13,848 (3,167)
Deferred gain on sale leaseback (102) (3)
Loss from sale of assets 391 19
Changes in Operating Assets and Liabilities:
Decrease in accounts receivable, prepaid expenses and other 2,126 5,538
Increase in merchandise inventories (47,853) (33,075)
Increase in accounts payable 30,689 44,791
(Decrease) increase in accrued expenses (23,347) 21,547
(Decrease) increase in other long-term liabilities (350) (39)
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Net cash provided by continuing operations 10,013 47,094
Net cash (used in) provided by discontinued operations (776) 1,109
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Net Cash Provided by Operating Activities 9,237 48,203
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Cash Flows from Investing Activities:
Capital expenditures (7,683) (8,565)
Proceeds from sales of assets 1,411 745
Proceeds from sales of assets held for disposal 6,879 1,146
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Net Cash Provided by (Used in) Investing Activities 607 (6,674)
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Cash Flows from Financing Activities:
Net (payments) borrowings under line of credit agreements (40) 10,631
Repayments of short-term borrowings (2,408) -
Payments on capital lease obligations (41) (112)
Reduction of long-term debt (79,423) (10,503)
Dividends paid (3,898) (3,487)
Net proceeds from sale of common stock 108,909 -
Proceeds from exercise of stock options 4,561 39
Proceeds from dividend reinvestment plan 278 322
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Net Cash Provided by (Used in) Financing Activities 27,938 (3,110)
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Net Increase in Cash 37,782 38,419
Cash and Cash Equivalents at Beginning of Period 60,984 42,770
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Cash and Cash Equivalents at End of Period $ 98,766 $ 81,189
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See notes to condensed consolidated financial statements.
5
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (As Restated, See
Note 2)
NOTE 1. Condensed Consolidated Financial Statements
The consolidated balance sheets as of May 1, 2004, the consolidated
statements of operations and the consolidated statements of cash flows for the
thirteen week periods ended May 1, 2004 and May 3, 2003 have been prepared by
the Company without audit. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations and
cash flows at May 1, 2004 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's restated
Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. The
results of operations for the thirteen week period ended May 1, 2004 are not
necessarily indicative of the operating results for the full year.
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the current year's presentation.
NOTE 2. Restatement of Financial Statements
Subsequent to the issuance of the Company's fiscal 2003 financial statements,
the Company's management reviewed its lease-related accounting policies and
determined to correct its computation of depreciation, straight-line rent
expense and the related deferred rent liability. As a result, on
January 30, 2005, the Company's Board of Directors, including the Company's
Audit Committee, concluded to restate the Company's financial statements for
the three year period ended January 31, 2004 and for the first three quarters
of fiscal 2004.
Historically, when accounting for leases with renewal options, we depreciated
our leasehold improvements on those leased properties over a period that
included both the initial lease term and all option periods (or the useful
lives of the assets, if shorter). We previously recorded rent expense on a
straight-line basis over the initial lease term commencing when actual rent
payments began. We, in consultation with our independent registered public
accounting firm, Deloitte and Touche, LLP, have now determined to use a
consistent lease period (generally, the initial lease term) when calculating
depreciation of leasehold improvements on leased properties and straight-line
rent expense. Straight-line rent expense will commence on the date when we
become legally obligated under the lease.
The primary effect of the corrections is to accelerate the depreciation of
leasehold improvements of leased properties where the initial lease term is
shorter than the estimated useful economic life of those assets and rental
expense on properties we occupied before payment of rents was required. The
cumulative effect of the restatement through fiscal quarter ended May 1, 2004
is an increase in other current assets of $652,000, an increase in accumulated
depreciation of $64,972,000, an increase in the deferred rent liability of
$10,165,000 and a decrease in deferred income tax liability of $27,516,000. As
a result, retained earnings at the end of fiscal quarter ended May 1, 2004
decreased by $46,969,000. Depreciation expense from continuing operations
increased by $2,021,000 and $2,065,000 and rent expense from continuing
operations decreased by $235,000 and $310,000 for the thirteen weeks ended
May 1, 2004 and May 3, 2003, respectively. The Restatement increased reported
diluted loss per share by $0.02,for the thirteen weeks ended May 1, 2004 and
May 3, 2003. The cumulative effect of the Restatement for all years prior to
fiscal 2001 was $34,812,000, which was recorded as an adjustment to opening
stockholders' equity at February 2, 2002 in the Company's restated Annual
Report as of January 31, 2004 on Form 10-K/A. The restatement did not have any
impact on the Company's previously reported cash flows, sales or comparable
sales or the Company's compliance with any covenant under the Company's line of
credit facility or other debt instruments.
The consolidated financial statements included in this Form 10-Q/A
have been restated to reflect the adjustments described above. The
restatement has been set forth, for the periods presented, in Amendment
No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended
January 31, 2004 which we are filing concurrently with this Form 10-Q/A.
6
The following is a summary of the impact of the Restatement on (i) the
Company's consolidated balance sheets at May 1, 2004 and January 31, 2004
and (ii) the Company's consolidated statements of operations for the fiscal
quarters ended May 1, 2004 and May 3, 2003. We have not presented a summary of
the impact of the Restatement on the consolidated statements of cash flows for
any of the above-referenced fiscal periods because the net impact for each such
fiscal period is zero.
