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 July 31, 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 and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days. Yes ( x ) No ( )
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 August 28, 2004 there were 57,999,044 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 July 31, 2004, initially filed with
the Securities and Exchange Commission (the "SEC") on September 9, 2004
(the "Original Filing"), is being filed to reflect restatements of (i) the
Company's consolidated balance sheets at July 31, 2004 and January 31, 2004 and
(ii) the Company's consolidated statements of operations, stockholders'
equity and cash flows for the quarters ended July 31, 2004 and August 2, 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 May 1, 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)
July 31, 2004 and January 31, 2004 3
Consolidated Statements of Operations - (As
Restated) Thirteen and Twenty-six weeks ended
July 31, 2004 and August 2, 2003 4
Consolidated Statements of
Cash Flows - (As Restated) Twenty-six weeks
ended July 31, 2004 and August 2, 2003 5
Notes to Condensed Consolidated
Financial Statements 6-24
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 25-34
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 35
Item 4. Controls and Procedures 35
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 36
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of
Security Holders 37
Item 5. Other Information 38
Item 6. Exhibits 38
SIGNATURES 39
INDEX TO EXHIBITS 40
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
July 31, 2004 Jan. 31, 2004*
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ASSETS
Current Assets:
Cash and cash equivalents $ 83,893 $ 60,984
Accounts receivable, net 40,355 30,562
Merchandise inventories 596,451 553,562
Prepaid expenses 32,714 39,480
Deferred income taxes 10,645 20,826
Other 77,430 81,096
Assets held for disposal 3,118 16,929
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Total Current Assets 844,606 803,439
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Property and Equipment-at cost:
Land 263,199 263,907
Buildings and improvements 908,139 899,114
Furniture, fixtures and equipment 596,497 586,607
Construction in progress 19,255 12,800
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1,787,090 1,762,428
Less accumulated depreciation and amortization 873,873 839,219
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Property and Equipment - Net 913,217 923,209
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Other 52,526 51,398
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Total Assets $1,810,349 $1,778,046
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 335,890 $ 342,584
Accrued expenses 244,831 267,565
Current maturities of long-term debt and obligations
under capital leases 147,258 117,063
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Total Current Liabilities 727,979 727,212
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Long-term debt and obligations under capital leases,
less current maturities 144,727 258,016
Convertible long-term debt, less current maturities 150,000 150,000
Other long-term liabilities 38,422 39,201
Deferred income taxes 40,497 29,976
Deferred gain on sale leaseback 59 3,907
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $1 per share:
Authorized 500,000,000 shares; Issued 68,557,041
and 63,910,577 shares 68,557 63,911
Additional paid-in capital 284,465 177,317
Retained earnings 549,133 531,933
Common stock subscriptions receivable (144) -
Accumulated other comprehensive income (loss) 1,098 (15)
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903,109 773,146
Less cost of shares in treasury - 8,372,727 shares
and 8,928,159 shares 135,180 144,148
Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264
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Total Stockholders' Equity 708,665 569,734
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Total Liabilities and Stockholders' Equity $1,810,349 $1,778,046
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See notes to condensed consolidated financial statements.
* Taken from the 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 Twenty-six weeks Ended
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July 31, 2004 Aug. 2, 2003 July 31, 2004 Aug. 2, 2003
------------- ------------ -------------- ------------
Amount Amount Amount Amount
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Merchandise Sales $ 488,716 $ 451,285 $ 949,597 $ 862,417
Service Revenue 104,710 104,745 209,962 204,523
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Total Revenues 593,426 556,030 1,159,559 1,066,940
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Costs of Merchandise Sales 347,249 345,401 672,623 636,976
Costs of Service Revenue 80,701 81,315 159,252 156,519
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Total Costs of Revenues 427,950 426,716 831,875 793,495
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Gross Profit from Merchandise Sales 141,467 105,884 276,974 225,441
Gross Profit from Service Revenue 24,009 23,430 50,710 48,004
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Total Gross Profit 165,476 129,314 327,684 273,445
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Selling, General and Administrative
Expenses 136,694 143,049 266,256 290,826
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Operating Profit (Loss) 28,782 (13,735) 61,428 (17,381)
Non-operating Income 470 851 1,062 1,901
Interest Expense 7,800 9,603 17,098 20,304
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Earnings (Loss) From Continuing
Operations Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle 21,452 (22,487) 45,392 (35,784)
Income Tax Expense (Benefit) 7,937 (8,309) 16,795 (13,238)
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Net Earnings (Loss) from Continuing
Operations Before Cumulative Effect of
Change in Accounting Principle 13,515 (14,178) 28,597 (22,546)
Discontinued Operations, Net of Tax (852) (20,757) (1,383) (20,219)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (2,484)
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Net Earnings (Loss) 12,663 (34,935) 27,214 (45,249)
Retained Earnings, beginning of period 541,203 572,589 531,933 586,735
Cash Dividends (3,915) (3,491) (7,813) (6,978)
Effect of Stock Options (818) (6,477) (2,201) (6,548)
Dividend Reinvestment Plan - (46) - (320)
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Retained Earnings, end of period $ 549,133 $ 527,640 $ 549,133 $ 527,640
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Basic Earnings (Loss) Per Share:
Net Earnings (Loss) From Continuing
Operations Before Cumulative Effect
of Change in Accounting Principle $ 0.23 $ (0.27) $ 0.51 $ (0.43)
Discontinued Operations, Net of Tax (0.01) (0.40) (0.03) (0.39)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (0.05)
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Basic Earnings (Loss) Per Share $ 0.22 $ (0.67) $ 0.48 $ (0.87)
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Diluted Earnings (Loss) Per Share:
Net Earnings (Loss) From Continuing
Operations Before Cumulative Effect
of Change in Accounting Principle $ 0.22 $ (0.27) $ 0.47 $ (0.43)
Discontinued Operations, Net of Tax (0.01) (0.40) (0.02) (0.39)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (0.05)
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Diluted Earnings (Loss) Per Share $ 0.21 $ (0.67) $ 0.45 $ (0.87)
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Cash Dividends Per Share $ .0675 $ .0675 $ .1350 $ .1350
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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
Twenty-six Weeks Ended July 31, 2004 Aug. 2, 2003
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Cash Flows from Operating Activities:
Net earnings (loss) $ 27,214 $ (45,249)
Net loss from discontinued operations (1,383) (20,219)
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Net earnings (loss) from continuing operations 28,597 (25,030)
Adjustments to Reconcile Net Earnings (Loss) From Continuing
Operations to Net Cash Provided by Continuing Operations:
Cumulative effect of change
in accounting principle, net of tax - 2,484
Depreciation and amortization 37,767 39,214
Accretion of asset disposal obligation 71 90
Stock compensation expense 847 -
Deferred income taxes 20,553 (38,749)
Deferred gain on sale lease back (119) (8)
Loss on asset impairment - 1,371
Loss from sales of assets 360 34
Changes in operating assets and liabilities:
Decrease in accounts receivable,
prepaid expenses and other 3,711 9,289
Increase in merchandise inventories (42,889) (17,628)
(Decrease) increase in accounts payable (3,493) 119,170
(Decrease) increase in accrued expenses (22,554) 40,593
(Decrease) increase in other long-term liabilities (779) 2,463
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Net cash provided by continuing operations 22,072 133,293
Net cash (used in) provided by discontinued operations (1,728) 4,133
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Net Cash Provided by Operating Activities 20,344 137,426
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Cash Flows from Investing Activities:
Capital expenditures (28,830) (21,420)
Proceeds from sales of assets 1,453 806
Proceeds from sales of assets held for disposal 10,532 1,146
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Net Cash Used in Investing Activities (16,845) (19,468)
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Cash Flows from Financing Activities:
Net borrowings under line of credit agreements 137 1,441
Repayments of short-term borrowings (7,216) -
Reduction of long-term debt (84,425) (91,427)
Other 3,283 (400)
Dividends paid (7,813) (6,978)
Proceeds from issuance of common stock 108,854 -
Proceeds from exercise of stock options 6,049 4,085
Proceeds from dividend reinvestment plan 541 646
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Net Cash Provided by (Used in) Financing Activities 19,410 (92,633)
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Net Increase in Cash 22,909 25,325
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Cash and Cash Equivalents at Beginning of Period 60,984 42,770
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Cash and Cash Equivalents at End of Period $ 83,893 $ 68,095
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Non-cash financing activities:
Equipment Capital Leases $ 1,413 $ -
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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 July 31, 2004, the consolidated
statements of operations for the thirteen and twenty-six week periods ended
July 31, 2004 and August 2, 2003 and the consolidated statements of cash flows
for the twenty-six week periods ended July 31, 2004 and August 2, 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 July 31, 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 and twenty-six week periods ended
July 31, 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 comform to the current year's presentation.
