10-Q/A 1 r1qa04.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-Q/A (Amendment No. 1) (Mark One) (x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended May 1, 2004 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ----------- ---------- Commission File No. 1-3381 ------ The Pep Boys - Manny, Moe & Jack ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-0962915 ------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer ID number) incorporation or organization) 3111 W. Allegheny Ave. Philadelphia, PA 19132 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) 215-430-9000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ( x ) No ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ( x ) No ( ) As of May 29, 2004, there were 57,836,136 shares of the registrant's Common Stock outstanding. ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- EXPLANATORY NOTE As previously disclosed, on January 30, 2005, our Board of Directors, including our Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. These non-cash adjustments, which are similar to those recently announced by several restaurant and retail companies, will not have any impact on our previously reported cash flows, sales, comparable sales or our compliance with any financial covenant under our revolving credit facility or other debt instruments. This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to our Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2004, initially filed with the Securities and Exchange Commission (the "SEC") on June 10, 2004 (the "Original Filing"), is being filed to reflect restatements of (i) the Company's consolidated balance sheets at May 1, 2004 and January 31, 2004 and (ii) the Company's consolidated statements of operations, stockholders' equity and cash flows for the quarters ended May 1, 2004 and May 3, 2003, and the notes related thereto. For a more detailed description of these restatements, see Note 2, "Restatement of Financial Statements," to the accompanying consolidated financial statements and the section entitled "Restatement" in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q/A. For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety. However, this Form 10-Q/A only amends and restates Items 1,2 and 4 of Part I and Exhibit 12 of Item 6 of Part II of the Original Filing, in each case, solely as a result of, and to reflect, the Restatement, and no other information in the original filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as exhibits 31.1, 31.2, 32.1 and 32.2 respectively. Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. Other events occurring after the filing of the Original Filing or other disclosures necessary to reflect subsequent events have been or will be addressed in our amended Quarterly Report on Form 10-Q/A for the quarterly periods ended July 31, 2004 and October 31, 2004 which are being filed concurrently with the filing of this Form 10-Q/A and any reports filed with the SEC subsequent to the date of this filing. We have not amended and do not intend to amend our previously-filed Annual Reports on Form 10-k or our Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended prior to January 31, 2004. For this reason, the consolidated financial statements, auditors' reports and related financial information for the affected periods contained in such reports should no longer be relied upon. 1 ------------------------------------------------------------------- Index Page ------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets (As restated) - May 1, 2004 and January 31, 2004 3 Consolidated Statements of Operations (As Restated) - Thirteen weeks ended May 1, 2004 and May 3, 2003 4 Consolidated Statements of Cash Flows (As Restated) - Thirteen weeks ended May 1, 2004 and May 3, 2003 5 Notes to Condensed Consolidated Financial Statements 6-21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22-29 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Item 4. Controls and Procedures 30 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32 Item 3. Defaults Upon Senior Securities 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 SIGNATURES 33 INDEX TO EXHIBITS 34 2
PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited) THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - (As Restated, See Note 2) (dollar amounts in thousands, except per share amounts) UNAUDITED May 1, 2004 Jan.31, 2004* ----------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 98,766 $ 60,984 Accounts receivable, net 33,989 30,562 Merchandise inventories 601,415 553,562 Prepaid expenses 38,277 39,480 Deferred income taxes 11,175 20,826 Other 79,950 81,096 Assets held for disposal 10,350 16,929 ----------------------------------------------------------------------------------------------------- Total Current Assets 873,922 803,439 ----------------------------------------------------------------------------------------------------- Property and Equipment-at cost: Land 263,199 263,907 Buildings and improvements 900,159 899,114 Furniture, fixtures and equipment 592,218 586,607 Construction in progress 11,641 12,800 ----------------------------------------------------------------------------------------------------- 1,767,217 1,762,428 Less accumulated depreciation and amortization 856,994 839,219 ----------------------------------------------------------------------------------------------------- Property and Equipment - Net 910,223 923,209 ----------------------------------------------------------------------------------------------------- Other 52,286 51,398 ----------------------------------------------------------------------------------------------------- Total Assets $1,836,431 $1,778,046 ----------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 366,360 $ 342,584 Accrued expenses 244,549 267,565 Short-term borrowings 4,505 - Current maturities of long-term debt and obligations under capital leases 51,023 117,063 ----------------------------------------------------------------------------------------------------- Total Current Liabilities 666,437 727,212 ----------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 244,552 258,016 Convertible long-term debt 150,000 150,000 Other long-term liabilities 38,851 39,201 Deferred income taxes 35,309 29,976 Deferred gain on sale leaseback 3,805 3,907 Commitments and Contingencies Stockholders' Equity: Common Stock, par value $1 per share: Authorized 500,000,000 shares; Issued 68,557,041 shares and 63,910,577 shares 68,557 63,911 Additional paid-in capital 283,912 177,317 Retained earnings 541,203 531,933 Accumulated other comprehensive income (loss) 1,045 (15) ----------------------------------------------------------------------------------------------------- 894,717 773,146 Less cost of shares in treasury - 8,545,885 shares and 8,928,159 shares 137,976 144,148 Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264 ----------------------------------------------------------------------------------------------------- Total Stockholders' Equity 697,477 569,734 ----------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $1,836,431 $1,778,046 ---------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. * Taken from restated audited financial statements as of January 31, 2004 as filed on Form 10-K/A
3
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - (As Restated, See Note 2) (dollar amounts in thousands, except per share amounts) UNAUDITED Thirteen weeks ended ------------------------------------------------ May 1, 2004 May 3, 2003 ------------------- ------------------- --------------------------------------------------------------------------------------------------------- Merchandise Sales $ 460,881 $ 411,132 Service Revenue 105,252 99,778 --------------------------------------------------------------------------------------------------------- Total Revenues 566,133 510,910 --------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 325,374 291,575 Costs of Service Revenue 78,551 75,204 --------------------------------------------------------------------------------------------------------- Total Costs of Revenues 403,925 366,779 --------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 135,507 119,557 Gross Profit from Service Revenue 26,701 24,574 --------------------------------------------------------------------------------------------------------- Total Gross Profit 162,208 144,131 --------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 129,562 147,777 --------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 32,646 (3,646) Non-operating Income 592 1,050 Interest Expense 9,298 10,701 --------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle 23,940 (13,297) Income Tax Expense (Benefit) 8,858 (4,929) --------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 15,082 (8,368) (Loss) Earnings from Discontinued Operations, Net of Tax (531) 538 Cumulative Effect of Change in Accounting Principle, Net of Tax - (2,484) --------------------------------------------------------------------------------------------------------- Net Earnings (Loss) 14,551 (10,314) Retained Earnings, beginning of period 531,933 586,735 Cash Dividends (3,898) (3,487) Effect of Stock Options (1,383) (71) Dividend Reinvestment Plan - (274) --------------------------------------------------------------------------------------------------------- Retained Earnings, end of period $ 541,203 $ 572,589 --------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share: Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle $ 0.27 $ (0.16) (Loss) Earnings From Discontinued Operations, Net of Tax (0.01) .01 Cumulative Effect of Change in Accounting Principle, Net of Tax - (0.05) --------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share $ 0.26 $ (0.20) --------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share: Net Earnings (Loss) From Continuing Operations Before Cumulative Effect of Change in Accounting Principle $ 0.25 $ (0.16) (Loss) Earnings From Discontinued Operations, Net of Tax (0.01) 0.01 Cumulative Effect of Change in Accounting Principle, Net of Tax - (0.05) --------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share $ 0.24 $ (0.20) --------------------------------------------------------------------------------------------------------- Cash Dividends Per Share $ .0675 $ .0675 --------------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements.