(dollar amounts in thousands) As Previously
May 1, 2004 Reported Adjustments As Restated
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Consolidated Balance Sheet
Other $ 79,298 $ 652 $ 79,950
Total Current Assets 873,270 652 873,922
Accumulated depreciation and amortization 792,022 64,972 856,994
Property and equipment, net 975,195 (64,972) 910,223
Total Assets 1,900,751 (64,320) 1,836,431
Other long-term liabilities 28,686 10,165 38,851
Deferred income taxes 62,825 (27,516) 35,309
Retained earnings 588,172 (46,969) 541,203
Total Stockholders'Equity 744,446 (46,969) 697,477
Total Liabilities and Stockholders' Equity 1,900,751 (64,320) 1,836,431
As Previously
January 31, 2004 Reported Adjustments As Restated
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Consolidated Balance Sheet
Accumulated depreciation and amortization $ 776,242 $ 62,977 $ 839,219
Property and equipment, net 986,186 (62,977) 923,209
Total Assets 1,841,023 (62,977) 1,778,046
Other long-term liabilities 28,802 10,399 39,201
Deferred income taxes 57,492 (27,516) 29,976
Retained earnings 577,793 (45,860) 531,933
Total Stockholders'Equity 615,594 (45,860) 569,734
Total Liabilities and Stockholders' Equity 1,841,023 (62,977) 1,778,046
As Previously
Thirteen weeks ended May 1, 2004 Reported Adjustments As Restated
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Consolidated Statement of Earnings
Costs of Merchandise Sales $ 324,054 $ 1,320 $ 325,374
Costs of Service Revenue 78,111 440 78,551
Total Costs of revenue 402,165 1,760 403,925
Gross Profit from Merchandise Sales 136,827 (1,320) 135,507
Gross Profit from Service Revenue 27,141 (440) 26,701
Total Gross Profit 163,968 (1,760) 162,208
Operating Profit 34,406 (1,760) 32,646
Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 25,700 (1,760) 23,940
Income Tax Expense 9,509 (651) 8,858
Earnings Before Cumulative Effect of Change
in Accounting Principle 16,191 (1,109) 15,082
Net Earnings 15,660 (1,109) 14,551
Basic Earnings Per Share:
Net Earnings from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle 0.29 (0.02) 0.27
Basic Earnings Per Share 0.28 (0.02) 0.26
Diluted Earnings Per Share:
Net Earnings from Continuing Operations Before Cumulative
Effect of Change in Accounting Principle 0.27 (0.02) 0.25
Diluted Earnings Per Share 0.26 (0.02) 0.24
As Previously
Thirteen weeks ended May 3, 2003 Reported Adjustments As Restated
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Consolidated Statement of Earnings
Costs of Merchandise Sales $ 290,340 $ 1,235 $ 291,575
Costs of Service Revenue 74,772 432 75,204
Total Costs of revenue 365,112 1,667 366,779
Gross Profit from Merchandise Sales 120,792 (1,235) 119,557
Gross Profit from Service Revenue 25,006 (432) 24,574
Total Gross Profit 145,798 (1,667) 144,131
Operating Loss (1,979) (1,667) (3,646)
Loss Before Income Taxes and Cumulative
Effect of Change in Accounting Principle (11,630) (1,667) (13,297)
Income Tax Benefit (4,303) (626) (4,929)
Loss Before Cumulative Effect of Change
in Accounting Principle (7,327) (1,041) (8,368)
Discontinued Operations, Net of Tax 594 (56) 538
Cumulative Effect of Change in
Net Loss (9,217) (1,097) (10,314)
Basic Loss Per Share:
Net Loss from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle (0.14) (0.02) (0.16)
Basic Earnings Per Share (0.18) (0.02) (0.20)
Diluted Loss Per Share:
Net Loss from Continuing Operations Before Cumulative
Effect of Change in Accounting Principle (0.14) (0.02) (0.16)
Diluted Loss Per Share (0.18) (0.02) (0.20)
In addition, certain amounts in Notes 3,7,8,9,11,14 and 17 have been restated
to reflect the Restatement adjustments described above.
7
NOTE 3. Accounting for Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans in
accordance with the recognition and measurement principles of Accounting
Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. For all stock option plans, no stock-based
employee compensation cost is reflected in net earnings, 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. In the first quarter of 2004,
the Company issued restricted stock unit awards to certain employees. The
recorded expense for these awards under the intrinsic method was $698,000
($439,000,net of tax) for the thirteen weeks ended May 1, 2004. The following
table illustrates the effect on net earnings and earnings per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation:
(dollar amounts in thousands,
except per share amounts)
Thirteen weeks ended May 1, 2004 May 3, 2003
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Net (loss) earnings:
As reported $ 14,551 $ (10,314)
Add: Stock compensation expense,
net of tax 439 -
Less: Total stock-based compensation
expense determined under fair
value-based method, net of tax (1,302) (811)
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Pro forma $ 13,688 $ (11,125)
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Net earnings (loss) per share:
Basic:
As reported $ .26 $ (.20)
Pro forma $ .25 $ (.22)
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Diluted:
As reported $ .24 $ (.20)
Pro forma $ .23 $ (.22)
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8
The fair value of each option granted during the periods ending May 1, 2004
and May 3, 2003 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Thirteen weeks ended May 1, 2004 May 3, 2003
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Dividend yield 1.67% 1.57%
Expected volatility 41% 42%
Risk-free interest rate range:
high 4.07% 5.3%
low 1.97% 2.0%
Ranges of expected lives in years 4-8 4-8
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NOTE 4. New Accounting Standards
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure, an Amendment of FASB Statement
No. 123," to provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based compensation. We
have adopted the disclosure requirements of this statement. In March 2004,
the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB
Statements No. 123 and 95." The proposed standard would require companies to
expense share-based payments to employees, including stock options, based on
the fair value of the award at the grant date. The proposed statement would
eliminate the intrinsic value method of accounting for stock options permitted
by APB (Accounting Principles Board) No. 25, "Accounting for Stock Issued to
Employees," which we currently follow. We will continue to monitor the actions
of the FASB and assess the impact, if any, on our consolidated financial
statements.
NOTE 5. Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method. An actual valuation
of inventory under the LIFO method can be made only at the end of each fiscal
year based on inventory and costs at that time. Accordingly, interim LIFO
calculations must be based on management's estimates of expected fiscal
year-end inventory levels and costs. Replacement cost, which approximates FIFO
cost was $578,151,000 and $531,830,000 at May 1, 2004 and January 31, 2004,
respectively.
NOTE 6. Accrued Expenses
The Company's accrued expenses for the periods ending May 1, 2004 and
January 31, 2004 were as follows:
(dollar amounts in thousands) May 1, 2004 Jan. 31, 2004
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Medical and casualty risk
participation reserve $ 131,168 $ 136,599
Accrued compensation and
related taxes 42,890 51,043
Legal Reserves 1,577 26,576
Other 68,914 53,347
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Total $ 244,549 $ 267,565
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9
NOTE 7. Other Current Assets
The Company's other current assets for the periods ending May 1, 2004 and
January 31, 2004 were as follows:
(dollar amounts in thousands) May 1, 2004 Jan. 31, 2004
- ---------------------------------------------------------------------
Reinsurance premiums receivable $ 64,626 $ 67,326
Income taxes receivable 15,135 13,517
Other 189 253
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Total $ 79,950 $ 81,096
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NOTE 8. 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. The Company expects
these actions, including the disposal and sublease of the Company's real
properties, to be substantially completed by the end of the second quarter 2004
and estimates the costs, including future costs that were not accrued, to be
approximately $66,752,000. 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."