NOTE 2. Restatement of Financial Statements
Subsequent to the issuance of the Company's fiscal 2003 financial statemnets,
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 July 31, 2004
is an increase in other current assets of $1,317,000, an increase in
accumulated depreciation of $67,006,000, an increase in the deferred rent
liability of $9,930,000 and a decrease in deferred income tax liability of
$27,516,000. As a result, retained earnings at the end of fiscal quarter ended
July 31, 2004 decreased by $48,103,000. Depreciation expense from continuing
operations increased by $4,056,000 and $3,943,000 for the twenty-six weeks
ended July 31, 2004 and August 2, 2003, respectively. Rent expense from
continuing operations decreased by $470,000 and $594,000 for the twenty-six
weeks ended July 31, 2004 and August 2, 2003, respectively. The restatement
decreased reported diluted earnings per share and diluted loss per share by
$0.03 and $0.01 for the twenty-six weeks ended July 31, 2004 and August 2,
2003, respectively. 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. The restatement did not have
any impact on the Company's previously reported cash flows, sales or comparable
sales or on 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 July 31, 2004 and January 31, 2004
and (ii) the Company's consolidated statements of operations for the fiscal
quarters ended July 31, 2004 and August 2, 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 years because the net impact for
each such fiscal year is zero.
(dollar amounts in thousands) As Previously
July 31, 2004 Reported Adjustments As Restated
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Consolidated Balance Sheet
Other $ 76,113 $ 1,317 $ 77,430
Total Current Assets 843,289 1,317 844,606
Accumulated depreciation and amortization 806,867 67,006 873,873
Property and equipment, net 980,223 (67,006) 913,217
Total Assets 1,876,038 (65,689) 1,810,349
Other long-term liabilities 28,492 9,930 38,422
Deferred income taxes 68,013 (27,516) 40,497
Retained earnings 597,236 (48,103) 549,133
Total Stockholders'Equity 756,768 (48,103) 708,665
Total Liabilities and Stockholders' Equity 1,876,038 (65,689) 1,810,349
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
7
As Previously
Thirteen weeks ended July 31, 2004 Reported Adjustments As Restated
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Consolidated Statement of Earnings
Costs of Merchandise Sales $ 345,894 $ 1,355 $ 347,249
Costs of Service Revenue 80,256 445 80,701
Total Costs of revenue 426,150 1,800 427,950
Gross Profit from Merchandise Sales 142,822 (1,355) 141,467
Gross Profit from Service Revenue 24,454 (445) 24,009
Total Gross Profit 167,276 (1,800) 165,476
Operating Profit 30,582 (1,800) 28,782
Earnings from Continuing Operations Before Income
Taxes and Cumulative Effect of Change in Accounting
Principle 23,252 (1,800) 21,452
Income Tax Expense 8,603 (666) 7,937
Net Earnings from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle 14,649 (1,134) 13,515
Discontinued Operations, Net of Tax (852) - (852)
Net Earnings 13,797 (1,134) 12,663
Basic Earnings Per Share:
Net Earnings from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle 0.25 (0.02) 0.23
Discontinued Operations, Net of Tax (0.01) - (0.01)
Basic Earnings Per Share 0.24 (0.02) 0.22
Diluted Earnings Per Share:
Net Earnings from Continuing Operations Before Cumulative
Effect of Change in Accounting Principle 0.23 (0.01) 0.22
Discontinued Operations, Net of Tax (0.01) - (0.01)
Diluted Earnings Per Share 0.22 (0.01) 0.21
As Previously
Twenty-six weeks ended July 31, 2004 Reported Adjustments As Restated
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Consolidated Statement of Earnings
Costs of Merchandise Sales $ 669,948 $ 2,675 $ 672,623
Costs of Service Revenue 158,367 885 159,252
Total Costs of revenue 828,315 3,560 831,875
Gross Profit from Merchandise Sales 279,649 (2,675) 276,974
Gross Profit from Service Revenue 51,595 (885) 50,710
Total Gross Profit 331,244 (3,560) 327,684
Operating Loss 64,988 (3,560) 61,428
Loss from Continuing Operations Before Income Taxes
and Cumulative Effect of Change in Accounting
Principle 48,952 (3,560) 45,392
Income Tax Benefit 18,112 (1,317) 16,795
Net Earnings from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle 30,840 (2,243) 28,597
Discontinued Operations, Net of Tax (1,383) - (1,383)
Net Earnings 29,457 (2,243) 27,214
Basic Earnings Per Share:
Net Earnings from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle 0.55 (0.04) 0.51
Discontinued Operations, Net of Tax (0.03) - (0.03)
Basic Earnings Per Share 0.52 (0.04) (0.48)
Diluted Earnings Per Share:
Net Earnings from Continuing Operations Before Cumulative
Effect of Change in Accounting Principle 0.50 (0.03) 0.47
Discontinued Operations, Net of Tax (0.02) - (0.02)
Diluted Earnings Per Share 0.48 (0.03) 0.45
8
As Previously
Thirteen weeks ended August 2, 2003 Reported Adjustments As Restated
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Consolidated Statement of Earnings
Costs of Merchandise Sales $ 344,903 $ 498 $ 345,401
Costs of Service Revenue 80,881 434 81,315
Total Costs of revenue 425,784 932 426,716
Gross Profit from Merchandise Sales 106,382 (498) 105,884
Gross Profit from Service Revenue 23,864 (434) 23,430
Total Gross Profit 130,246 (932) 129,314
Operating Loss (12,803) (932) (13,735)
Loss from Continuing Operations Before Income
Taxes and Cumulative Effect of Change in
Accounting Principle (21,555) (932) (22,487)
Income Tax Benefit (7,976) (333) (8,309)
Net Loss from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle (13,579) (599) (14,178)
Discontinued Operations, Net of Tax (22,802) 2,045 (20,757)
Net Loss (36,381) 1,446 (34,935)
Basic and Diluted Loss Per Share:
Net Loss from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle (0.26) (0.01) (0.27)
Discontinued Operations, Net of Tax (0.44) 0.04 (0.40)
Basic and Diluted Loss Per Share (0.70) 0.03 (0.67)
As Previously
Twenty-six weeks ended August 2, 2003 Reported Adjustments As Restated
- --------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Earnings
Costs of Merchandise Sales $ 635,243 $ 1,733 $ 636,976
Costs of Service Revenue 155,653 866 156,519
Total Costs of revenue 790,896 2,599 793,495
Gross Profit from Merchandise Sales 227,174 (1,733) 225,441
Gross Profit from Service Revenue 48,870 (866) 48,004
Total Gross Profit 276,044 (2,599) 273,445
Operating Loss (14,782) (2,599) (17,381)
Loss from Continuing Operations Before Income
Taxes and Cumulative Effect of Change in Accounting
Principle (33,185) (2,599) (35,784)
Income Tax Benefit (12,279) (959) (13,238)
Net Loss from Continuing Operations Before Cumulative
Effect of Change in Accou (20,906) (1,640) (22,546)
Discontinued Operations, Net of Tax (22,208) 1,989 (20,219)
Net Loss (45,598) 349 (45,249)
Basic and Diluted Loss Per Share:
Net Loss from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle (0.40) (0.03) (0.43)
Discontinued Operations, Net of Tax (0.43) 0.04 (0.39)
Cumulative Effect of Change in Accounting Principle (0.05) - (0.05)
Basic and Diluted Loss Per Share (0.88) 0.01 (0.87)
In addition, certain amounts in Notes 3,7,8,9,11,14 and 17 have been restated
to reflect the Restatement adjustments described above.