4
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (As Restated, See Note 2) (dollar amounts in thousands) UNAUDITED Thirteen Weeks Ended May 1, 2004 May 3, 2003 --------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net earnings (loss) $ 14,551 $ (10,314) Net (loss) earnings from discontinued operations (531) 538 --------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from continuing operations 15,082 (10,852) Adjustments to Reconcile Net Earnings (Loss) From Continuing Operations to Net Cash Provided by Continuing Operations: Depreciation and amortization 18,796 19,802 Cumulative effect of change in accounting principle, net of tax - 2,484 Accretion of asset disposal obligation 35 49 Stock compensation expense 698 - Deferred income taxes 13,848 (3,167) Deferred gain on sale leaseback (102) (3) Loss from sale of assets 391 19 Changes in Operating Assets and Liabilities: Decrease in accounts receivable, prepaid expenses and other 2,126 5,538 Increase in merchandise inventories (47,853) (33,075) Increase in accounts payable 30,689 44,791 (Decrease) increase in accrued expenses (23,347) 21,547 (Decrease) increase in other long-term liabilities (350) (39) --------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 10,013 47,094 Net cash (used in) provided by discontinued operations (776) 1,109 --------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 9,237 48,203 --------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (7,683) (8,565) Proceeds from sales of assets 1,411 745 Proceeds from sales of assets held for disposal 6,879 1,146 --------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities 607 (6,674) --------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net (payments) borrowings under line of credit agreements (40) 10,631 Repayments of short-term borrowings (2,408) - Payments on capital lease obligations (41) (112) Reduction of long-term debt (79,423) (10,503) Dividends paid (3,898) (3,487) Net proceeds from sale of common stock 108,909 - Proceeds from exercise of stock options 4,561 39 Proceeds from dividend reinvestment plan 278 322 --------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 27,938 (3,110) --------------------------------------------------------------------------------------------------------------- Net Increase in Cash 37,782 38,419 Cash and Cash Equivalents at Beginning of Period 60,984 42,770 --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 98,766 $ 81,189 --------------------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements.
5 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (As Restated, See Note 2) NOTE 1. Condensed Consolidated Financial Statements The consolidated balance sheets as of May 1, 2004, the consolidated statements of operations and the consolidated statements of cash flows for the thirteen week periods ended May 1, 2004 and May 3, 2003 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at May 1, 2004 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's restated Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. The results of operations for the thirteen week period ended May 1, 2004 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation. NOTE 2. Restatement of Financial Statements Subsequent to the issuance of the Company's fiscal 2003 financial statements, the Company's management reviewed its lease-related accounting policies and determined to correct its computation of depreciation, straight-line rent expense and the related deferred rent liability. As a result, on January 30, 2005, the Company's Board of Directors, including the Company's Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. The primary effect of the corrections is to accelerate the depreciation of leasehold improvements of leased properties where the initial lease term is shorter than the estimated useful economic life of those assets and rental expense on properties we occupied before payment of rents was required. The cumulative effect of the restatement through fiscal quarter ended May 1, 2004 is an increase in other current assets of $652,000, an increase in accumulated depreciation of $64,972,000, an increase in the deferred rent liability of $10,165,000 and a decrease in deferred income tax liability of $27,516,000. As a result, retained earnings at the end of fiscal quarter ended May 1, 2004 decreased by $46,969,000. Depreciation expense from continuing operations increased by $2,021,000 and $2,065,000 and rent expense from continuing operations decreased by $235,000 and $310,000 for the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively. The Restatement increased reported diluted loss per share by $0.02,for the thirteen weeks ended May 1, 2004 and May 3, 2003. The cumulative effect of the Restatement for all years prior to fiscal 2001 was $34,812,000, which was recorded as an adjustment to opening stockholders' equity at February 2, 2002 in the Company's restated Annual Report as of January 31, 2004 on Form 10-K/A. The restatement did not have any impact on the Company's previously reported cash flows, sales or comparable sales or the Company's compliance with any covenant under the Company's line of credit facility or other debt instruments. The consolidated financial statements included in this Form 10-Q/A have been restated to reflect the adjustments described above. The restatement has been set forth, for the periods presented, in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004 which we are filing concurrently with this Form 10-Q/A. 6 The following is a summary of the impact of the Restatement on (i) the Company's consolidated balance sheets at May 1, 2004 and January 31, 2004 and (ii) the Company's consolidated statements of operations for the fiscal quarters ended May 1, 2004 and May 3, 2003. We have not presented a summary of the impact of the Restatement on the consolidated statements of cash flows for any of the above-referenced fiscal periods because the net impact for each such fiscal period is zero.
(dollar amounts in thousands) As Previously May 1, 2004 Reported Adjustments As Restated ------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheet Other $ 79,298 $ 652 $ 79,950 Total Current Assets 873,270 652 873,922 Accumulated depreciation and amortization 792,022 64,972 856,994 Property and equipment, net 975,195 (64,972) 910,223 Total Assets 1,900,751 (64,320) 1,836,431 Other long-term liabilities 28,686 10,165 38,851 Deferred income taxes 62,825 (27,516) 35,309 Retained earnings 588,172 (46,969) 541,203 Total Stockholders'Equity 744,446 (46,969) 697,477 Total Liabilities and Stockholders' Equity 1,900,751 (64,320) 1,836,431
As Previously January 31, 2004 Reported Adjustments As Restated -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheet Accumulated depreciation and amortization $ 776,242 $ 62,977 $ 839,219 Property and equipment, net 986,186 (62,977) 923,209 Total Assets 1,841,023 (62,977) 1,778,046 Other long-term liabilities 28,802 10,399 39,201 Deferred income taxes 57,492 (27,516) 29,976 Retained earnings 577,793 (45,860) 531,933 Total Stockholders'Equity 615,594 (45,860) 569,734 Total Liabilities and Stockholders' Equity 1,841,023 (62,977) 1,778,046
As Previously Thirteen weeks ended May 1, 2004 Reported Adjustments As Restated -------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings Costs of Merchandise Sales $ 324,054 $ 1,320 $ 325,374 Costs of Service Revenue 78,111 440 78,551 Total Costs of revenue 402,165 1,760 403,925 Gross Profit from Merchandise Sales 136,827 (1,320) 135,507 Gross Profit from Service Revenue 27,141 (440) 26,701 Total Gross Profit 163,968 (1,760) 162,208 Operating Profit 34,406 (1,760) 32,646 Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle 25,700 (1,760) 23,940 Income Tax Expense 9,509 (651) 8,858 Earnings Before Cumulative Effect of Change in Accounting Principle 16,191 (1,109) 15,082 Net Earnings 15,660 (1,109) 14,551 Basic Earnings Per Share: Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 0.29 (0.02) 0.27 Basic Earnings Per Share 0.28 (0.02) 0.26 Diluted Earnings Per Share: Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 0.27 (0.02) 0.25 Diluted Earnings Per Share 0.26 (0.02) 0.24
As Previously Thirteen weeks ended May 3, 2003 Reported Adjustments As Restated -------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings Costs of Merchandise Sales $ 290,340 $ 1,235 $ 291,575 Costs of Service Revenue 74,772 432 75,204 Total Costs of revenue 365,112 1,667 366,779 Gross Profit from Merchandise Sales 120,792 (1,235) 119,557 Gross Profit from Service Revenue 25,006 (432) 24,574 Total Gross Profit 145,798 (1,667) 144,131 Operating Loss (1,979) (1,667) (3,646) Loss Before Income Taxes and Cumulative Effect of Change in Accounting Principle (11,630) (1,667) (13,297) Income Tax Benefit (4,303) (626) (4,929) Loss Before Cumulative Effect of Change in Accounting Principle (7,327) (1,041) (8,368) Discontinued Operations, Net of Tax 594 (56) 538 Cumulative Effect of Change in Net Loss (9,217) (1,097) (10,314) Basic Loss Per Share: Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (0.14) (0.02) (0.16) Basic Earnings Per Share (0.18) (0.02) (0.20) Diluted Loss Per Share: Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (0.14) (0.02) (0.16) Diluted Loss Per Share (0.18) (0.02) (0.20)