Reserve Summary
The following chart details the reserve balances through May 1, 2004. The
reserve includes remaining rent on leases net of sublease income, other
contractual obligations associated with leased properties and employee
severance.
(dollar amounts Lease Contractual
in thousands) Severance Expenses Obligations Total
- -------------------------------------------------------------------------------
Reserve balance
at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204
Provision for present
value of liabilities - 41 47 88
Changes in assumptions about
future sublease income, lease
termination, contractual
obligations and severance - - - -
Cash payments (213) (253) (171) (637)
- -------------------------------------------------------------------------------
Reserve Balance
at May 1, 2004 $ 160 $ 2,156 $ 339 $ 2,655
- -------------------------------------------------------------------------------
10
NOTE 9. 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 thirteen weeks ended
May 1, 2004 and May 3, 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:
Thirteen weeks ended
----------------------------
May 1, 2004 May 3, 2003
------------ -------------
(dollar amounts in thousands) Amount Amount
- ---------------------------------------------------------------------------------------------
Total Revenues $ 1 $ 18,306
Total Gross (Loss) Profit (804) 4,918
Selling, General and Administrative
Expenses 40 4,065
(Loss) Earnings from Discontinued
Operations Before Income Taxes (844) 854
Net (Loss) Earnings from Discontinued
Operations, Net of Tax $ (531) $ 538
- ---------------------------------------------------------------------------------------------
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 May 1, 2004 and January 31, 2004, these
reclassifications were as follows:
(Dollar amounts in thousands) May 1, 2004 Jan. 31, 2004
- ------------------------------------------------------------------------------------------------
Land $ (4,425) $ (8,954)
Building and improvements (5,925) (7,975)
- ------------------------------------------------------------------------------------------------
Property and equipment $(10,350) $(16,929)
- ------------------------------------------------------------------------------------------------
Assets held for disposal $ 10,350 $ 16,929
- ------------------------------------------------------------------------------------------------
During the first quarter of 2004, the Company sold assets held for disposal for
proceeds of $6,879,000 resulting in a gain of $172,000 which was recorded in
discontinued operations on the consolidated statement of operations.
11
NOTE 10. Pension and Savings Plan
Pension expense includes the following:
Thirteen weeks ended
(dollar amounts in thousands) Pension Benefits
- -----------------------------------------------------------------------
5/1/2004 5/3/2003
- -----------------------------------------------------------------------
Service cost $ 108 $ 153
Interest Cost 706 764
Expected return on plan assets (575) (516)
Amortization of transition obligation 41 69
Amortization of prior service cost 91 153
Amortization of net loss (gain) 444 430
FAS 88 settlement - 5,231
-------- --------
Net periodic benefit cost $ 815 $ 6,284
======== ========
The Company previously disclosed in its financial statements for the fiscal
year ended January 31, 2004 that it expected to contribute $1,055,000 to its
pension plan in fiscal 2004. As of May 1, 2004, $276,000 of contributions have
been made. The Company anticipates no change in expected total contributions
for fiscal 2004.
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
contribution's or 3% of the participant's compensation. The Company's savings
plans' contribution expense was $1,026,000 and $1,050,000 for the fiscal
quarters ending May 1, 2004 and May 3, 2003 respectively.
On January 31, 2004, the Company amended and restated its Executive
Supplemental Retirement Plan (SERP). This amendment converted the
defined benefit plan to a defined contribution plan for certain unvested
participants and all future participants. All vested participants 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 $217,000 for the fiscal quarter ended May 1, 2004.
12
NOTE 11. Net Earnings Per Share
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(in thousands, except per share amounts)
UNAUDITED
Thirteen weeks ended
-----------------------------------
May 1, 2004 May 3, 2003
-------------- ---------------
(a) Net earnings (loss) from continuing operations
before cumulative effect of change in
accounting principle $ 15,082 $ (8,368)
Adjustment for interest on convertible senior
notes, net of income tax effect 1,001 -
- -------------------------------------------------------------------------------------------
(b) Adjusted net earnings (loss) from continuing
operations before cumulative effect of change
in accounting principle $ 16,083 $ (8,368)
- -------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during period 54,945 51,652
Common shares assumed issued upon conversion of
convertible senior notes 6,697 -
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price 1,945 -
- -------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during period 63,587 51,652
- -------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Continuing operations, before cumulative effect
of change in accounting principle (a/c) $ 0.27 $ (0.16)
(Loss) Earnings from discontinued
operations, net of tax (0.01) 0.01
Cumulative effect of change in
accounting principle - (0.05)
- -------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.26 $ (0.20)
- -------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Continuing operations, before cumulative effect
of change in accounting principle (b/d) $ 0.25 $ (0.16)
(Loss) earnings from discontinued
operations, net of tax (0.01) 0.01
Cumulative effect of change in
accounting principle - (0.05)
- -------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.24 $ (0.20)
- -------------------------------------------------------------------------------------------
Adjustments for the convertible senior notes were anti-dilutive during the
thirteen week period ended May 3, 2003 and therefore excluded from the
computation of diluted EPS. Options to purchase 942,000 and 5,575,000 shares
of common stock were outstanding at May 1, 2004 and May 3, 2003, respectively,
but were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares
on such dates. Restricted stock units of 124,000 equivalent shares were
anti-dilutive and excluded from the calculation during the period ended
May 1, 2004.
13
NOTE 12. 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 the thirteen week period
ending May 1, 2004 are as follows:
(dollar amounts in thousands)
- ------------------------------------------------------------------------
Beginning balance at January 31, 2004 $ 614
Additions related to current period sales 1,326
Warranty costs incurred in current period (1,326)
Adjustments to accruals related to
prior year sales -
- ------------------------------------------------------------------------
Ending Balance at May 1, 2004 $ 614
- ------------------------------------------------------------------------
NOTE 13. Debt and Financing Arrangements
In the first quarter of fiscal 2004, the Company prepaid $20,919,000 aggregate
principal amount of its Senior Secured Credit Facility with a stated maturity
date of July 1, 2006.
In the first quarter of fiscal 2004, the Company retired $32,000,000 aggregate
principal amount of 6.75% Medium-Term Notes with a stated maturity date of
March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term
Notes with a stated maturity date of March 3, 2004.
In the first quarter of 2004, the Company has 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 it
payment of the full payable to the bank at the extended payment term. As of
May 1, 2004, there was $4,505,000 outstanding under these arrangements, which
was recorded in short-term borrowings on the consolidated balance sheets.