9
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 options, 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 $149,000 ($94,000 net
of tax) and $847,000 ($534,000 net of tax) for the thirteen and twenty-six
weeks ended July 31, 2004, respectively. 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 Twenty-six weeks ended
--------------------------------- -----------------------------------
July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003
- ----------------------------------------------------------------------------------------------------------------------
Net earnings (loss):
As reported $ 12,663 $(34,935) $ 27,214 $ (45,249)
Add: Stock compensation expense,
net of tax 94 - 534 -
Less: Total stock-based compensation
expense determined under fair
value-based method, net of tax (768) (636) (2,070) (1,447)
- ----------------------------------------------------------------------------------------------------------------------
Pro forma $ 11,989 $(35,571) $ 25,678 $ (46,696)
- ----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share:
Basic:
As reported $ .22 $ (.67) $ .48 $ (.87)
Pro forma $ .21 $ (.69) $ .46 $ (.90)
- ----------------------------------------------------------------------------------------------------------------------
Diluted:
As reported $ .21 $ (.67) $ .45 $ (.87)
Pro forma $ .20 $ (.69) $ .43 $ (.90)
- ----------------------------------------------------------------------------------------------------------------------
10
The fair value of each option granted during the periods ending July 31, 2004
and August 2, 2003 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
July 31, 2004 August 2, 2003
- ------------------------------------------------------------------
Dividend yield 1.67% 1.57%
Expected volatility 41% 42%
Risk-free interest rate range:
high 4.7% 4.4%
low 2.0% 1.5%
Ranges of expected lives in years 3-8 4-8
- ------------------------------------------------------------------
NOTE 4. New Accounting Standards
In December 2002, the Financial Accounting Standards Board (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-based compensation 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 by using the last-in, first-out ("LIFO") method. An actual valuation
of inventory under the LIFO method can be made only at the end of each fiscal
year based on inventory and costs at that time. Accordingly, interim LIFO
calculations must be based on management's estimates of expected fiscal
year-end inventory levels and costs. Replacement cost, which approximates FIFO
cost was $575,930,000 and $531,830,000 at July 31, 2004 and January 31, 2004,
respectively.
NOTE 6. Accrued Expenses
The Company's accrued expenses for the periods ending July 31, 2004 and
January 31, 2004 were as follows:
(dollar amounts in thousands) July 31, 2004 Jan. 31, 2004
- ---------------------------------------------------------------------
Medical and casualty risk
participation reserve $ 127,075 $ 136,599
Accrued compensation and
related taxes 42,963 51,043
Legal Reserves 1,367 26,576
Other 73,426 53,347
- ---------------------------------------------------------------------
Total $ 244,831 $ 267,565
- ---------------------------------------------------------------------
11
NOTE 7. Other Current Assets
The Company's other current assets for the periods ending July 31, 2004 and
January 31, 2004 were as follows:
(dollar amounts in thousands) July 31, 2004 Jan. 31, 2004
- ---------------------------------------------------------------------
Reinsurance premiums receivable $ 62,678 $ 67,326
Income taxes receivable 14,298 13,517
Other 454 253
- ---------------------------------------------------------------------
Total $ 77,430 $ 81,096
- ---------------------------------------------------------------------
NOTE 8. Restructuring
Building upon the Profit Enhancement Plan launched in October 2000, the
Company conducted a comprehensive review of its operations including
individual store performance, the entire management infrastructure and
its merchandise and service offerings. On July 31, 2003, the Company
announced several initiatives aimed at realigning its business and continuing
to improve upon the Company's profitability. These actions, including the
disposal and sublease of the properties, were substantially completed by
July 31 ,2004 and costs were 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 July 31, 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 - 80 90 170
Changes in assumptions
about future sublease
income, lease termination
and severance - 272 - 272
Cash payments (215) (473) (302) (990)
- ---------------------------------------------------------------------------------
Reserve balance at
July 31, 2004 $ 158 $ 2,247 $ 251 $ 2,656
- ---------------------------------------------------------------------------------
12
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.
Additionally, the Company has classified certain assets as assets held for
disposal on its consolidated balance sheets. As of July 31, 2004 and
January 31, 2004, these assets were as follows:
(Dollar amounts in thousands) July 31, 2004 Jan. 31, 2004
- -------------------------------------------------------------------------------
Land $ 2,012 $ 8,954
Building and improvements 1,106 7,975
- -------------------------------------------------------------------------------
Assets held for disposal $ 3,118 $ 16,929
- -------------------------------------------------------------------------------
Six of the Company's closed stores remained unsold as of July 31, 2004. Three
of the properties are without signed agreements of sale and were reclassified
in the second quarter of fiscal 2004 to assets held for use at market value,
which is lower than cost adjusted for depreciation. The other three properties
have signed agreements of sale as of July 31, 2004 and therefore will remain in
assets held for disposal until the completion of those sales.
During the second quarter of 2004, the Company sold assets held for disposal
for proceeds of $3,652,000 resulting in a loss of $157,000 which was recorded
in discontinued operations on the consolidated statement of operations.
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.
13
NOTE 10. Pension and Savings Plan
Pension expense includes the following:
Thirteen weeks ended Twenty-six weeks ended
(dollar amounts in thousands) Pension Benefits Pension Benefits
- ----------------------------------------------------------------------- -----------------------
7/31/2004 8/2/2003 7/31/2004 8/2/2003
- ----------------------------------------------------------------------- -----------------------
Service cost $ 111 $ 153 $ 219 $ 306
Interest Cost 745 764 1,451 1,528
Expected return on plan assets (574) (516) (1,149) (1,032)
Amortization of transition obligation 41 68 82 137
Amortization of prior service cost 91 155 182 308
Amortization of net loss (gain) 422 431 866 861
FAS 88 settlement - - - 5,231
-------- -------- --------- ---------
Net periodic benefit cost $ 836 $ 1,055 $ 1,651 $ 7,339
======== ======== ========= =========
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 July 31, 2004, $903,000 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
contributions or 3% of the participant's compensation. The Company's savings
plans' contribution expense was $780,000 and $1,225,000 for the thirteen weeks
ending July 31, 2004 and August 31, 2003, respectively, and $1,807,000 and
$2,275,000 for the twenty-six weeks ending July 31, 2004 and August 31, 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 $212,000 and $429,000 for the thirteen and twenty-six weeks ending
July 31, 2004, respectively.