In addition, certain amounts in Notes 3,7,8,9,11,14 and 17 have been restated to reflect the Restatement adjustments described above. 7 NOTE 3. Accounting for Stock-Based Compensation The Company accounts for its stock-based employee compensation plans in accordance with the recognition and measurement principles of Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. For all stock option plans, no stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In the first quarter of 2004, the Company issued restricted stock unit awards to certain employees. The recorded expense for these awards under the intrinsic method was $698,000 ($439,000,net of tax) for the thirteen weeks ended May 1, 2004. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
(dollar amounts in thousands, except per share amounts) Thirteen weeks ended May 1, 2004 May 3, 2003 ------------------------------------------------------------------------------- Net (loss) earnings: As reported $ 14,551 $ (10,314) Add: Stock compensation expense, net of tax 439 - Less: Total stock-based compensation expense determined under fair value-based method, net of tax (1,302) (811) ------------------------------------------------------------------------------- Pro forma $ 13,688 $ (11,125) ------------------------------------------------------------------------------- Net earnings (loss) per share: Basic: As reported $ .26 $ (.20) Pro forma $ .25 $ (.22) ------------------------------------------------------------------------------- Diluted: As reported $ .24 $ (.20) Pro forma $ .23 $ (.22) -------------------------------------------------------------------------------
8 The fair value of each option granted during the periods ending May 1, 2004 and May 3, 2003 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Thirteen weeks ended May 1, 2004 May 3, 2003 ----------------------------------------------------------------- Dividend yield 1.67% 1.57% Expected volatility 41% 42% Risk-free interest rate range: high 4.07% 5.3% low 1.97% 2.0% Ranges of expected lives in years 4-8 4-8 -----------------------------------------------------------------
NOTE 4. New Accounting Standards In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. We have adopted the disclosure requirements of this statement. In March 2004, the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB Statements No. 123 and 95." The proposed standard would require companies to expense share-based payments to employees, including stock options, based on the fair value of the award at the grant date. The proposed statement would eliminate the intrinsic value method of accounting for stock options permitted by APB (Accounting Principles Board) No. 25, "Accounting for Stock Issued to Employees," which we currently follow. We will continue to monitor the actions of the FASB and assess the impact, if any, on our consolidated financial statements. NOTE 5. Merchandise Inventories Merchandise inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management's estimates of expected fiscal year-end inventory levels and costs. Replacement cost, which approximates FIFO cost was $578,151,000 and $531,830,000 at May 1, 2004 and January 31, 2004, respectively. NOTE 6. Accrued Expenses The Company's accrued expenses for the periods ending May 1, 2004 and January 31, 2004 were as follows:
(dollar amounts in thousands) May 1, 2004 Jan. 31, 2004 --------------------------------------------------------------------- Medical and casualty risk participation reserve $ 131,168 $ 136,599 Accrued compensation and related taxes 42,890 51,043 Legal Reserves 1,577 26,576 Other 68,914 53,347 --------------------------------------------------------------------- Total $ 244,549 $ 267,565 ---------------------------------------------------------------------
9 NOTE 7. Other Current Assets The Company's other current assets for the periods ending May 1, 2004 and January 31, 2004 were as follows:
(dollar amounts in thousands) May 1, 2004 Jan. 31, 2004 --------------------------------------------------------------------- Reinsurance premiums receivable $ 64,626 $ 67,326 Income taxes receivable 15,135 13,517 Other 189 253 --------------------------------------------------------------------- Total $ 79,950 $ 81,096 ---------------------------------------------------------------------
NOTE 8. Restructuring Building upon the Profit Enhancement Plan launched in October 2000, the Company, during fiscal 2003, conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon the Company's profitability. The Company expects these actions, including the disposal and sublease of the Company's real properties, to be substantially completed by the end of the second quarter 2004 and estimates the costs, including future costs that were not accrued, to be approximately $66,752,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Reserve Summary The following chart details the reserve balances through May 1, 2004. The reserve includes remaining rent on leases net of sublease income, other contractual obligations associated with leased properties and employee severance.
(dollar amounts Lease Contractual in thousands) Severance Expenses Obligations Total ------------------------------------------------------------------------------- Reserve balance at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204 Provision for present value of liabilities - 41 47 88 Changes in assumptions about future sublease income, lease termination, contractual obligations and severance - - - - Cash payments (213) (253) (171) (637) ------------------------------------------------------------------------------- Reserve Balance at May 1, 2004 $ 160 $ 2,156 $ 339 $ 2,655 -------------------------------------------------------------------------------
10 NOTE 9. Discontinued operations In accordance with SFAS No. 144, the Company's discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company's corporate restructuring. The results for the thirteen weeks ended May 1, 2004 and May 3, 2003 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results: Thirteen weeks ended ---------------------------- May 1, 2004 May 3, 2003 ------------ ------------- (dollar amounts in thousands) Amount Amount --------------------------------------------------------------------------------------------- Total Revenues $ 1 $ 18,306 Total Gross (Loss) Profit (804) 4,918 Selling, General and Administrative Expenses 40 4,065 (Loss) Earnings from Discontinued Operations Before Income Taxes (844) 854 Net (Loss) Earnings from Discontinued Operations, Net of Tax $ (531) $ 538 ---------------------------------------------------------------------------------------------
Additionally, the Company has made certain reclassifications to its consolidated balance sheets to reflect the assets held for disposal and assets from discontinued operations associated with the 33 stores closed on July 31, 2003. As of May 1, 2004 and January 31, 2004, these reclassifications were as follows: (Dollar amounts in thousands) May 1, 2004 Jan. 31, 2004 ------------------------------------------------------------------------------------------------ Land $ (4,425) $ (8,954) Building and improvements (5,925) (7,975) ------------------------------------------------------------------------------------------------ Property and equipment $(10,350) $(16,929) ------------------------------------------------------------------------------------------------ Assets held for disposal $ 10,350 $ 16,929 ------------------------------------------------------------------------------------------------
During the first quarter of 2004, the Company sold assets held for disposal for proceeds of $6,879,000 resulting in a gain of $172,000 which was recorded in discontinued operations on the consolidated statement of operations. 11 NOTE 10. Pension and Savings Plan Pension expense includes the following: Thirteen weeks ended (dollar amounts in thousands) Pension Benefits ----------------------------------------------------------------------- 5/1/2004 5/3/2003 ----------------------------------------------------------------------- Service cost $ 108 $ 153 Interest Cost 706 764 Expected return on plan assets (575) (516) Amortization of transition obligation 41 69 Amortization of prior service cost 91 153 Amortization of net loss (gain) 444 430 FAS 88 settlement - 5,231 -------- -------- Net periodic benefit cost $ 815 $ 6,284 ======== ========