14
NOTE 14. Supplemental Guarantor Information - Convertible Senior Notes
On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of
4.25% Convertible Senior Notes. The notes are jointly and severally and fully
and unconditionally guaranteed by the Company's wholly-owned direct and
indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny
Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and
Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc.
The following are consolidating balance sheets of the Company as of
May 1, 2004 and January 31, 2004 and the related consolidating statements
of operations and consolidating statements of cash flows for the thirteen
weeks ended May 1, 2004 and May 3, 2003:
CONSOLIDATING BALANCE SHEET
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 78,575 $ 11,179 $ 9,012 $ - $ 98,766
Accounts receivable, net 17,668 16,321 - - 33,989
Merchandise inventories 204,603 396,812 - - 601,415
Prepaid expenses 23,775 14,285 14,015 (13,798) 38,277
Deferred income taxes 7,804 (1,297) 4,668 - 11,175
Other 19,552 7,928 52,470 - 79,950
Assets held for disposal 6,706 3,644 - 10,350
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 358,683 448,872 80,165 (13,798) 873,922
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 87,405 175,794 - - 263,199
Buildings and improvements 308,375 591,784 - - 900,159
Furniture, fixtures and equipment 288,173 304,045 - - 592,218
Construction in progress 11,626 15 - - 11,641
- -----------------------------------------------------------------------------------------------------------------------------
695,579 1,071,638 - - 1,767,217
Less accumulated depreciation and amortization 370,336 486,658 - - 856,994
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - Net 325,243 584,980 - - 910,223
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,462,133 - 1,182,944 (2,645,077) -
Intercompany receivable - 407,871 353,275 (761,146) -
Other 49,073 3,213 - - 52,286
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,195,132 $ 1,444,936 $ 1,616,384 $ (3,420,021) $ 1,836,431
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 366,351 $ 9 $ - $ - $ 366,360
Accrued expenses 42,794 69,356 146,197 (13,798) 244,549
Short-term borrowings 4,505 - - - 4,505
Current maturities of long-term debt and
obligations under capital leases 51,023 - - - 51,023
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 464,673 69,365 146,197 (13,798) 666,437
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 243,963 589 - - 244,552
Convertible long-term debt 150,000 - - - 150,000
Other long-term liabilities 11,965 26,886 - - 38,851
Intercompany liabilities 597,546 163,600 - (761,146) -
Deferred income taxes 28,376 6,933 - - 35,309
Deferred gain on sale leaseback 1,132 2,673 - - 3,805
Stockholders' Equity:
Common stock 68,557 1,501 101 (1,602) 68,557
Additional paid-in capital 283,912 240,359 200,398 (440,757) 283,912
Retained earnings 541,203 933,030 1,269,688 (2,202,718) 541,203
Accumulated other comprehensive loss 1,045 - - - 1,045
- -----------------------------------------------------------------------------------------------------------------------------
894,717 1,174,890 1,470,187 (2,645,077) 894,717
Less:
Cost of shares in treasury 137,976 - - - 137,976
Cost of shares in benefits trust 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 697,477 1,174,890 1,470,187 (2,645,077) 697,477
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,195,132 $ 1,444,936 $ 1,616,384 $ (3,420,021) $ 1,836,431
- -----------------------------------------------------------------------------------------------------------------------------
15
CONSOLIDATING BALANCE SHEET
(dollar amounts in thousands)
Non-
Subsidiary guarantor
January 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 43,929 $ 9,070 $ 7,985 $ - $ 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 7,457 55,748 - 81,096
Assets held for disposal 8,083 8,846 - - 16,929
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 308,671 428,881 86,637 (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
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - Net 331,170 592,039 - - 923,209
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,440,412 - 1,162,965 (2,603,377) -
Intercompany receivable - 410,107 356,382 (766,489) -
Other 48,240 3,158 - - 51,398
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,128,493 $ 1,434,185 $ 1,605,984 $ (3,390,616) $ 1,778,046
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 342,575 $ 9 $ - $ - $ 342,584
Accrued expenses 43,670 85,790 158,855 (20,750) 267,565
Current maturities of long-term debt and
obligations under capital leases 117,063 - - - 117,063
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 503,308 85,799 158,855 (20,750) 727,212
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 257,983 33 - - 258,016
Convertible long-term debt 150,000 - - - 150,000
Other long-term liabilities 12,287 26,914 - - 39,201
Intercompany liabilities 607,168 159,321 - (766,489) -
Deferred income taxes 26,856 3,120 - - 29,976
Deferred gain on sale leaseback 1,157 2,750 - - 3,907
Stockholders' Equity:
Common stock 63,911 1,501 101 (1,602) 63,911
Additional paid-in capital 177,317 240,359 200,398 (440,757) 177,317
Retained earnings 531,933 914,388 1,246,630 (2,161,018) 531,933
Accumulated other comprehensive loss (15) - - - (15)
- -----------------------------------------------------------------------------------------------------------------------------
773,146 1,156,248 1,447,129 (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 1,156,248 1,447,129 (2,603,377) 569,734
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,128,493 $ 1,434,185 $ 1,605,984 $ (3,390,616) $ 1,778,046
- -----------------------------------------------------------------------------------------------------------------------------
16
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 160,262 $ 300,619 $ - $ - $ 460,881
Service Revenue 36,918 68,334 - - 105,252
Other Revenue - - 7,070 (7,070) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 197,180 368,953 7,070 (7,070) 566,133
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 114,349 211,025 - - 325,374
Costs of Service Revenue 26,546 52,005 - - 78,551
Costs of Other Revenue - - 7,164 (7,164) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 140,895 263,030 7,164 (7,164) 403,925
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 45,913 89,594 - - 135,507
Gross Profit from Service Revenue 10,372 16,329 - - 26,701
Gross Loss from Other Revenue - - (94) 94 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 56,285 105,923 (94) 94 162,208
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 46,942 82,416 110 94 129,562
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 9,343 23,507 (204) - 32,646
Equity in Earnings of Subsidiaries 21,722 - 19,979 (41,701) -
Non-operating (Expense) Income (4,475) 12,312 5,090 (12,335) 592
Interest Expense 16,008 5,625 - (12,335) 9,298
- -----------------------------------------------------------------------------------------------------------------------------
Earnings From Continuing Operations Before
Income Taxes 10,582 30,194 24,865 (41,701) 23,940
Income Tax (Benefit) Expense (4,122) 11,172 1,808 - 8,858
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings From Continuing Operations 14,704 19,022 23,057 (41,701) 15,082
Loss from Discontinued Operations, Net of Tax (153) (378) - - (531)
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 14,551 $ 18,644 $ 23,057 $ (41,701) $ 14,551