14
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 Twenty-six weeks ended
----------------------------------- ----------------------------------
July 31, 2004 Aug. 2, 2003 July 31, 2004 Aug. 2, 2003
-------------- --------------- -------------- ------------
(a) Net earnings (loss) from continuing operations
before cumulative effect of change in
accounting principle $ 13,515 $(14,178) $ 28,597 $(22,546)
Adjustment for interest on convertible senior
notes, net of income tax effect 1,001 - 2,003 -
- ---------------------------------------------------------------------------------------------------------------------------------
(b) Adjusted net earnings (loss) from continuing
operations before cumulative effect
of change in accounting principle $ 14,516 $(14,178) $ 30,600 $(22,546)
- ---------------------------------------------------------------------------------------------------------------------------------
(c) Average number of common shares outstanding
during period 57,875 51,816 56,410 51,733
Common shares assumed issued upon conversion of
convertible senior notes 6,697 - 6,697 -
Common shares assumed issued upon exercise
of dilutive stock options, net of assumed
repurchase, at the average market price 1,749 - 1,847 -
- ---------------------------------------------------------------------------------------------------------------------------------
(d) Average number of common shares assumed
outstanding during period 66,321 51,816 64,954 51,733
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share:
Net Earnings (Loss) From Continuing Operations
Before Cumulative Effect of Change in
Accounting Principle (a/c) $ 0.23 $ (0.27) $ 0.50 $ (0.43)
Discontinued Operations, Net of Tax (0.01) (0.40) (0.02) (0.39)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (0.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share $ 0.22 $ (0.67) $ 0.48 $ (0.87)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss)Per share:
Net Earnings (Loss) From Continuing Operations
Before Cumulative Effect of Change in
Accounting Principle (b/d) $ 0.22 $ (0.27) $ 0.47 $ (0.43)
Discontinued Operations, Net of Tax (0.01) (0.40) (0.02) (0.39)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - - (0.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share $ 0.20 $ (0.67) $ 0.45 $ (0.87)
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustments for the convertible senior notes were anti-dilutive during the
thirteen and twenty-six week periods ended August 2, 2003 and therefore
excluded from the computation of diluted EPS. Options to purchase 944,000 and
939,000 shares of common stock were outstanding at July 31, 2004 and
August 2, 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.
15
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 twenty-six week period
ending July 31, 2004 are as follows:
(dollar amounts in thousands)
- ------------------------------------------------------------------------
Beginning balance at January 31, 2004 $ 614
Additions related to current period sales 4,024
Warranty costs incurred in current period (2,727)
Adjustments to accruals related to
prior year sales -
- ------------------------------------------------------------------------
Ending Balance at July 31, 2004 $ 1,911
- ------------------------------------------------------------------------
NOTE 13. Debt and Financing Arrangements
In the second quarter of 2004, the Company reclassified $100,000,000
aggregate principal amount of 7.00% notes with a stated maturity date of
June 1, 2005 to current liabilities on the consolidated balance sheet.
In the second quarter of fiscal 2004, the Company prepaid $5,000,000 aggregate
principal amount of 6.71% Medium-Term Notes with a stated maturity date of
November 3, 2004.
In October 2001, the Company entered into a contractual commitment to purchase
media advertising services with equal annual purchase requirements totaling
$39,773,000 over four years. The minimum required purchases for 2004 and 2005
(the remaining two years of this commitment) are $8,112,000 and $7,457,000,
respectively. During the second quarter of fiscal 2004, it was determined that
the Company would be unable to meet this obligation for the 2004 contract year
which ends on November 30, 2004. As a result, the Company recorded a $1,579,000
charge to selling, general and administrative expenses in the quarter ending
July 31, 2004 related to the anticipated shortfall in this purchase commitment.
In May 2001, the Company sold certain operating assets for $14,000,000. The
assets were leased back from the purchaser in a lease structured as a one-year
term with three one-year renewal options. The resulting lease was accounted for
as an operating lease and the gain of $3,817,000 from the sale of certain
operating assets was deferred at the time of sale. In May 2004, the Company
repurchased these assets for $5,468,000. The remaining deferred gain of
$3,729,000 was netted against the purchase price of the repurchased assets
resulting in a net book value of $1,739,000 recorded on the consolidated
balance sheet as of July 31, 2004 for the repurchased assets.
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 fiscal 2004, the Company entered into arrangements with
certain of its vendors and banks to extend payment terms on certain merchandise
purchases. Under this program, the bank makes payments to the vendor based
upon a negotiated discount rate between the parties and the Company makes its
payment of the full payable to the bank at the extended payment term. As of
July 31, 2004, all obligations under these arrangements were fully satisfied
and the agreement was terminated.
16
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
July 31, 2004 and January 31, 2004 and the related consolidating statements of
operations for the thirteen and twenty-six weeks ended July 31, 2004 and
August 2, 2003 and condensed consolidating statements of cash flows for the
twenty-six weeks ended July 31, 2004 and August 2, 2003:
CONSOLIDATING BALANCE SHEET
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
July 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 64,968 $ 9,229 $ 9,696 $ - $ 83,893
Accounts receivable, net 21,729 18,626 - - 40,355
Merchandise inventories 205,549 390,902 - - 596,451
Prepaid expenses 25,628 15,224 8,780 (16,918) 32,714
Deferred income taxes 7,075 (1,234) 4,804 - 10,645
Other 19,347 8,411 49,672 - 77,430
Assets held for disposal 2,453 665 - - 3,118
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 346,749 441,823 72,952 (16,918) 844,606
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - at cost:
Land 87,405 175,794 - - 263,199
Buildings and improvements 311,968 596,171 - - 908,139
Furniture, fixtures and equipment 288,910 307,587 - - 596,497
Construction in progress 19,197 58 - - 19,255
- -----------------------------------------------------------------------------------------------------------------------------
707,480 1,079,610 - - 1,787,090
Less accumulated depreciation and amortization 376,038 497,835 - - 873,873
- -----------------------------------------------------------------------------------------------------------------------------
Property and Equipment - Net 331,442 581,775 - - 913,217
- -----------------------------------------------------------------------------------------------------------------------------
Investment in subsidiaries 1,481,807 - 1,203,717 (2,685,524) -
Intercompany receivable - 451,033 353,729 (804,762) -
Other 49,251 3,275 - - 52,526
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,209,249 $ 1,477,906 $ 1,630,398 $ (3,507,204) $ 1,810,349
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 335,881 $ 9 $ - $ - $ 335,890
Accrued expenses 38,572 84,854 138,323 (16,918) 244,831
Current maturities of long-term debt and
obligations under capital leases 147,258 - - - 147,258
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 521,711 84,863 138,323 (16,918) 727,979
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt and obligations under capital
leases, less current maturities 144,604 123 - - 144,727
Convertible long-term debt 150,000 - - - 150,000
Other long-term liabilities 11,614 26,808 - - 38,422
Intercompany liabilities 644,503 160,259 - (804,762) -
Deferred income taxes 28,132 12,365 - - 40,497
Deferred gain on sale leaseback 20 39 - - 59
Stockholders' Equity:
Common stock 68,557 1,501 101 (1,602) 68,557
Additional paid-in capital 284,465 240,359 200,398 (440,757) 284,465
Retained earnings 549,133 951,589 1,291,576 (2,243,165) 549,133
Common stock subscriptions receivable (144) - - - (144)
Accumulated other comprehensive income 1,098 - - - 1,098
- -----------------------------------------------------------------------------------------------------------------------------
903,109 1,193,449 1,492,075 (2,685,524) 903,109
Less:
Cost of shares in treasury 135,180 - - - 135,180
Cost of shares in benefits trust 59,264 - - - 59,264
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 708,665 1,193,449 1,492,075 (2,685,524) 708,665
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,209,249 $ 1,477,906 $ 1,630,398 $ (3,507,204) $ 1,810,349
- -----------------------------------------------------------------------------------------------------------------------------
17
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, less current maturities 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
- -----------------------------------------------------------------------------------------------------------------------------
18
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended July 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 169,204 $ 319,512 $ - $ - $ 488,716
Service Revenue 36,331 68,379 - - 104,710
Other Revenue - - 7,079 (7,079) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 205,535 387,891 7,079 (7,079) 593,426
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 121,495 225,754 - - 347,249
Costs of Service Revenue 27,942 52,759 - - 80,701
Costs of Other Revenue - - 10,326 (10,326) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 149,437 278,513 10,326 (10,326) 427,950
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 47,709 93,758 - - 141,467
Gross Profit from Service Revenue 8,389 15,620 - - 24,009