The Company previously disclosed in its financial statements for the fiscal year ended January 31, 2004 that it expected to contribute $1,055,000 to its pension plan in fiscal 2004. As of May 1, 2004, $276,000 of contributions have been made. The Company anticipates no change in expected total contributions for fiscal 2004. The Company has 401(k) savings plans which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant's contribution's or 3% of the participant's compensation. The Company's savings plans' contribution expense was $1,026,000 and $1,050,000 for the fiscal quarters ending May 1, 2004 and May 3, 2003 respectively. On January 31, 2004, the Company amended and restated its Executive Supplemental Retirement Plan (SERP). This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants. All vested participants will continue to accrue benefits according to the previous defined benefit formula. The Company's contribution expense for the defined contribution portion of the plan was $217,000 for the fiscal quarter ended May 1, 2004. 12
NOTE 11. Net Earnings Per Share THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (in thousands, except per share amounts) UNAUDITED Thirteen weeks ended ----------------------------------- May 1, 2004 May 3, 2003 -------------- --------------- (a) Net earnings (loss) from continuing operations before cumulative effect of change in accounting principle $ 15,082 $ (8,368) Adjustment for interest on convertible senior notes, net of income tax effect 1,001 - ------------------------------------------------------------------------------------------- (b) Adjusted net earnings (loss) from continuing operations before cumulative effect of change in accounting principle $ 16,083 $ (8,368) ------------------------------------------------------------------------------------------- (c) Average number of common shares outstanding during period 54,945 51,652 Common shares assumed issued upon conversion of convertible senior notes 6,697 - Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price 1,945 - ------------------------------------------------------------------------------------------- (d) Average number of common shares assumed outstanding during period 63,587 51,652 ------------------------------------------------------------------------------------------- Basic earnings (loss) per share: Continuing operations, before cumulative effect of change in accounting principle (a/c) $ 0.27 $ (0.16) (Loss) Earnings from discontinued operations, net of tax (0.01) 0.01 Cumulative effect of change in accounting principle - (0.05) ------------------------------------------------------------------------------------------- Basic earnings (loss) per share $ 0.26 $ (0.20) ------------------------------------------------------------------------------------------- Diluted earnings (loss) per share: Continuing operations, before cumulative effect of change in accounting principle (b/d) $ 0.25 $ (0.16) (Loss) earnings from discontinued operations, net of tax (0.01) 0.01 Cumulative effect of change in accounting principle - (0.05) ------------------------------------------------------------------------------------------- Diluted earnings (loss) per share $ 0.24 $ (0.20) -------------------------------------------------------------------------------------------
Adjustments for the convertible senior notes were anti-dilutive during the thirteen week period ended May 3, 2003 and therefore excluded from the computation of diluted EPS. Options to purchase 942,000 and 5,575,000 shares of common stock were outstanding at May 1, 2004 and May 3, 2003, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares on such dates. Restricted stock units of 124,000 equivalent shares were anti-dilutive and excluded from the calculation during the period ended May 1, 2004. 13 NOTE 12. Warranty Reserve The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by its vendors, with the Company covering any costs above the vendor's stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions. Components of the reserve for warranty costs for the thirteen week period ending May 1, 2004 are as follows:
(dollar amounts in thousands) ------------------------------------------------------------------------ Beginning balance at January 31, 2004 $ 614 Additions related to current period sales 1,326 Warranty costs incurred in current period (1,326) Adjustments to accruals related to prior year sales - ------------------------------------------------------------------------ Ending Balance at May 1, 2004 $ 614 ------------------------------------------------------------------------
NOTE 13. Debt and Financing Arrangements In the first quarter of fiscal 2004, the Company prepaid $20,919,000 aggregate principal amount of its Senior Secured Credit Facility with a stated maturity date of July 1, 2006. In the first quarter of fiscal 2004, the Company retired $32,000,000 aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a stated maturity date of March 3, 2004. In the first quarter of 2004, the Company has entered into arrangements with certain of its vendors and banks to extend payment terms on certain merchandise purchases. Under this program, the bank makes payments to the vendor based upon a negotiated discount rate between the parties and the Company makes it payment of the full payable to the bank at the extended payment term. As of May 1, 2004, there was $4,505,000 outstanding under these arrangements, which was recorded in short-term borrowings on the consolidated balance sheets. 14 NOTE 14. Supplemental Guarantor Information - Convertible Senior Notes On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of 4.25% Convertible Senior Notes. The notes are jointly and severally and fully and unconditionally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The following are consolidating balance sheets of the Company as of May 1, 2004 and January 31, 2004 and the related consolidating statements of operations and consolidating statements of cash flows for the thirteen weeks ended May 1, 2004 and May 3, 2003:
CONSOLIDATING BALANCE SHEET (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 78,575 $ 11,179 $ 9,012 $ - $ 98,766 Accounts receivable, net 17,668 16,321 - - 33,989 Merchandise inventories 204,603 396,812 - - 601,415 Prepaid expenses 23,775 14,285 14,015 (13,798) 38,277 Deferred income taxes 7,804 (1,297) 4,668 - 11,175 Other 19,552 7,928 52,470 - 79,950 Assets held for disposal 6,706 3,644 - 10,350 ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 358,683 448,872 80,165 (13,798) 873,922 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 87,405 175,794 - - 263,199 Buildings and improvements 308,375 591,784 - - 900,159 Furniture, fixtures and equipment 288,173 304,045 - - 592,218 Construction in progress 11,626 15 - - 11,641 ----------------------------------------------------------------------------------------------------------------------------- 695,579 1,071,638 - - 1,767,217 Less accumulated depreciation and amortization 370,336 486,658 - - 856,994 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - Net 325,243 584,980 - - 910,223 ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,462,133 - 1,182,944 (2,645,077) - Intercompany receivable - 407,871 353,275 (761,146) - Other 49,073 3,213 - - 52,286 ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,195,132 $ 1,444,936 $ 1,616,384 $ (3,420,021) $ 1,836,431 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 366,351 $ 9 $ - $ - $ 366,360 Accrued expenses 42,794 69,356 146,197 (13,798) 244,549 Short-term borrowings 4,505 - - - 4,505 Current maturities of long-term debt and obligations under capital leases 51,023 - - - 51,023 ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 464,673 69,365 146,197 (13,798) 666,437 ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 243,963 589 - - 244,552 Convertible long-term debt 150,000 - - - 150,000 Other long-term liabilities 11,965 26,886 - - 38,851 Intercompany liabilities 597,546 163,600 - (761,146) - Deferred income taxes 28,376 6,933 - - 35,309 Deferred gain on sale leaseback 1,132 2,673 - - 3,805 Stockholders' Equity: Common stock 68,557 1,501 101 (1,602) 68,557 Additional paid-in capital 283,912 240,359 200,398 (440,757) 283,912 Retained earnings 541,203 933,030 1,269,688 (2,202,718) 541,203 Accumulated other comprehensive loss 1,045 - - - 1,045 ----------------------------------------------------------------------------------------------------------------------------- 894,717 1,174,890 1,470,187 (2,645,077) 894,717 Less: Cost of shares in treasury 137,976 - - - 137,976 Cost of shares in benefits trust 59,264 - - - 59,264 ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 697,477 1,174,890 1,470,187 (2,645,077) 697,477 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,195,132 $ 1,444,936 $ 1,616,384 $ (3,420,021) $ 1,836,431 -----------------------------------------------------------------------------------------------------------------------------
15