- -----------------------------------------------------------------------------------------------------------------------------
17
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 142,247 $ 268,885 $ - $ - $ 411,132
Service Revenue 35,175 64,603 - - 99,778
Other Revenue - - 6,675 (6,675) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 177,422 333,488 6,675 (6,675) 510,910
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 101,205 190,370 - - 291,575
Costs of Service Revenue 25,956 49,248 - - 75,204
Costs of Other Revenue - - 7,205 (7,205) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 127,161 239,618 7,205 (7,205) 366,779
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 41,042 78,515 - - 119,557
Gross Profit from Service Revenue 9,219 15,355 - - 24,574
Gross Loss from Other Revenue - - (530) 530 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 50,261 93,870 (530) 530 144,131
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 43,758 103,411 78 530 147,777
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 6,503 (9,541) (608) - (3,646)
Equity in Earnings of Subsidiaries (151) - 2,124 (1,973) -
Non-operating (Expense) Income (4,096) 12,032 5,258 (12,144) 1,050
Interest Expense 17,978 4,867 - (12,144) 10,701
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes and Cumulative
Effect of Change in Accounting Principle (15,722) (2,376) 6,774 (1,973) (13,297)
Income Tax (Benefit) Expense (5,765) (885) 1,721 - (4,929)
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings from Continuing Operations
Before Cumulative Effect of Change in
Accounting Principle (9,957) (1,491) 5,053 (1,973) (8,368)
Earnings from Discontinued Operations, Net of Tax 542 (4) 538
Cumulative Effect of Change in
Accounting Principle (899) (1,585) - - (2,484)
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings $ (10,314) $ (3,080) $ 5,053 $ (1,973) $ (10,314)
- -----------------------------------------------------------------------------------------------------------------------------
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Earnings $ 14,551 $ 18,642 $ 23,057 $ (41,699) $ 14,551
Net loss from discontinued operations (153) (378) - - (531)
- ------------------------------------------------------------------------------------------------------------------------------
Net Earnings from continuing operations 14,704 19,020 23,057 (41,699) 15,082
Adjustments to Reconcile Net Earnings
from Continuing Operations to Net Cash
Provided By Continuing Operations:
Non-cash operating activities (13,622) 24,987 (19,398) 41,699 33,666
Change in operating assets and
liabilities 15,937 (48,933) (5,739) - (38,735)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash provided by (used in) continuing
operations 17,019 (4,926) (2,080) - 10,013
Net Cash used in discontinued operations (123) (653) - - (776)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Operating Activities 16,896 (5,579) (2,080) - 9,237
Cash Flows from Investing Activities:
Net Cash (Used in) Provided by Investing
Activities (1,175) 1,782 - - 607
Cash Flows from Financing Activities:
Net Cash Provided by Financing Activities 18,925 5,906 3,107 - 27,938
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 34,646 2,109 1,027 - 37,782
Cash and Cash Equivalents at Beginning of Period 43,929 9,070 7,985 - 60,984
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 78,575 $ 11,179 $ 9,012 $ - $ 98,766
- ------------------------------------------------------------------------------------------------------------------------------
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollar amount in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (10,314) $ (3,079) $ 5,053 $ (1,974) $ (10,314)
Net earnings from discontinued operations 536 2 - - 538
- -------------------------------------------------------------------------------------------------------------------------------
Net Loss from Continuing Operations (10,850) (3,081) 5,053 (1,974) (10,852)
Adjustments to Reconcile Net Earnings
from Continuing Operations to Net Cash
Provided By Continuing Operations:
Non-cash operating activities 8,422 11,749 (2,961) 1,974 19,184
Change in operating assets and
liabilities 17,152 23,013 (1,403) - 38,762
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 14,724 31,681 689 - 47,094
Net Cash provided by discontinued operations 368 741 - - 1,109
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 15,092 32,422 689 - 48,203
Cash Flows from Investing Activities:
Net Cash (Used in) Provided by Investing
Activities (6,758) 84 - - (6,674)
Cash Flows from Financing Activities:
Net Cash Provided by (Used in) Financing
Activities 18,511 (32,118) 10,497 - (3,110)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 26,845 388 11,186 - 38,419
Cash and Cash Equivalents at Beginning of Period 32,654 9,714 402 - 42,770
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 59,499 $ 10,102 $ 11,588 $ - $ 81,189
- -------------------------------------------------------------------------------------------------------------------------------
20
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 continues to believe that the claims are without merit and to
vigorously defend this matter.
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. 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 $108,909,000.
NOTE 17. Comprehensive Income
The following are the components of comprehensive income (loss):
Thirteen weeks ended
-------------------------------------
(dollar amounts in thousands) May 1, 2004 May 3, 2003
- --------------------------------------------------------------------------------------------------
Net earnings (loss) $ 14,551 $ (10,314)
Other comprehensive
income, net of tax:
Derivative financial
instrument adjustments 1,060 -
- --------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 15,611 $ (10,314)
- --------------------------------------------------------------------------------------------------
The components of accumulated other comprehensive income (loss) are:
May 1, January 31,
(dollar amounts in thousands) 2004 2004
- --------------------------------------------------------------------
Derivative financial instrument
adjustment, net of tax $ 2,449 $ 1,389
Minimum pension liability
adjustment, net of tax (1,404) (1,404)
- --------------------------------------------------------------------
$ 1,045 $ (15)
- --------------------------------------------------------------------
21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The discussion and analysis below for the Company should be read in
conjunction with (i) the financial statements and the notes to such
financial statements included elsewhere in this Form 10-Q/A and (ii)
the financial statements and the notes to such financial statements
included in Item 8, "Financial Statements and Supplementary Data" of our
Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. All
applicable disclosures in the following discussion have been modified to
reflect the Restatement as described below.
Restatement
- -----------
Following a review of our lease-related accounting policies, we have
determined to correct our computation of depreciation, straight-line rent
expense and the related deferred rent liability. As a result, on
January 30, 2005, our Board of Directors, including our Audit Committee,
concluded to restate the Company's financial statements for the three year
period ended January 31, 2004 and for the first three quarters of fiscal
2004.