Gross Loss from Other Revenue - - (3,247) 3,247 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 56,098 109,378 (3,247) 3,247 165,476
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 48,621 84,741 85 3,247 136,694
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 7,477 24,637 (3,332) - 28,782
Non-operating (Expense) Income (4,890) 12,670 5,104 (12,414) 470
Interest Expense 13,440 6,774 - (12,414) 7,800
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes (10,853) 30,533 1,772 - 21,452
Income Tax (Benefit) Expense (4,016) 11,298 655 - 7,937
Equity in Earnings of Subsidiaries 19,671 - 20,774 (40,445) -
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings From Continuing Operations 12,834 19,235 21,891 (40,445) 13,515
Discontinued Operations, Net of Tax (171) (681) - - (852)
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 12,663 $ 18,554 $ 21,891 $ (40,445) $ 12,663
- -----------------------------------------------------------------------------------------------------------------------------
19
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Thirteen weeks ended August 2, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 154,518 $ 296,767 $ - $ - $ 451,285
Service Revenue 36,402 68,343 - - 104,745
Other Revenue - - 6,676 (6,676) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 190,920 365,110 6,676 (6,676) 556,030
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 119,831 225,570 - - 345,401
Costs of Service Revenue 28,919 52,396 - - 81,315
Costs of Other Revenue - - 10,762 (10,762) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 148,750 277,966 10,762 (10,762) 426,716
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 34,687 71,197 - - 105,884
Gross Profit from Service Revenue 7,483 15,947 - - 23,430
Gross Loss from Other Revenue - - (4,086) 4,086 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 42,170 87,144 (4,086) 4,086 129,314
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 40,251 98,635 77 4,086 143,049
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 1,919 (11,491) (4,163) - (13,735)
Non-operating (Expense) Income (4,492) 12,305 4,557 (11,519) 851
Interest Expense 14,897 6,225 - (11,519) 9,603
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes (17,470) (5,411) 394 - (22,487)
Income Tax (Benefit) Expense (6,421) (2,035) 147 - (8,309)
Equity in Earnings of Subsidiaries (19,896) - (3,602) 23,498 -
- -----------------------------------------------------------------------------------------------------------------------------
Net Loss From Continuing Operations (30,945) (3,376) (3,355) 23,498 (14,178)
Discontinued Operations, Net of Tax (3,990) (16,767) - - (20,757)
- -----------------------------------------------------------------------------------------------------------------------------
Net Loss $ (34,935) $ (20,143) $ (3,355) $ 23,498
$ (34,935)
- -----------------------------------------------------------------------------------------------------------------------------
20
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Twenty-six weeks ended July 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 329,466 $ 620,131 $ - $ - $ 949,597
Service Revenue 73,249 136,713 - - 209,962
Other Revenue - - 14,149 (14,149) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 402,715 756,844 14,149 (14,149) 1,159,559
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 235,844 436,779 - - 672,623
Costs of Service Revenue 54,488 104,764 - - 159,252
Costs of Other Revenue - - 17,490 (17,490) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 290,332 541,543 17,490 (17,490) 831,875
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 93,622 183,352 - - 276,974
Gross Profit from Service Revenue 18,761 31,949 - - 50,710
Gross Loss from Other Revenue - - (3,341) 3,341 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 112,383 215,301 (3,341) 3,341 327,684
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 95,563 167,157 195 3,341 266,256
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 16,820 48,144 (3,536) - 61,428
Non-operating (Expense) Income (9,365) 24,982 10,194 (24,749) 1,062
Interest Expense 29,448 12,399 - (24,749) 17,098
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes (21,993) 60,727 6,658 - 45,392
Income Tax (Benefit) Expense (8,138) 22,470 2,463 - 16,795
Equity in Earnings of Subsidiaries 41,393 - 40,753 (82,146) -
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings From Continuing
Operations 27,538 38,257 44,948 (82,146) 28,597
Discontinued Operations, Net of Tax (324) (1,059) - - (1,383)
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 27,214 $ 37,198 $ 44,948 $ (82,146) $ 27,214
- -----------------------------------------------------------------------------------------------------------------------------
21
CONSOLIDATING STATEMENT OF OPERATIONS
(dollar amounts in thousands)
(unaudited)
Non-
Subsidiary guarantor
Twenty-six weeks ended August 2, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
Merchandise Sales $ 296,765 $ 565,652 $ - $ - $ 862,417
Service Revenue 71,577 132,946 - - 204,523
Other Revenue - - 13,351 (13,351) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 368,342 698,598 13,351 (13,351) 1,066,940
- -----------------------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales 221,036 415,940 - - 636,976
Costs of Service Revenue 54,875 101,644 - - 156,519
Costs of Other Revenue - - 17,967 (17,967) -
- -----------------------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 275,911 517,584 17,967 (17,967) 793,495
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 75,729 149,712 - - 225,441
Gross Profit from Service Revenue 16,702 31,302 - - 48,004
Gross Loss from Other Revenue - - (4,616) 4,616 -
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit (Loss) 92,431 181,014 (4,616) 4,616 273,445
- -----------------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses 84,009 202,046 155 4,616 290,826
- -----------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 8,422 (21,032) (4,771) - (17,381)
Non-operating (Expense) Income (8,588) 24,337 9,815 (23,663) 1,901
Interest Expense 32,875 11,092 - (23,663) 20,304
- -----------------------------------------------------------------------------------------------------------------------------
(Loss) Earnings From Continuing Operations
Before Income Taxes and Cumulative Effect
of Change in Accounting Principle (33,041) (7,787) 5,044 - (35,784)
Income Tax (Benefit) Expense (12,186) (2,920) 1,868 - (13,238)
Equity in Earnings of Subsidiaries (20,047) - (1,478) 21,525 -
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings From Continuing
Operations Before Cumulative Effect of
Change in Accounting Principle (40,902) (4,867) 1,698 21,525 (22,546)
Discontinued Operations, Net of Tax (3,448) (16,771) - - (20,219)
Cumulative Effect of Change in
Accounting Principle, Net of Tax (899) (1,585) - - (2,484)
- -----------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings $ (45,249) $ (23,223) $ 1,698 $ 21,525 $ (45,249)
- -----------------------------------------------------------------------------------------------------------------------------
22
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollar amount in thousands)
(unaudited)
Non-
Subsidiary guarantor
Twenty-six weeks ended July 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $ 27,214 $ 37,199 $ 44,946 $ (82,145) $ 27,214
Net loss from discontinued operations (324) (1,059) - - (1,383)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Earnings from Continuing Operations 27,538 38,258 44,946 (82,145) 28,597
Adjustments to Reconcile Net Earnings from
Continuing Operations to Net Cash (Used In)
Provided by Continuing Operations:
Non-cash operating activities (24,575) 42,217 (40,308) 82,145 59,479
Change in operating assets and
liabilities (28,908) (31,516) (5,580) - (66,004)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by continuing
operations (25,945) 48,959 (942) - 22,072
Net Cash used in discontinued operations (137) (1,591) - - (1,728)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by
Operating Activities (26,082) 47,368 (942) - 20,344
Cash Flows from Investing Activities:
Net Cash Used in Investing Activities (11,501) (5,344) - - (16,845)
Cash Flows from Financing Activities:
Net Cash Provided by (Used in)
Financing Activities 58,622 (41,865) 2,653 - 19,410
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 21,039 159 1,711 - 22,909
Cash and Cash Equivalents at Beginning of Period 43,929 9,070 7,985 - 60,984
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 64,968 $ 9,229 $ 9,696 $ - $ 83,893
- ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(dollar amount in thousands)
(unaudited)
Non-
Subsidiary guarantor
Twenty-six weeks ended August 2, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net (loss) earnings $ (45,249) $ (23,336) $ 1,701 $ 21,635 $ (45,249)
Net loss from discontinued operations (3,091) (17,128) - - (20,219)
- ---------------------------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings from continuing
operations (42,158) (6,208) 1,701 21,635 (25,030)
Adjustments to Reconcile Net (Loss)
Earnings from Continuing Operations to
Net Cash Provided by Continuing Operations:
Non-cash operating activities 28,078 (4,053) 2,046 (21,635) 4,436
Change in operating assets and
liabilities 80,447 68,293 5,147 - 153,887
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 66,367 58,032 8,894 - 133,293
Net Cash provided by discontinued operations 2,201 1,932 - - 4,133
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 68,568 59,964 8,894 - 137,426
Cash Flows from Investing Activities:
Net Cash Used in Investing Activities (17,000) (2,468) - - (19,468)
Cash Flows from Financing Activities:
Net Cash (Used in) Provided by
Financing Activities (36,048) (57,045) 460 - (92,633)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 15,520 451 9,354 - 25,325
Cash and Cash Equivalents at Beginning of Period 32,654 9,714 402 - 42,770
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 48,174 $ 10,165 $ 9,756 $ - $ 68,095
- ---------------------------------------------------------------------------------------------------------------------------------
23
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 $108,854,000.