CONSOLIDATING BALANCE SHEET (dollar amounts in thousands) Non- Subsidiary guarantor January 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 43,929 $ 9,070 $ 7,985 $ - $ 60,984 Accounts receivable, net 14,573 15,989 - - 30,562 Merchandise inventories 191,111 362,451 - - 553,562 Prepaid expenses 25,860 16,714 17,656 (20,750) 39,480 Deferred income taxes 7,224 8,354 5,248 - 20,826 Other 17,891 7,457 55,748 - 81,096 Assets held for disposal 8,083 8,846 - - 16,929 ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 308,671 428,881 86,637 (20,750) 803,439 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 87,484 176,423 - - 263,907 Buildings and improvements 308,066 591,048 - - 899,114 Furniture, fixtures and equipment 286,472 300,135 - - 586,607 Construction in progress 12,800 - - - 12,800 ----------------------------------------------------------------------------------------------------------------------------- 694,822 1,067,606 - - 1,762,428 Less accumulated depreciation and amortization 363,652 475,567 - - 839,219 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - Net 331,170 592,039 - - 923,209 ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,440,412 - 1,162,965 (2,603,377) - Intercompany receivable - 410,107 356,382 (766,489) - Other 48,240 3,158 - - 51,398 ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,128,493 $ 1,434,185 $ 1,605,984 $ (3,390,616) $ 1,778,046 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 342,575 $ 9 $ - $ - $ 342,584 Accrued expenses 43,670 85,790 158,855 (20,750) 267,565 Current maturities of long-term debt and obligations under capital leases 117,063 - - - 117,063 ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 503,308 85,799 158,855 (20,750) 727,212 ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 257,983 33 - - 258,016 Convertible long-term debt 150,000 - - - 150,000 Other long-term liabilities 12,287 26,914 - - 39,201 Intercompany liabilities 607,168 159,321 - (766,489) - Deferred income taxes 26,856 3,120 - - 29,976 Deferred gain on sale leaseback 1,157 2,750 - - 3,907 Stockholders' Equity: Common stock 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital 177,317 240,359 200,398 (440,757) 177,317 Retained earnings 531,933 914,388 1,246,630 (2,161,018) 531,933 Accumulated other comprehensive loss (15) - - - (15) ----------------------------------------------------------------------------------------------------------------------------- 773,146 1,156,248 1,447,129 (2,603,377) 773,146 Less: Cost of shares in treasury 144,148 - - - 144,148 Cost of shares in benefits trust 59,264 - - - 59,264 ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 569,734 1,156,248 1,447,129 (2,603,377) 569,734 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,128,493 $ 1,434,185 $ 1,605,984 $ (3,390,616) $ 1,778,046 -----------------------------------------------------------------------------------------------------------------------------
16
CONSOLIDATING STATEMENT OF OPERATIONS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 160,262 $ 300,619 $ - $ - $ 460,881 Service Revenue 36,918 68,334 - - 105,252 Other Revenue - - 7,070 (7,070) - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 197,180 368,953 7,070 (7,070) 566,133 ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 114,349 211,025 - - 325,374 Costs of Service Revenue 26,546 52,005 - - 78,551 Costs of Other Revenue - - 7,164 (7,164) - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 140,895 263,030 7,164 (7,164) 403,925 ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 45,913 89,594 - - 135,507 Gross Profit from Service Revenue 10,372 16,329 - - 26,701 Gross Loss from Other Revenue - - (94) 94 - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 56,285 105,923 (94) 94 162,208 ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 46,942 82,416 110 94 129,562 ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 9,343 23,507 (204) - 32,646 Equity in Earnings of Subsidiaries 21,722 - 19,979 (41,701) - Non-operating (Expense) Income (4,475) 12,312 5,090 (12,335) 592 Interest Expense 16,008 5,625 - (12,335) 9,298 ----------------------------------------------------------------------------------------------------------------------------- Earnings From Continuing Operations Before Income Taxes 10,582 30,194 24,865 (41,701) 23,940 Income Tax (Benefit) Expense (4,122) 11,172 1,808 - 8,858 ----------------------------------------------------------------------------------------------------------------------------- Net Earnings From Continuing Operations 14,704 19,022 23,057 (41,701) 15,082 Loss from Discontinued Operations, Net of Tax (153) (378) - - (531) ----------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 14,551 $ 18,644 $ 23,057 $ (41,701) $ 14,551 -----------------------------------------------------------------------------------------------------------------------------
17
CONSOLIDATING STATEMENT OF OPERATIONS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 142,247 $ 268,885 $ - $ - $ 411,132 Service Revenue 35,175 64,603 - - 99,778 Other Revenue - - 6,675 (6,675) - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 177,422 333,488 6,675 (6,675) 510,910 ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 101,205 190,370 - - 291,575 Costs of Service Revenue 25,956 49,248 - - 75,204 Costs of Other Revenue - - 7,205 (7,205) - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 127,161 239,618 7,205 (7,205) 366,779 ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 41,042 78,515 - - 119,557 Gross Profit from Service Revenue 9,219 15,355 - - 24,574 Gross Loss from Other Revenue - - (530) 530 - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 50,261 93,870 (530) 530 144,131 ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 43,758 103,411 78 530 147,777 ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 6,503 (9,541) (608) - (3,646) Equity in Earnings of Subsidiaries (151) - 2,124 (1,973) - Non-operating (Expense) Income (4,096) 12,032 5,258 (12,144) 1,050 Interest Expense 17,978 4,867 - (12,144) 10,701 ----------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings From Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle (15,722) (2,376) 6,774 (1,973) (13,297) Income Tax (Benefit) Expense (5,765) (885) 1,721 - (4,929) ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (9,957) (1,491) 5,053 (1,973) (8,368) Earnings from Discontinued Operations, Net of Tax 542 (4) 538 Cumulative Effect of Change in Accounting Principle (899) (1,585) - - (2,484) ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings $ (10,314) $ (3,080) $ 5,053 $ (1,973) $ (10,314) -----------------------------------------------------------------------------------------------------------------------------
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net Earnings $ 14,551 $ 18,642 $ 23,057 $ (41,699) $ 14,551 Net loss from discontinued operations (153) (378) - - (531) ------------------------------------------------------------------------------------------------------------------------------ Net Earnings from continuing operations 14,704 19,020 23,057 (41,699) 15,082 Adjustments to Reconcile Net Earnings from Continuing Operations to Net Cash Provided By Continuing Operations: Non-cash operating activities (13,622) 24,987 (19,398) 41,699 33,666 Change in operating assets and liabilities 15,937 (48,933) (5,739) - (38,735) ------------------------------------------------------------------------------------------------------------------------------ Net Cash provided by (used in) continuing operations 17,019 (4,926) (2,080) - 10,013 Net Cash used in discontinued operations (123) (653) - - (776) ------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by (Used in) Operating Activities 16,896 (5,579) (2,080) - 9,237 Cash Flows from Investing Activities: Net Cash (Used in) Provided by Investing Activities (1,175) 1,782 - - 607 Cash Flows from Financing Activities: Net Cash Provided by Financing Activities 18,925 5,906 3,107 - 27,938 ------------------------------------------------------------------------------------------------------------------------------ Net Increase in Cash 34,646 2,109 1,027 - 37,782 Cash and Cash Equivalents at Beginning of Period 43,929 9,070 7,985 - 60,984 ------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 78,575 $ 11,179 $ 9,012 $ - $ 98,766 ------------------------------------------------------------------------------------------------------------------------------