Historically, when accounting for leases with renewal options, we depreciated
our leasehold improvements on those leased properties over a period that
included both the initial lease term and all option periods (or the useful
lives of the assets, if shorter). We previously recorded rent expense on a
straight-line basis over the initial lease term commencing when actual rent
payments began. We, in consultation with our independent registered public
accounting firm, Deloitte and Touche, LLP, have now determined to use a
consistent lease period (generally, the initial lease term) when calculating
depreciation of leasehold improvements on leased properties and straight-line
rent expense. Straight-line rent expense will commence on the date when we
become legally obligated under the lease.
These non-cash adjustments, will not have any impact on our previously reported
cash flows, sales, comparable sales or our compliance with any financial
covenant under our revolving credit facility or other debt instruments.
The primary effect of the corrections is to accelerate the depreciation of
leasehold improvements of leased properties where the initial lease term is
shorter than the estimated useful economic life of those assets and rental
expense on properties we occupied before payment of rents was required. The
cumulative effect of the restatement through fiscal quarter ended May 1, 2004
is an increase in other current assets of $652,000, an increase in accumulated
depreciation of $64,972,000, an increase in the deferred rent liability of
$10,165,000 and a decrease in deferred income tax liability of $27,516,000. As
a result, retained earnings at the end of fiscal quarter ended May 1, 2004
decreased by $46,969,000. Depreciation expense from continuing operations
increased by $2,021,000 and $2,065,000 and rent expense from continuing
operations decreased by $235,000 and $310,000 for the thirteen weeks ended
May 1, 2004 and May 3, 2003, respectively. The Restatement increased reported
diluted loss per share by $0.02,for the thirteen weeks ended May 1, 2004 and
May 3, 2003. The cumulative effect of the Restatement for all years prior to
fiscal 2001 was $34,812,000, which was recorded as an adjustment to opening
stockholders' equity at February 2, 2002 in the Company's restated Annual
Report as of January 31, 2004 on Form 10-K/A. The Restatement did not have any
impact on the Company's previously reported cash flows, sales or comparable
sales or the Company's compliance with any covenant under the Company's line of
credit facility or other debt instruments.
Management's Discussion and Analysis of Financial Condition and results of
Operations has been revised for the effects of the Restatement. See note 2 to
the consolidated financial statements.
OVERVIEW
- --------
The Pep Boys - Manny, Moe & Jack is a leader in the automotive aftermarket with
595 stores located throughout 36 states and Puerto Rico. All of our stores
feature the nationally-recognized Pep Boys brand name, established through
more than 80 years of providing high-quality automotive merchandise and
services, and are company-owned, ensuring chain-wide consistency for our
customers. We are the only national chain offering automotive service,
accessories, tires and parts under one roof, positioning us to achieve our goal
of becoming the category dominant one-stop shop for automotive maintenance and
accessories.
For the thirteen weeks ended May 1, 2004, our comparative sales increased by
11.0% compared to (5.4)% for the thirteen weeks ended May 3, 2003. This
increase in comparable sales is due primarily to new product offerings and
increased overall foot traffic at our stores.
On March 24, 2004, we successfully completed a common stock offering for net
proceeds of $108,909,000. We have used the proceeds from this stock sale to
repay the outstanding balance under our revolving credit facility, which was
used along with cash to repay the $57,000,000 aggregate principal amount of
medium term notes that matured on March 3,2004 and March 10,2003 and prepay
$20,919,000 aggregate principal amount outstanding under our senior secured
(equipment and real estate) credit facility. The remaining balance will be
applied to store redesigns.
During the first quarter of fiscal 2004, we have begun to reinvest in our
existing stores to completely redesign their interiors and enhance their
exterior appeal. Our new interior design will feature four distinct
merchandising worlds: accessories (fashion, electronic and performance
merchandise), maintenance (hard parts and chemicals), garage (repair shop and
travel) and service (including tire, wheel and accessory installation).
We believe that this layout will provide customers with a clear and concise way
of finding what they need and will promote cross-selling. The most important of
these changes will be to move all of our service desks and waiting areas inside
the retail stores adjacent to our tire offering displays. We also are planning
modifications to the exterior of our stores that are designed to increase
customer traffic.
The following discussion explains the material changes in our results of
operations for the thirteen weeks ended May 1, 2004 and May 3, 2003 and the
significant developments affecting our financial condition since
January 31, 2004. We strongly recommend that you read our audited financial
statements and footnotes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our restated Annual Report on
Form 10-K/A for the fiscal year ended January 31, 2004.
22
LIQUIDITY AND CAPITAL RESOURCES - May 1, 2004
- ------------------------------------------------
For the thirteen weeks ended May 1, 2004, we increased our cash and cash
equivalents by $37,782,000 from the balance at January 31, 2004. This increase
was due primarily to net proceeds from our March 24, 2004 common stock offering
and an increase in accounts payable offset, in part, by the increase in
merchandise inventories, the reduction of long-term debt and the payment of a
legal settlement.
We have used the $108,909,000 net proceeds from the common stock offering to
repay the outstanding balance under our revolving credit facility, which was
used along with cash to repay the $57,000,000 aggregate principal amount of
medium term notes that matured on March 3,2004 and March 10, 2004 and prepay
$20,919,000 aggregate principal amount outstanding under our senior secured
(equipment and real estate) credit facility. The remaining balance will be
applied to store redesigns.
Our cash requirements arise principally from the capital expenditures related
to existing stores, offices and warehouses and to purchase inventory. The
primary capital expenditures for the thirteen weeks ended May 1, 2004 were
attributed to capital maintenance of our existing stores and offices. We
invested $7,683,000 in property and equipment, which is a 10% decrease compared
to the same period in the previous fiscal year. Management estimates that
capital expenditures related to existing stores, warehouses and offices during
the remainder of fiscal 2004 will be approximately $72,695,000, related
primarily to the redesign of our existing stores.
We anticipate that our net cash provided by operating activities, the net
proceeds from our common stock offering and our existing line of credit will
exceed our principal cash requirements for capital expenditures and inventory
purchases in fiscal 2004.
Working Capital increased from $76,227,000 at January 31, 2004 to $207,485,000
at May 1, 2004. At May 1, 2004, we had stockholders' equity of $697,477,000 and
long-term debt, net of current maturities, of $394,552,000. Our long-term debt
was 36% of our total capitalization at May 1, 2004 and 42% at January 31, 2004.
As of May 1, 2004, we had an available line of credit totaling $179,136,000.
In the first quarter of fiscal 2004, we prepaid $20,919,000 aggregate
principal amount of our Senior Secured Credit Facility with a stated maturity
date of July 1, 2006. This prepayment was funded out of cash from operations
and our existing revolving credit facility.