NOTE 17. Comprehensive Income
The following are the components of comprehensive income (loss):
Thirteen weeks ended Twenty-six weeks ended
--------------------------------- ----------------------------------
(Amounts in thousands) July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003
- -----------------------------------------------------------------------------------------------------
Net earnings (loss) $ 12,663 $ (34,935) $ 27,214 $ (45,249)
Other comprehensive
income, net of tax:
Derivative financial
instrument adjustments 53 3,900 1,113 3,900
- -----------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 12,716 $ (31,035) $ 28,327 $ (41,349)
- -----------------------------------------------------------------------------------------------------
The components of accumulated other comprehensive income (loss) are:
July 31, January 31,
2004 2004
----------- -------------
Derivative financial
instrument adjustment,
net of tax $ 2,502 $ 1,389
Minimum pension liability
adjustment, net of tax (1,404) (1,404)
----------- -------------
$ 1,098 $ (15)
----------- -------------
24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Restated
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 July 31, 2004
is an increase in other current assets of $1,317,000, an increase in
accumulated depreciation of $67,006,000, an increase in the deferred rent
liability of $9,930,000 and a decrease in deferred income tax liability of
$27,516,000. As a result, retained earnings at the end of fiscal quarter ended
July 31, 2004 decreased by $48,103,000. Depreciation expense from continuing
operations increased by $4,056,000 and $3,943,000 for the twenty-six weeks
ended July 31, 2004 and August 2, 2003, respectively. Rent expense from
continuing operations decreased by $470,000 and $594,000 for the twenty-six
weeks ended July 31, 2004 and August 2, 2003, respectively. The restatement
decreased reported diluted earnings per share and diluted loss per share by
$0.03 and $0.01 for the twenty-six weeks ended July 31, 2004 and August 2,
2003, respectively. 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. The restatement did not have
any impact on the Company's previously reported cash flows, sales or comparable
sales or on 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 and twenty-six weeks ended July 31, 2004, our comparative
sales increased by 6.9% and 8.8%, respectively, compared to (1.7)% and (3.5)%
for the thirteen and twenty-six weeks ended August 2, 2003, respectively. 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 $108,854,000. 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, 2004) and to
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 second quarter of fiscal 2004, we continued to reinvest in our
existing stores to completely redesign their interiors and enhance their
exterior appeal. Our new interior design features 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 provides customers with a clear and concise way of finding what
they need and will promote cross-selling. The most important of these changes
is to move all of our service desks and waiting areas inside the retail
stores adjacent to our tire offering displays. Modifications to the exterior of
our stores are designed to increase customer traffic.
The following discussion explains the material changes in our results of
operations for the thirteen and twenty-six weeks ended July 31, 2004 and
August 2, 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
Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
25
LIQUIDITY AND CAPITAL RESOURCES - July 31, 2004
- ------------------------------------------------
For the twenty-six weeks ended July 31, 2004, we increased our cash and cash
equivalents by $22,909,000 from the balance at January 31, 2004. This increase
was due primarily to the net proceeds from our March 24, 2004 common stock
offering offset, in part, by a decrease in accounts payable, an increase in
merchandise inventories, reductions of long-term debt and the payment of the
legal settlement discussed below in the first quarter of 2004.
We have used the $108,854,000 net proceeds from the common stock offering to
repay the outstanding balance under our existing line of credit (which was
used along with cash from operations to repay the $57,000,000 aggregate
principal amount of medium term notes that matured on March 3, 2004 and
March 10, 2004) and to prepay $20,919,000 aggregate principal amount
outstanding under our senior secured (equipment and real estate) credit
facility in the first quarter of 2004. The remaining balance will be applied to
store redesigns.
Our cash requirements arise principally from capital expenditures related to
existing stores, offices and warehouses and from the purchase of inventory. The
primary capital expenditures for the twenty-six weeks ended July 31, 2004 were
attributed to capital maintenance of our existing stores and offices including
store redesigns. During this period, we invested $28,830,000 in property and
equipment, which is a 35% increase from the amount invested in the same period
in the previous fiscal year. We estimate that capital expenditures related to
existing stores, warehouses and offices during the remainder of fiscal 2004
will be approximately $64,522,000, 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 $116,627,000
at July 31, 2004. At July 31, 2004, we had stockholders' equity of $708,665,000
and long-term debt, net of current maturities, of $294,727,000. Our long-term
debt was 29% of our total capitalization at July 31, 2004 and 42% at
January 31, 2004. As of July 31, 2004, we had an available line of credit
totaling $183,704,000.
In the second quarter of 2004, we reclassified $100,000,000 aggregate principal
amount of 7.00% notes with a stated maturity date of June 1, 2005 to current
liabilities on the consolidated balance sheet. We anticipate that we will
repurchase these notes with cash from operations and borrowing against our
existing line of credit.
In the second quarter of fiscal 2004, we prepaid $5,000,000 aggregate principal
amount of 6.71% Medium-Term Notes with a stated maturity date of November 3,
2004 from cash from operations.
In October 2001, we entered into a contractual commitment to purchase media
advertising services with equal annual purchase requirements totaling
$39,773,000 over four years. The minimum required purchases for 2004 and 2005
(the remaining two years of this commitment) are $8,112,000 and $7,457,000
respectively. During the second quarter of fiscal 2004, it was determined that
we would be unable to meet this obligation for the 2004 contract year which
ends on November 30, 2004. As a result, we recorded a $1,579,000 charge to
selling, general and administrative expenses in the quarter ended July 31,
2004 related to the anticipated shortfall in this purchase commitment.
In May 2001, we sold certain operating assets for $14,000,000. The assets were
leased back from the purchaser in a lease structured as a one-year term with
three one-year renewal options. The resulting lease was accounted for as an
operating lease and the gain of $3,817,000 from the sale of certain operating
assets was deferred at the time of sale. In May 2004, we repurchased these
assets for $5,468,000. The remaining deferred gain of $3,729,000 was netted
against the purchase price of the repurchased assets resulting in a net book
value of $1,739,000 recorded on the consolidated balance sheet as of July 31,
2004 for the repurchased assets.