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (dollar amount in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net loss $ (10,314) $ (3,079) $ 5,053 $ (1,974) $ (10,314) Net earnings from discontinued operations 536 2 - - 538 ------------------------------------------------------------------------------------------------------------------------------- Net Loss from Continuing Operations (10,850) (3,081) 5,053 (1,974) (10,852) Adjustments to Reconcile Net Earnings from Continuing Operations to Net Cash Provided By Continuing Operations: Non-cash operating activities 8,422 11,749 (2,961) 1,974 19,184 Change in operating assets and liabilities 17,152 23,013 (1,403) - 38,762 ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 14,724 31,681 689 - 47,094 Net Cash provided by discontinued operations 368 741 - - 1,109 ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 15,092 32,422 689 - 48,203 Cash Flows from Investing Activities: Net Cash (Used in) Provided by Investing Activities (6,758) 84 - - (6,674) Cash Flows from Financing Activities: Net Cash Provided by (Used in) Financing Activities 18,511 (32,118) 10,497 - (3,110) ------------------------------------------------------------------------------------------------------------------------------- Net Increase in Cash 26,845 388 11,186 - 38,419 Cash and Cash Equivalents at Beginning of Period 32,654 9,714 402 - 42,770 ------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 59,499 $ 10,102 $ 11,588 $ - $ 81,189 -------------------------------------------------------------------------------------------------------------------------------
20 NOTE 15. Contingencies An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company's motion for summary judgment was granted and the case was dismissed. The plaintiff has appealed. The Company continues to believe that the claims are without merit and to vigorously defend this matter. The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. NOTE 16. Sale of Common Stock On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share) at a price of $24.75 per share for net proceeds of $108,909,000. NOTE 17. Comprehensive Income The following are the components of comprehensive income (loss): Thirteen weeks ended ------------------------------------- (dollar amounts in thousands) May 1, 2004 May 3, 2003 -------------------------------------------------------------------------------------------------- Net earnings (loss) $ 14,551 $ (10,314) Other comprehensive income, net of tax: Derivative financial instrument adjustments 1,060 - -------------------------------------------------------------------------------------------------- Comprehensive income (loss) $ 15,611 $ (10,314) --------------------------------------------------------------------------------------------------
The components of accumulated other comprehensive income (loss) are: May 1, January 31, (dollar amounts in thousands) 2004 2004 -------------------------------------------------------------------- Derivative financial instrument adjustment, net of tax $ 2,449 $ 1,389 Minimum pension liability adjustment, net of tax (1,404) (1,404) -------------------------------------------------------------------- $ 1,045 $ (15) -------------------------------------------------------------------- 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion and analysis below for the Company should be read in conjunction with (i) the financial statements and the notes to such financial statements included elsewhere in this Form 10-Q/A and (ii) the financial statements and the notes to such financial statements included in Item 8, "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. All applicable disclosures in the following discussion have been modified to reflect the Restatement as described below. Restatement ----------- Following a review of our lease-related accounting policies, we have determined to correct our computation of depreciation, straight-line rent expense and the related deferred rent liability. As a result, on January 30, 2005, our Board of Directors, including our Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. These non-cash adjustments, will not have any impact on our previously reported cash flows, sales, comparable sales or our compliance with any financial covenant under our revolving credit facility or other debt instruments. The primary effect of the corrections is to accelerate the depreciation of leasehold improvements of leased properties where the initial lease term is shorter than the estimated useful economic life of those assets and rental expense on properties we occupied before payment of rents was required. The cumulative effect of the restatement through fiscal quarter ended May 1, 2004 is an increase in other current assets of $652,000, an increase in accumulated depreciation of $64,972,000, an increase in the deferred rent liability of $10,165,000 and a decrease in deferred income tax liability of $27,516,000. As a result, retained earnings at the end of fiscal quarter ended May 1, 2004 decreased by $46,969,000. Depreciation expense from continuing operations increased by $2,021,000 and $2,065,000 and rent expense from continuing operations decreased by $235,000 and $310,000 for the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively. The Restatement increased reported diluted loss per share by $0.02,for the thirteen weeks ended May 1, 2004 and May 3, 2003. The cumulative effect of the Restatement for all years prior to fiscal 2001 was $34,812,000, which was recorded as an adjustment to opening stockholders' equity at February 2, 2002 in the Company's restated Annual Report as of January 31, 2004 on Form 10-K/A. The Restatement did not have any impact on the Company's previously reported cash flows, sales or comparable sales or the Company's compliance with any covenant under the Company's line of credit facility or other debt instruments. Management's Discussion and Analysis of Financial Condition and results of Operations has been revised for the effects of the Restatement. See note 2 to the consolidated financial statements. OVERVIEW -------- The Pep Boys - Manny, Moe & Jack is a leader in the automotive aftermarket with 595 stores located throughout 36 states and Puerto Rico. All of our stores feature the nationally-recognized Pep Boys brand name, established through more than 80 years of providing high-quality automotive merchandise and services, and are company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, accessories, tires and parts under one roof, positioning us to achieve our goal of becoming the category dominant one-stop shop for automotive maintenance and accessories. For the thirteen weeks ended May 1, 2004, our comparative sales increased by 11.0% compared to (5.4)% for the thirteen weeks ended May 3, 2003. This increase in comparable sales is due primarily to new product offerings and increased overall foot traffic at our stores. On March 24, 2004, we successfully completed a common stock offering for net proceeds of $108,909,000. We have used the proceeds from this stock sale to repay the outstanding balance under our revolving credit facility, which was used along with cash to repay the $57,000,000 aggregate principal amount of medium term notes that matured on March 3,2004 and March 10,2003 and prepay $20,919,000 aggregate principal amount outstanding under our senior secured (equipment and real estate) credit facility. The remaining balance will be applied to store redesigns. During the first quarter of fiscal 2004, we have begun to reinvest in our existing stores to completely redesign their interiors and enhance their exterior appeal. Our new interior design will feature four distinct merchandising worlds: accessories (fashion, electronic and performance merchandise), maintenance (hard parts and chemicals), garage (repair shop and travel) and service (including tire, wheel and accessory installation). We believe that this layout will provide customers with a clear and concise way of finding what they need and will promote cross-selling. The most important of these changes will be to move all of our service desks and waiting areas inside the retail stores adjacent to our tire offering displays. We also are planning modifications to the exterior of our stores that are designed to increase customer traffic. The following discussion explains the material changes in our results of operations for the thirteen weeks ended May 1, 2004 and May 3, 2003 and the significant developments affecting our financial condition since January 31, 2004. We strongly recommend that you read our audited financial statements and footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our restated Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. 