In the first quarter of fiscal 2004, we retired $32,000,000 aggregate principal
amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004
and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a
stated maturity date of March 3, 2004. These notes were retired with cash from
operations and our existing revolving credit facility.
In the first quarter of 2004, we entered into arrangements with certain of our
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 we make a payment of the full
payable to the bank at the extended payment term. As of May 1, 2004, there was
$4,505,000 outstanding under these arrangements, which was recorded in short-
term borrowings on the consolidated balance sheets.
In the third quarter of 2003, the Company reached an agreement, through binding
arbitration, to settle the consolidated action entitled "Dubrow et al vs. The
Pep Boys - Manny Moe & Jack". The two consolidated actions, originally filed
on March 29, 2000 and July 25, 2000 in the California Superior Court in Orange
County, involved former and current store management employees who claimed that
they were improperly classified as exempt from the overtime provisions of
California law and sought to be compensated for all overtime hours worked. The
settlement was paid by the Company in the first quarter of fiscal 2004 from
cash from operations and its existing line of credit.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
There have been no material changes to off-balance sheet arrangements as
reflected in the Management's Discussion and Analysis in the Company's 2003
annual report on Form 10-K.
23
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. The Company expects
these actions, including the disposal and sublease of the Company's real
properties, to be substantially completed by the end of the second quarter 2004
and estimates the costs, including future costs that were not accrued, to be
approximately $66,752,000. 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 Statement of Financial Accounting
Standards (SFAS) No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets".
Reserve Summary
The following chart details the reserve balances through May 1, 2004. The
reserve includes remaining rent on leases net of subleases income, other
contractual obligations associated with leased properties and employee
severance.
(dollar amounts Lease Contractual
in thousands) Severance Expenses Obligations Total
- -------------------------------------------------------------------------------
Reserve balance
at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204
Provision for present
value of liabilities - 41 47 88
Changes in assumptions about
future sublease income, lease
termination, contractual
obligations and severance - - - -
Cash payments (213) (253) (171) (637)
- -------------------------------------------------------------------------------
Reserve Balance
at May 1, 2004 $ 160 $ 2,156 $ 339 $ 2,655
- -------------------------------------------------------------------------------
24
In accordance with SFAS 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 thirteen weeks ended
May 1, 2004 and May 3, 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:
Thirteen weeks ended
----------------------------
May 1, 2004 May 3, 2003
------------ -------------
(dollar amounts in thousands) Amount Amount
- ---------------------------------------------------------------------------------------------
Total Revenues $ 1 $ 18,306
Total Gross (Loss) Profit (804) 4,918
Selling, General and Administrative
Expenses 40 4,065
(Loss) Earnings from Discontinued
Operations Before Income Taxes (844) 854
Net (Loss) Earnings from Discontinued
Operations, Net of Tax $ (531) $ 538
- ---------------------------------------------------------------------------------------------
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 May 1, 2004 and January 31, 2004, these
reclassifications were as follows:
(Dollar amounts in thousands) May 1, 2004 Jan. 31, 2004
- ------------------------------------------------------------------------------------------------
Land $ (4,425) $ (8,954)
Building and improvements (5,925) (7,975)
- ------------------------------------------------------------------------------------------------
Property and equipment $(10,350) $(16,929)
- ------------------------------------------------------------------------------------------------
Assets held for disposal $ 10,350 $ 16,929
- ------------------------------------------------------------------------------------------------
During the first quarter of 2004, the Company sold assets held for disposal for
proceeds of $6,879,000, resulting in a gain of $172,000 which was recorded in
discontinued operations on the consolidated statement of operations.
25
Results 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
- ----------------------------------------------------------------------------------------------------------------
May 1, 2004 May 3, 2003 Fiscal 2004 vs.
Thirteen weeks ended (Fiscal 2004) (Fiscal 2003) Fiscal 2003
- ----------------------------------------------------------------------------------------------------------------
Merchandise Sales 81.4% 80.5% 12.1%
Service Revenue (1) 18.6 19.5 5.5
- ----------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 10.8
- ----------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales (2) 70.6 (3) 70.9 (3) 11.6
Costs of Service Revenue (2) 74.6 (3) 75.4 (3) 4.5
- ----------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 71.3 71.8 10.1
- ----------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 29.4 (3) 29.1 (3) 13.3
Gross Profit from Service Revenue 25.4 (3) 24.6 (3) 8.7
- ----------------------------------------------------------------------------------------------------------------
Total Gross Profit 28.7 28.2 (12.5)
- ----------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 23.0 28.9 (12.3)
- ----------------------------------------------------------------------------------------------------------------
Operating (Loss) Profit 5.7 (0.7) 995.4
Non-operating Income 0.1 0.2 (43.6)
Interest Expense 1.6 2.1 13.1
- ----------------------------------------------------------------------------------------------------------------
(Loss) Earnings from Continuing Operations Before
Income Taxes and Cumulative Effect of Change in
Accounting Principle 4.2 (2.6) 280.0
Income Tax (Benefit) Expense 37.0 (4) 37.0 (4) 279.7
- ----------------------------------------------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle 2.7 (1.6) 280.2
(Loss) Earnings from Discontinued Operations,
Net of Tax (0.1) 0.1 (198.7)
Cumulative Effect of Change in Accounting Principle 0.0 (0.5) 100.0
- ----------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) 2.6 (2.0) 241.1
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed parts or
materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include
service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
(3) As a percentage of related sales or revenue, as applicable.
(4) As a percentage of earnings before income taxes.
</FN>
26
Thirteen Weeks Ended May 1, 2004 vs. Thirteen Weeks Ended May 3, 2003
- ------------------------------------------------------------------------
Total revenues for the first quarter of fiscal 2004 increased 10.8% from the
first quarter of fiscal 2003. This increase was due primarily to an increase in
comparable store revenues (revenues generated by stores in operation during the
same period) of 11.0%. Comparable store merchandise sales increased 12.3%,
while comparable store service revenue increased 5.6%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 29.4% in fiscal 2004 from 29.1% in fiscal 2003. This increase, as a
percentage of merchandise sales, was due primarily to a decrease in store
occupancy costs offset, in part, by an increase in warehousing costs and a
decrease in merchandise margins, as a percentage of merchandise sales. The
decrease in store occupancy costs, as a percentage of merchandise sales, was a
result of lower rent and building maintenance expenses. The increase in
warehousing costs, as a percentage of merchandise sales, was a result of
increased hauling and rent expenses. The decrease in merchandise margins was a
result of slightly lower POS margins due to the mix shift into newer
transportation and garage categories.