In the first quarter of fiscal 2004, we prepaid $20,919,000 aggregate
principal amount of our senior secured (equipment and real estate) 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.
26
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 line of credit.
In the first quarter of fiscal 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 our payment of the
full payable to the bank at the extended payment term. As of July 31, 2004, all
obligations under these arrangements were fully satisfied and the agreement was
terminated.
In the third quarter of 2003, we 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. We
paid the settlement in the first quarter of fiscal 2004 from cash from
operations and our 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 of Financial Condition
and Results of Operations included in our Annual Report on Form 10-K for the
fiscal year ended January 31, 2004.
RESTRUCTURING
- -------------
Building upon the Profit Enhancement Plan launched in October 2000, we
conducted a comprehensive review of our operations including individual store
performance, the entire management infrastructure and our merchandise and
service offerings. On July 31, 2003, we announced several initiatives aimed
at realigning our business and continuing to improve upon our profitability.
These actions, including the disposal and sublease of the properties, were
substantially completed by July 31 ,2004 and costs were approximately
$66,752,000. We are 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 July 31, 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 - 80 90 170
Changes in assumptions
about future sublease
income, lease termination
and severance - 272 - 272
Cash payments (215) (473) (302) (990)
- ---------------------------------------------------------------------------------
Reserve balance at
July 31, 2004 $ 158 $ 2,247 $ 251 $ 2,656
- ---------------------------------------------------------------------------------
27
In accordance with SFAS No. 144, our discontinued operations reflect the
operating results for the 33 stores closed on July 31, 2003 as part of our
corporate restructuring.
Additionally, we have classified certain assets as assets held for disposal
on its consolidated balance sheets. As of July 31, 2004 and
January 31, 2004, these assets were as follows:
(Dollar amounts in thousands) July 31, 2004 Jan. 31, 2004
- -------------------------------------------------------------------------------
Land $ 2,012 $ 8,954
Building and improvements 1,106 7,975
- -------------------------------------------------------------------------------
Assets held for disposal $ 3,118 $ 16,929
- -------------------------------------------------------------------------------
Six of our closed stores remained unsold as of July 31, 2004. Three of the
properties are without signed agreements of sale and were reclassified in the
second quarter of fiscal 2004 to assets held for use at market value, which is
lower than cost adjusted for depreciation. The other three properties have
signed agreements of sale as of July 31, 2004 and therefore will remain in
assets held for disposal until the completion of those sales.
During the second quarter of 2004, we sold assets held for disposal for
proceeds of $3,652,000 resulting in a loss of $157,000 which was recorded in
discontinued operations on the consolidated statement of operations.
During the first quarter of 2004, we 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.
28
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
- ----------------------------------------------------------------------------------------------------------------
Thirteen weeks ended July 31, 2004 Aug. 2, 2003 Fiscal 2004 vs.
(Fiscal 2004) (Fiscal 2003) Fiscal 2003
- ----------------------------------------------------------------------------------------------------------------
Merchandise Sales 82.4% 81.2% 8.3 %
Service Revenue (1) 17.6 18.8 0.0
- ----------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 6.7
- ----------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales (2) 71.1 (3) 76.5 (3) 0.5
Costs of Service Revenue (2) 77.1 (3) 77.6 (3) (0.8)
- ----------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 72.1 76.7 0.3
- ----------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 28.9 (3) 23.5 (3) 33.6
Gross Profit from Service Revenue 22.9 (3) 22.4 (3) 2.5
- ----------------------------------------------------------------------------------------------------------------
Total Gross Profit 27.9 23.3 28.0
- ----------------------------------------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 23.0 25.7 (4.4)
- ----------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 4.9 (2.5) 309.6
Non-operating Income 0.0 0.1 (44.8)
Interest Expense 1.3 1.7 (18.8)
- ----------------------------------------------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations
Before Income Taxes 3.6 (4.1) 195.4
Income Tax Expense (Benefit) 37.0 (4) 37.0 (4) 195.5
- ----------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) from Continuing
Operations 2.3 (2.6) 195.3
Discontinued Operations, Net of Tax (0.2) (3.7) 95.9
Net Earnings (Loss) 2.1 (6.3) 136.2
- ----------------------------------------------------------------------------------------------------------------
<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>
29
Thirteen Weeks Ended July 31, 2004 vs. Thirteen Weeks Ended August 2, 2003
- -----------------------------------------------------------------------------
Total revenues for the second quarter increased 6.7%. This increase was due
primarily to an increase in comparable revenues (revenues generated by
locations in operation during the same period) of 6.9%. Comparable merchandise
sales increased 8.4% while comparable service revenue increased 0.3%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 28.9% in fiscal 2004 from 23.5% in fiscal 2003. This was a 33.6% or
$35,583,000 increase from the prior year. This increase, as a percentage of
merchandise sales, was due primarily to an increase in merchandise margins and
a decrease in store occupancy costs offset, in part, by an increase in
warehousing costs. The increase in merchandise margins was primarily due to the
impact of a $24,580,000 inventory write-down made in the second quarter of
fiscal 2003 associated with the corporate restructuring. The decrease in store
occupancy costs, as a percentage of merchandise sales, was due to the impact of
a charge made in 2003 for an asset impairment of $2,121,000 coupled with lower
rent, utilities and building maintenance expenses, as a percentage of
merchandise sales. The increase in warehousing costs, as a percentage of
merchandise sales, was a result of increased hauling and public storage costs.
Selling, general and administrative expenses decreased, as a percentage of
total revenues, to 23.0% in fiscal 2004 from 25.7% in fiscal 2003. This
decrease, as a percentage of total revenues, was due primarily to a decrease
in general office costs offset, in part, by an increase in net media expenses.
The decrease in general office costs was due primarily to the impact of charges
made in the second quarter 2003 of $6,500,000 and $5,613,000 for litigation
expenses and costs associated with the corporate restructuring, respectively.
The increase in net media expense, as a percentage of total revenues, was due
primarily to a decrease in cooperative advertising.
Interest expense decreased 18.8% or $1,803,000 due primarily to lower debt
levels.
Results from discontinued operations for the second quarter of 2004 was a loss
of $852,000 (net of tax) compared to a loss of $20,757,000 (net of tax) in the
second quarter of fiscal 2003. The loss recorded in the second quarter of
fiscal 2004 is primarily related to changes in estimated market values for
assets held for disposal and lease and maintenance costs related to stores
closed in the second quarter of fiscal 2003. The loss in fiscal 2003 was due
primarily to the charge associated with the closure of those stores.
Net earnings increased, as a percentage of total revenues, due primarily to
an increase in gross profit from merchandise sales, as a percentage of
merchandise sales, a decrease in selling, general and administrative expenses
and interest expense, as a percentage of total revenues, and the decrease in
the loss from discontinued operations.
30
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
- ----------------------------------------------------------------------------------------------------------------
Twenty-six weeks ended July 31, 2004 Aug. 2, 2003 Fiscal 2004 vs.