22 LIQUIDITY AND CAPITAL RESOURCES - May 1, 2004 ------------------------------------------------ For the thirteen weeks ended May 1, 2004, we increased our cash and cash equivalents by $37,782,000 from the balance at January 31, 2004. This increase was due primarily to net proceeds from our March 24, 2004 common stock offering and an increase in accounts payable offset, in part, by the increase in merchandise inventories, the reduction of long-term debt and the payment of a legal settlement. We have used the $108,909,000 net proceeds from the common stock offering to repay the outstanding balance under our revolving credit facility, which was used along with cash to repay the $57,000,000 aggregate principal amount of medium term notes that matured on March 3,2004 and March 10, 2004 and prepay $20,919,000 aggregate principal amount outstanding under our senior secured (equipment and real estate) credit facility. The remaining balance will be applied to store redesigns. Our cash requirements arise principally from the capital expenditures related to existing stores, offices and warehouses and to purchase inventory. The primary capital expenditures for the thirteen weeks ended May 1, 2004 were attributed to capital maintenance of our existing stores and offices. We invested $7,683,000 in property and equipment, which is a 10% decrease compared to the same period in the previous fiscal year. Management estimates that capital expenditures related to existing stores, warehouses and offices during the remainder of fiscal 2004 will be approximately $72,695,000, related primarily to the redesign of our existing stores. We anticipate that our net cash provided by operating activities, the net proceeds from our common stock offering and our existing line of credit will exceed our principal cash requirements for capital expenditures and inventory purchases in fiscal 2004. Working Capital increased from $76,227,000 at January 31, 2004 to $207,485,000 at May 1, 2004. At May 1, 2004, we had stockholders' equity of $697,477,000 and long-term debt, net of current maturities, of $394,552,000. Our long-term debt was 36% of our total capitalization at May 1, 2004 and 42% at January 31, 2004. As of May 1, 2004, we had an available line of credit totaling $179,136,000. In the first quarter of fiscal 2004, we prepaid $20,919,000 aggregate principal amount of our Senior Secured Credit Facility with a stated maturity date of July 1, 2006. This prepayment was funded out of cash from operations and our existing revolving credit facility. In the first quarter of fiscal 2004, we retired $32,000,000 aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a stated maturity date of March 3, 2004. These notes were retired with cash from operations and our existing revolving credit facility. In the first quarter of 2004, we entered into arrangements with certain of our vendors and banks to extend payment terms on certain merchandise purchases. Under this program, the bank makes payments to the vendor based upon a negotiated discount rate between the parties and we make a payment of the full payable to the bank at the extended payment term. As of May 1, 2004, there was $4,505,000 outstanding under these arrangements, which was recorded in short- term borrowings on the consolidated balance sheets. In the third quarter of 2003, the Company reached an agreement, through binding arbitration, to settle the consolidated action entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack". The two consolidated actions, originally filed on March 29, 2000 and July 25, 2000 in the California Superior Court in Orange County, involved former and current store management employees who claimed that they were improperly classified as exempt from the overtime provisions of California law and sought to be compensated for all overtime hours worked. The settlement was paid by the Company in the first quarter of fiscal 2004 from cash from operations and its existing line of credit. OFF-BALANCE SHEET ARRANGEMENTS ------------------------------ There have been no material changes to off-balance sheet arrangements as reflected in the Management's Discussion and Analysis in the Company's 2003 annual report on Form 10-K. 23 RESTRUCTURING ------------- Building upon the Profit Enhancement Plan launched in October 2000, the Company, during fiscal 2003, conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon the Company's profitability. The Company expects these actions, including the disposal and sublease of the Company's real properties, to be substantially completed by the end of the second quarter 2004 and estimates the costs, including future costs that were not accrued, to be approximately $66,752,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". Reserve Summary The following chart details the reserve balances through May 1, 2004. The reserve includes remaining rent on leases net of subleases income, other contractual obligations associated with leased properties and employee severance.
(dollar amounts Lease Contractual in thousands) Severance Expenses Obligations Total ------------------------------------------------------------------------------- Reserve balance at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204 Provision for present value of liabilities - 41 47 88 Changes in assumptions about future sublease income, lease termination, contractual obligations and severance - - - - Cash payments (213) (253) (171) (637) ------------------------------------------------------------------------------- Reserve Balance at May 1, 2004 $ 160 $ 2,156 $ 339 $ 2,655 -------------------------------------------------------------------------------
24 In accordance with SFAS 144, the Company's discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company's corporate restructuring. The results for the thirteen weeks ended May 1, 2004 and May 3, 2003 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results: Thirteen weeks ended ---------------------------- May 1, 2004 May 3, 2003 ------------ ------------- (dollar amounts in thousands) Amount Amount --------------------------------------------------------------------------------------------- Total Revenues $ 1 $ 18,306 Total Gross (Loss) Profit (804) 4,918 Selling, General and Administrative Expenses 40 4,065 (Loss) Earnings from Discontinued Operations Before Income Taxes (844) 854 Net (Loss) Earnings from Discontinued Operations, Net of Tax $ (531) $ 538 ---------------------------------------------------------------------------------------------
Additionally, the Company has made certain reclassifications to its consolidated balance sheets to reflect the assets held for disposal and assets from discontinued operations associated with the 33 stores closed on July 31, 2003. As of May 1, 2004 and January 31, 2004, these reclassifications were as follows: (Dollar amounts in thousands) May 1, 2004 Jan. 31, 2004 ------------------------------------------------------------------------------------------------ Land $ (4,425) $ (8,954) Building and improvements (5,925) (7,975) ------------------------------------------------------------------------------------------------ Property and equipment $(10,350) $(16,929) ------------------------------------------------------------------------------------------------ Assets held for disposal $ 10,350 $ 16,929 ------------------------------------------------------------------------------------------------
During the first quarter of 2004, the Company sold assets held for disposal for proceeds of $6,879,000, resulting in a gain of $172,000 which was recorded in discontinued operations on the consolidated statement of operations. 25 Results of Operations - The following table presents for the periods indicated certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change ---------------------------------------------------------------------------------------------------------------- May 1, 2004 May 3, 2003 Fiscal 2004 vs. Thirteen weeks ended (Fiscal 2004) (Fiscal 2003) Fiscal 2003 ---------------------------------------------------------------------------------------------------------------- Merchandise Sales 81.4% 80.5% 12.1% Service Revenue (1) 18.6 19.5 5.5 ---------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 10.8 ---------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales (2) 70.6 (3) 70.9 (3) 11.6 Costs of Service Revenue (2) 74.6 (3) 75.4 (3) 4.5 ---------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 71.3 71.8 10.1 ---------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 29.4 (3) 29.1 (3) 13.3 Gross Profit from Service Revenue 25.4 (3) 24.6 (3) 8.7 ---------------------------------------------------------------------------------------------------------------- Total Gross Profit 28.7 28.2 (12.5) ---------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 23.0 28.9 (12.3) ---------------------------------------------------------------------------------------------------------------- Operating (Loss) Profit 5.7 (0.7) 995.4 Non-operating Income 0.1 0.2 (43.6) Interest Expense 1.6 2.1 13.1 ---------------------------------------------------------------------------------------------------------------- (Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle 4.2 (2.6) 280.0 Income Tax (Benefit) Expense 37.0 (4) 37.0 (4) 279.7 ---------------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 2.7 (1.6) 280.2 (Loss) Earnings from Discontinued Operations, Net of Tax (0.1) 0.1 (198.7) Cumulative Effect of Change in Accounting Principle 0.0 (0.5) 100.0 ---------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) 2.6 (2.0) 241.1 ---------------------------------------------------------------------------------------------------------------- (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.