Selling, general and administrative expenses decreased, as a percentage of
total revenues, to 23.0% in fiscal 2004 from 28.9% in fiscal 2003. This was a
12.3% or $18,215,000 decrease from the prior year's quarter. This decrease, as
a percentage of total revenues, was due primarily to a decrease in general
office and benefit costs offset, in part, by an increase in net media expenses.
The decrease in general office costs and employee benefits was due primarily to
the impact of a charge made in the first quarter of 2003 for $20,000,000 to
legal reserves and $5,231,000 to benefits for a settlement of a retirement plan
obligation, respectively. The increase in net media expense was due primarily
to increased radio and circular advertising expense and a decrease in
cooperative advertising.
Interest expense decreased 13.1% due primarily to lower debt levels coupled
with lower average interest rates.
Results from discontinued operations for 2004 was a loss of $531,000 (net of
tax) compared to income of $538,000 (net of tax) in 2003. The change was due
primarily to the discontinued stores being in operation in the first quarter of
2003. The loss recorded in 2004 is primarily related to the costs for lease
and maintenance of stores closed in the second quarter of 2003.
Net earnings increased, as a percentage of total revenues, due primarily to
a decrease in selling, general and administrative expenses, as a percentage of
total revenues, 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, a decrease in
interest expense and an increase in gross profit from merchandise sales, as a
percentage of merchandise sales.
27
INDUSTRY COMPARISON
- --------------------
The Company operates in the U.S. automotive aftermarket, which 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.
Thirteen weeks ended
----------------------------
May 1, 2004 May 3, 2003
------------ -------------
(Dollar amounts in thousands) Amount Amount
- ---------------------------------------------------------------------------------------------
Retail Revenues $ 337,049 $ 286,353
Service Center Revenues 229,084 224,557
- ---------------------------------------------------------------------------------------------
Total Revenues $ 566,133 $ 510,910
- ---------------------------------------------------------------------------------------------
Gross Profit from Retail Revenues (1) $ 97,179 $ 76,075
Gross Profit from Service Center Revenues (1) 65,029 68,056
- ---------------------------------------------------------------------------------------------
Total Gross Profit $ 162,208 $ 144,131
- ---------------------------------------------------------------------------------------------
(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.
28
NEW ACCOUNTING STANDARDS
- ------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure, an Amendment of FASB Statement
No. 123," to provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based compensation. We
have adopted the disclosure requirements of this statement. In March 2004,
the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB
Statements No. 123 and 95." The proposed standard would require companies to
expense share-based payments to employees, including stock options, based on
the fair value of the award at the grant date. The proposed statement would
eliminate the intrinsic value method of accounting for stock options permitted
by APB (Accounting Principles Board) No. 25, "Accounting for Stock Issued to
Employees," which we currently follow. We will continue to monitor the actions
of the FASB and assess the impact, if any, on our consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to customer incentives, product returns and warranty obligations,
bad debts, inventories, income taxes, financing operations, restructuring
costs, retirement benefits, risk participation agreements and contingencies and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. For a detailed
discussion of significant accounting policies that may involve a higher degree
of judgment or complexity, refer to "-Critical Accounting Policies and
Estimates" as reported in the Company's Form 10-K/A for the year ended
January 31, 2004, which disclosures are hereby incorporated by reference.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements contained herein constitute "forward-looking statements"
within the meaning of The Private Securities Litigation Reform Act of 1995.
The words "guidance," "expect," "anticipate," "estimates," "forecasts" and
similar expressions are intended to identify such forward-looking statements.
Forward-looking statements include management's expectations regarding future
financial performance, automotive aftermarket trends, levels of competition,
business development activities, future capital expenditures, financing sources
and availability and the effects of regulation and litigation. Although the
Company believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, it can give no assurance that
its expectations will be achieved. The Company's actual results may differ
materially from the results discussed in the forward-looking statements due to
factors beyond the control of the Company, including the strength of the
national and regional economies, retail and commercial consumers' ability to
spend, the health of the various sectors of the automotive aftermarket, the
weather in geographical regions with a high concentration of the Company's
stores, competitive pricing, the location and number of competitors' stores,
product and labor costs and the additional factors described in the Company's
filings with the Securities and Exchange Commission (SEC). The Company assumes
no obligation to update or supplement forward-looking statements that become
untrue because of subsequent events.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not utilize financial instruments for trading purposes
and holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's primary market risk exposure with
regard to financial instruments is to changes in interest rates. Pursuant to
the terms of its revolving credit agreement, changes in the London Interbank
Offered Rate (LIBOR) could affect the rates at which the Company could borrow
funds thereunder. At May 1, 2004, the Company had outstanding borrowings of
$10,000 under this facility. Additionally, we have $132,000,000 of real estate
operating leases which vary based on changes in LIBOR. We have entered into an
interest rate swap, which was designated as a cash flow hedge to convert 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 May 1, 2004, the fair value of the interest rate swap was
$3,877,000 ($2,449,000 net of tax) and this change in value was included in
accumulated other comprehensive income on the consolidated balance sheet.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's chief
executive officer and principal financial officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the chief executive officer
and principal financial officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report are functioning
effectively to provide reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. A controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.
In connection with the restatement and the filing of this Form 10-Q/A, the
Company's management, with the participation of the Company's chief executive
officer and principal financial officer, re-evaluated the effectiveness of the
Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the chief executive officer
and principal financial officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report were effective as
of the end of the period covered by this report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in the Company's internal control over financial reporting occurred
during the fiscal quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
30
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
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 continues to
believe that the claims are without merit and to vigorously defend
this matter.
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.
31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1)* Amendment to and Restatement of the Executive
Supplemental Retirement Plan.
(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
(b) Reports on Form 8-K.
The Company filed a Form 8-K dated March 19, 2004 announcing an
Underwriting Agreement it had entered into related to the sale
of its common stock.
* Management contract or compensatory plan or arrangement.
** Filed herewith.
32
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEP BOYS - MANNY, MOE & JACK
--------------------------------
(Registrant)
Date: March 2, 2005 by: /s/ Harry F. Yanowitz
----------------------- --------------------------
Harry F. Yanowitz
Senior Vice President and
Chief Financial Officer
33
INDEX TO EXHIBITS
- -----------------
(10.1)* Amendment to and Restatement of the Executive
Supplemental Retirement Plan.
(31.1)** Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31.2)** Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(32.1)** Chief Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(32.2)** Chief Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
** - Filed herewith
34