(Fiscal 2004) (Fiscal 2003) Fiscal 2003
- ----------------------------------------------------------------------------------------------------------------
Merchandise Sales 81.9% 80.8% 10.1 %
Service Revenue (1) 18.1 19.2 2.7
- ----------------------------------------------------------------------------------------------------------------
Total Revenues 100.0 100.0 8.7
- ----------------------------------------------------------------------------------------------------------------
Costs of Merchandise Sales (2) 70.8 (3) 73.9 (3) 5.9
Costs of Service Revenue (2) 75.8 (3) 76.5 (3) 2.3
- ----------------------------------------------------------------------------------------------------------------
Total Costs of Revenues 71.7 74.4 5.2
- ----------------------------------------------------------------------------------------------------------------
Gross Profit from Merchandise Sales 29.2 (3) 26.1 (3) 21.9
Gross Profit from Service Revenue 24.2 (3) 23.5 (3) 3.8
- ----------------------------------------------------------------------------------------------------------------
Total Gross Profit 28.3 25.6 18.7
- ----------------------------------------------------------------------------------------------------------------
Selling, General and Administrative
Expenses 23.0 27.3 (8.4)
- ----------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) 5.3 (1.7) 515.6
Non-operating Income 0.1 0.2 (44.1)
Interest Expense 1.5 1.9 (15.8)
- ----------------------------------------------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations
Before Income Taxes and Cumulative Effect
of Change in Accounting Principle 3.9 (3.4) 236.8
Income Tax (Benefit) Expense 37.0 (4) 37.0 (4) 236.8
- ----------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) from Continuing
Operations and Cumulative Effect of
Change in Accounting Principle 2.4 (2.1) 236.8
Discontinued Operations, Net of Tax (0.1) (1.9) 93.8
Cumulative Effect of Change in
Accounting Principle, Net of Tax 0.0 (0.2) 100.0
Net Earnings (Loss) 2.3 (4.2) 159.7
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) Service revenue consists of the labor charge for installing merchandise or
maintaining or repairing vehicles, excluding the sale of any installed parts or
materials.
(2) Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include
service center payroll and related employee benefits and service center
occupancy costs. Occupancy costs include utilities, rents, real estate and
property taxes, repairs and maintenance and depreciation and amortization
expenses.
(3) As a percentage of related sales or revenue, as applicable.
(4) As a percentage of earnings before income taxes.
</FN>
31
Twenty-six Weeks Ended July 31, 2004 vs. Twenty-six Weeks Ended August 2, 2003
- -------------------------------------------------------------------------------
Total revenues for the first twenty-six weeks increased 8.7%. This increase was
due primarily to an increase in comparable revenues (revenues generated by
locations in operation during the same period) of 8.8%. Comparable merchandise
sales increased 10.3%, while comparable service revenue increased 2.8%.
Gross profit from merchandise sales increased, as a percentage of merchandise
sales, to 29.2% in fiscal 2004 from 26.1% in fiscal 2003. This was a 21.9% or
$51,533,000 increase from the prior year. This increase, as a percentage of
merchandise sales, was due primarily to an increase in merchandise margins and
a decrease in store occupancy costs offset, in part, by an increase in
warehousing costs. The increase in merchandise margins was primarily due to the
impact of a $24,580,000 inventory write-down made in the second quarter of
fiscal 2003 associated with the corporate restructuring. The decrease in store
occupancy costs, as a percentage of merchandise sales, was due to the impact of
a charge made in 2003 for an asset impairment of $2,121,000 coupled with lower
rent, utilities and building maintenance expenses, as a percentage of
merchandise sales. The increase in warehousing costs, as a percentage of
merchandise sales, was a result of increased hauling and public storage costs.
Selling, general and administrative expenses decreased, as a percentage of
total revenues, to 23.0% in fiscal 2004 from 27.3% in fiscal 2003. This was an
8.4% or $24,570,000 decrease from the prior year. This decrease, as a
percentage of total revenues, was due primarily to a decrease in general
office costs and employee benefits offset, in part, by an increase in net media
expenses. The decrease in general office costs was due primarily to the impact
of charges made in fiscal 2003 of $26,500,000 and $5,613,000 for litigation
expenses and costs associated with the corporate restructuring, respectively.
The decrease in employee benefits is due primarily to the impact of a charge
made in 2003 for the settlement of a retirement plan obligation. The increase
in net media expense, as a percentage of total revenues was due primarily to
a decrease in cooperative advertising.
Interest expense decreased 15.8% or $3,206,000 due primarily to lower debt
levels.
Results from discontinued operations for 2004 was a loss of $1,383,000 (net of
tax) compared to a loss of $20,219,000 (net of tax) in 2003. The change was due
primarily to the discontinued stores being in operation through the second
quarter of 2003. The loss in 2004 is primarily related to changes in estimated
market values of assets held for disposal and lease and maintenance costs
related to stores closed in the second quarter of 2003. The loss in fiscal 2003
was due primarily to the charge associated with the closure of those stores.
Net earnings increased, as a percentage of total revenues, due primarily to
an increase in gross profit from merchandise sales, as a percentage of
merchandise sales, a decrease in selling, general and administrative expenses
and a decrease in interest expense, as a percentage of total revenues coupled
with a decrease in the loss from discontinued operations and the impact of a
net charge for the cumulative effect of a change in accounting principle for
the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations"
recorded in fiscal 2003.
32
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 Twenty-six weeks ended
---------------------------- -----------------------------
July 31, 2004 Aug. 31, 2003 July 31, 2004 Aug. 31, 2003
------------- ------------- ------------- -------------
(Dollar amounts in thousands) Amount Amount Amount Amount
- -----------------------------------------------------------------------------------------------------------------------------
Retail Revenues $ 359,612 $ 307,955 $ 696,661 $ 594,308
Service Center Revenues 233,814 248,075 462,898 472,632
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 593,426 $ 556,030 $ 1,159,559 $ 1,066,940
- -----------------------------------------------------------------------------------------------------------------------------
Gross Profit from Retail Revenues (1) $ 99,035 $ 63,964 $ 196,214 $ 140,040
Gross Profit from Service Center Revenues (1) 66,441 65,350 131,470 133,405
- -----------------------------------------------------------------------------------------------------------------------------
Total Gross Profit $ 165,476 $ 129,314 $ 327,684 $ 273,445
- -----------------------------------------------------------------------------------------------------------------------------
(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.
33
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-based compensation
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.
34
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 July 31, 2004, the Company had outstanding borrowings of
$187,000 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 July 31, 2004, the fair value of the interest rate swap was
$3,961,000 ($2,502,000 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 principal
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.
35
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.
36
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
An annual meeting of shareholders was held on June 2, 2004.
The shareholders elected the directors shown below.
Directors Elected at Annual Meeting of Shareholders
----------------------------------------------------
Name Votes For Votes Withheld
---- --------- --------------
Benjamin Strauss 42,690,487 16,227,167
Bernard J. Korman 44,635,995 14,281,657
J. Richard Leaman, Jr. 44,545,663 14,371,990
Malcolmn D. Pryor 43,378,654 15,538,999
Peter A. Bassi 43,506,989 15,410,665
Jane Scaccetti 44,558,394 14,359,259
John T. Sweetwood 44,673,554 14,244,099
William Leonard 43,544,111 15,373,543
Lawrence N. Stevenson 57,917,928 999,726
M. Shan Atkins 58,128,501 789,156
....................................................................
The shareholders also voted on the appointment of the Company's
independent auditors, Deloitte & Touche, LLP, with 58,153,631
affirmative votes, 700,407 negative votes and 63,607 abstentions.
....................................................................
The shareholders also voted on an amendment to the Company's Annual
Incentive Bonus Plan with 57,108,522 affirmative votes, 1,315,507
negative votes and 493,604 abstentions.
....................................................................
The shareholders also voted on a shareholder proposal regarding the
Company's Shareholder Rights Plan with 36,594,682 affirmative votes,
12,493,001 negative votes, 655,463 abstentions and 9,174,499 broker
nonvotes.
....................................................................
37
Item 5. Other Information
None.
Item 6. Exhibits
(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
38
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
39
INDEX TO EXHIBITS
- -----------------
(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
40