26 Thirteen Weeks Ended May 1, 2004 vs. Thirteen Weeks Ended May 3, 2003 ------------------------------------------------------------------------ Total revenues for the first quarter of fiscal 2004 increased 10.8% from the first quarter of fiscal 2003. This increase was due primarily to an increase in comparable store revenues (revenues generated by stores in operation during the same period) of 11.0%. Comparable store merchandise sales increased 12.3%, while comparable store service revenue increased 5.6%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 29.4% in fiscal 2004 from 29.1% in fiscal 2003. This increase, as a percentage of merchandise sales, was due primarily to a decrease in store occupancy costs offset, in part, by an increase in warehousing costs and a decrease in merchandise margins, as a percentage of merchandise sales. The decrease in store occupancy costs, as a percentage of merchandise sales, was a result of lower rent and building maintenance expenses. The increase in warehousing costs, as a percentage of merchandise sales, was a result of increased hauling and rent expenses. The decrease in merchandise margins was a result of slightly lower POS margins due to the mix shift into newer transportation and garage categories. Selling, general and administrative expenses decreased, as a percentage of total revenues, to 23.0% in fiscal 2004 from 28.9% in fiscal 2003. This was a 12.3% or $18,215,000 decrease from the prior year's quarter. This decrease, as a percentage of total revenues, was due primarily to a decrease in general office and benefit costs offset, in part, by an increase in net media expenses. The decrease in general office costs and employee benefits was due primarily to the impact of a charge made in the first quarter of 2003 for $20,000,000 to legal reserves and $5,231,000 to benefits for a settlement of a retirement plan obligation, respectively. The increase in net media expense was due primarily to increased radio and circular advertising expense and a decrease in cooperative advertising. Interest expense decreased 13.1% due primarily to lower debt levels coupled with lower average interest rates. Results from discontinued operations for 2004 was a loss of $531,000 (net of tax) compared to income of $538,000 (net of tax) in 2003. The change was due primarily to the discontinued stores being in operation in the first quarter of 2003. The loss recorded in 2004 is primarily related to the costs for lease and maintenance of stores closed in the second quarter of 2003. Net earnings increased, as a percentage of total revenues, due primarily to a decrease in selling, general and administrative expenses, as a percentage of total revenues, the impact of a net charge for the cumulative effect of a change in accounting principle for the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" recorded in fiscal 2003, a decrease in interest expense and an increase in gross profit from merchandise sales, as a percentage of merchandise sales. 27 INDUSTRY COMPARISON -------------------- The Company operates in the U.S. automotive aftermarket, which is split into two areas: the Do-It-For-Me ("DIFM") (service labor, installed merchandise and tires) market and the Do-It-Yourself ("DIY") (retail merchandise) market. Generally, the specialized automotive retailers focus on either the "DIY" or "DIFM" areas of the business. The Company believes that its operation in both the "DIY" and "DIFM" areas of the business positively differentiates it from most of its competitors. Although the Company manages its store performance at a store level in aggregation, management believes that the following presentation shows the comparison against competitors within the two areas. The Company competes in the "DIY" area of the business through its retail sales floor and commercial sales business (Retail Business). The Company considers its Service Business (labor and installed merchandise and tires) to compete in the DIFM area of the industry. The following table presents the revenues and gross profit for each area of the business. Thirteen weeks ended ---------------------------- May 1, 2004 May 3, 2003 ------------ ------------- (Dollar amounts in thousands) Amount Amount --------------------------------------------------------------------------------------------- Retail Revenues $ 337,049 $ 286,353 Service Center Revenues 229,084 224,557 --------------------------------------------------------------------------------------------- Total Revenues $ 566,133 $ 510,910 --------------------------------------------------------------------------------------------- Gross Profit from Retail Revenues (1) $ 97,179 $ 76,075 Gross Profit from Service Center Revenues (1) 65,029 68,056 --------------------------------------------------------------------------------------------- Total Gross Profit $ 162,208 $ 144,131 --------------------------------------------------------------------------------------------- (1) Gross Profit from Retail Revenues includes the cost of products sold, buying, warehousing and store occupancy costs. Gross Profit from Service Business Revenues includes the cost of installed products sold, buying, warehousing, service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.
28 NEW ACCOUNTING STANDARDS ------------------------ In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. We have adopted the disclosure requirements of this statement. In March 2004, the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB Statements No. 123 and 95." The proposed standard would require companies to expense share-based payments to employees, including stock options, based on the fair value of the award at the grant date. The proposed statement would eliminate the intrinsic value method of accounting for stock options permitted by APB (Accounting Principles Board) No. 25, "Accounting for Stock Issued to Employees," which we currently follow. We will continue to monitor the actions of the FASB and assess the impact, if any, on our consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES ------------------------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to "-Critical Accounting Policies and Estimates" as reported in the Company's Form 10-K/A for the year ended January 31, 2004, which disclosures are hereby incorporated by reference. FORWARD-LOOKING STATEMENTS -------------------------- Certain statements contained herein constitute "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. The words "guidance," "expect," "anticipate," "estimates," "forecasts" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include management's expectations regarding future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. The Company's actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond the control of the Company, including the strength of the national and regional economies, retail and commercial consumers' ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, the location and number of competitors' stores, product and labor costs and the additional factors described in the Company's filings with the Securities and Exchange Commission (SEC). The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement, changes in the London Interbank Offered Rate (LIBOR) could affect the rates at which the Company could borrow funds thereunder. At May 1, 2004, the Company had outstanding borrowings of $10,000 under this facility. Additionally, we have $132,000,000 of real estate operating leases which vary based on changes in LIBOR. We have entered into an interest rate swap, which was designated as a cash flow hedge to convert the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1,2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. As of May 1, 2004, the fair value of the interest rate swap was $3,877,000 ($2,449,000 net of tax) and this change in value was included in accumulated other comprehensive income on the consolidated balance sheet. Item 4. Controls and Procedures EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's management, with the participation of the Company's chief executive officer and principal financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In connection with the restatement and the filing of this Form 10-Q/A, the Company's management, with the participation of the Company's chief executive officer and principal financial officer, re-evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective as of the end of the period covered by this report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No change in the Company's internal control over financial reporting occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 30 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company's motion for summary judgment was granted and the case was dismissed. The plaintiff has appealed. The Company continues to believe that the claims are without merit and to vigorously defend this matter. The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10.1)* Amendment to and Restatement of the Executive Supplemental Retirement Plan. (31.1)** Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.2)** Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32.1)** Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.2)** Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K. The Company filed a Form 8-K dated March 19, 2004 announcing an Underwriting Agreement it had entered into related to the sale of its common stock. * Management contract or compensatory plan or arrangement. ** Filed herewith. 32 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE PEP BOYS - MANNY, MOE & JACK -------------------------------- (Registrant) Date: March 2, 2005 by: /s/ Harry F. Yanowitz ----------------------- -------------------------- Harry F. Yanowitz Senior Vice President and Chief Financial Officer 33 INDEX TO EXHIBITS ----------------- (10.1)* Amendment to and Restatement of the Executive Supplemental Retirement Plan. (31.1)** Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.2)** Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32.1)** Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.2)** Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ** - Filed herewith 34