10-Q/A 1 r2qa04.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 July 31, 2004 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ----------- ---------- 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ( x ) No ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ( x ) No ( ) As of August 28, 2004 there were 57,999,044 shares of the registrant's Common Stock outstanding. ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- EXPLANATORY NOTE As previously disclosed, on January 30, 2005, our Board of Directors, including our Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. These non-cash adjustments, which are similar to those recently announced by several restaurant and retail companies, will not have any impact on our previously reported cash flows, sales, comparable sales or our compliance with any financial covenant under our revolving credit facility or other debt instruments. This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to our Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2004, initially filed with the Securities and Exchange Commission (the "SEC") on September 9, 2004 (the "Original Filing"), is being filed to reflect restatements of (i) the Company's consolidated balance sheets at July 31, 2004 and January 31, 2004 and (ii) the Company's consolidated statements of operations, stockholders' equity and cash flows for the quarters ended July 31, 2004 and August 2, 2003, and the notes related thereto. For a more detailed description of these restatements, see Note 2, "Restatement of Financial Statements," to the accompanying consolidated financial statements and the section entitled "Restatement" in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q/A. For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety. However, this Form 10-Q/A only amends and restates Items 1,2 and 4 of Part I and Exhibit 12 of Item 6 of Part II of the Original Filing, in each case, solely as a result of, and to reflect, the Restatement, and no other information in the original filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as exhibits 31.1, 31.2, 32.1 and 32.2 respectively. Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. Other events occurring after the filing of the Original Filing or other disclosures necessary to reflect subsequent events have been or will be addressed in our amended Quarterly Report on Form 10-Q/A for the quarterly periods ended May 1, 2004 and October 31, 2004 which are being filed concurrently with the filing of this Form 10-Q/A and any reports filed with the SEC subsequent to the date of this filing. We have not amended and do not intend to amend our previously-filed Annual Reports on Form 10-K or our Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended prior to January 31, 2004. For this reason, the consolidated financial statements, auditors' reports and related financial information for the affected periods contained in such reports should no longer be relied upon. 1 ------------------------------------------------------------------- Index Page ------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - (As Restated) July 31, 2004 and January 31, 2004 3 Consolidated Statements of Operations - (As Restated) Thirteen and Twenty-six weeks ended July 31, 2004 and August 2, 2003 4 Consolidated Statements of Cash Flows - (As Restated) Twenty-six weeks ended July 31, 2004 and August 2, 2003 5 Notes to Condensed Consolidated Financial Statements 6-24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25-34 Item 3. Quantitative and Qualitative Disclosures About Market Risk 35 Item 4. Controls and Procedures 35 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 36 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37 Item 3. Defaults Upon Senior Securities 37 Item 4. Submission of Matters to a Vote of Security Holders 37 Item 5. Other Information 38 Item 6. Exhibits 38 SIGNATURES 39 INDEX TO EXHIBITS 40 2 PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited)
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - (As Restated, See Note 2) (dollar amounts in thousands, except per share amounts) UNAUDITED July 31, 2004 Jan. 31, 2004* ------------------------------------------------------------------------------------------------------ ASSETS Current Assets: Cash and cash equivalents $ 83,893 $ 60,984 Accounts receivable, net 40,355 30,562 Merchandise inventories 596,451 553,562 Prepaid expenses 32,714 39,480 Deferred income taxes 10,645 20,826 Other 77,430 81,096 Assets held for disposal 3,118 16,929 ------------------------------------------------------------------------------------------------------ Total Current Assets 844,606 803,439 ------------------------------------------------------------------------------------------------------ Property and Equipment-at cost: Land 263,199 263,907 Buildings and improvements 908,139 899,114 Furniture, fixtures and equipment 596,497 586,607 Construction in progress 19,255 12,800 ------------------------------------------------------------------------------------------------------ 1,787,090 1,762,428 Less accumulated depreciation and amortization 873,873 839,219 ------------------------------------------------------------------------------------------------------ Property and Equipment - Net 913,217 923,209 ------------------------------------------------------------------------------------------------------ Other 52,526 51,398 ------------------------------------------------------------------------------------------------------ Total Assets $1,810,349 $1,778,046 ------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 335,890 $ 342,584 Accrued expenses 244,831 267,565 Current maturities of long-term debt and obligations under capital leases 147,258 117,063 ------------------------------------------------------------------------------------------------------ Total Current Liabilities 727,979 727,212 ------------------------------------------------------------------------------------------------------ Long-term debt and obligations under capital leases, less current maturities 144,727 258,016 Convertible long-term debt, less current maturities 150,000 150,000 Other long-term liabilities 38,422 39,201 Deferred income taxes 40,497 29,976 Deferred gain on sale leaseback 59 3,907 Commitments and Contingencies Stockholders' Equity: Common Stock, par value $1 per share: Authorized 500,000,000 shares; Issued 68,557,041 and 63,910,577 shares 68,557 63,911 Additional paid-in capital 284,465 177,317 Retained earnings 549,133 531,933 Common stock subscriptions receivable (144) - Accumulated other comprehensive income (loss) 1,098 (15) ------------------------------------------------------------------------------------------------------ 903,109 773,146 Less cost of shares in treasury - 8,372,727 shares and 8,928,159 shares 135,180 144,148 Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264 ------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 708,665 569,734 ------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $1,810,349 $1,778,046 ------------------------------------------------------------------------------------------------------ See notes to condensed consolidated financial statements. * Taken from the restated audited financial statements as of January 31, 2004 as filed on Form 10-K/A.
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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - (As Restated, See Note 2) (dollar amounts in thousands, except per share amounts) UNAUDITED Thirteen weeks ended Twenty-six weeks Ended --------------------------- ----------------------------- July 31, 2004 Aug. 2, 2003 July 31, 2004 Aug. 2, 2003 ------------- ------------ -------------- ------------ Amount Amount Amount Amount ------------------------------------------------------------------------------------------------------ Merchandise Sales $ 488,716 $ 451,285 $ 949,597 $ 862,417 Service Revenue 104,710 104,745 209,962 204,523 ------------------------------------------------------------------------------------------------------ Total Revenues 593,426 556,030 1,159,559 1,066,940 ------------------------------------------------------------------------------------------------------ Costs of Merchandise Sales 347,249 345,401 672,623 636,976 Costs of Service Revenue 80,701 81,315 159,252 156,519 ------------------------------------------------------------------------------------------------------ Total Costs of Revenues 427,950 426,716 831,875 793,495 ------------------------------------------------------------------------------------------------------ Gross Profit from Merchandise Sales 141,467 105,884 276,974 225,441 Gross Profit from Service Revenue 24,009 23,430 50,710 48,004 ------------------------------------------------------------------------------------------------------ Total Gross Profit 165,476 129,314 327,684 273,445 ------------------------------------------------------------------------------------------------------ Selling, General and Administrative Expenses 136,694 143,049 266,256 290,826 ------------------------------------------------------------------------------------------------------ Operating Profit (Loss) 28,782 (13,735) 61,428 (17,381) Non-operating Income 470 851 1,062 1,901 Interest Expense 7,800 9,603 17,098 20,304 ------------------------------------------------------------------------------------------------------ Earnings (Loss) From Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle 21,452 (22,487) 45,392 (35,784) Income Tax Expense (Benefit) 7,937 (8,309) 16,795 (13,238) ------------------------------------------------------------------------------------------------------ Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 13,515 (14,178) 28,597 (22,546) Discontinued Operations, Net of Tax (852) (20,757) (1,383) (20,219) Cumulative Effect of Change in Accounting Principle, Net of Tax - - - (2,484) ------------------------------------------------------------------------------------------------------ Net Earnings (Loss) 12,663 (34,935) 27,214 (45,249) Retained Earnings, beginning of period 541,203 572,589 531,933 586,735 Cash Dividends (3,915) (3,491) (7,813) (6,978) Effect of Stock Options (818) (6,477) (2,201) (6,548) Dividend Reinvestment Plan - (46) - (320) ------------------------------------------------------------------------------------------------------ Retained Earnings, end of period $ 549,133 $ 527,640 $ 549,133 $ 527,640 ------------------------------------------------------------------------------------------------------ Basic Earnings (Loss) Per Share: Net Earnings (Loss) From Continuing Operations Before Cumulative Effect of Change in Accounting Principle $ 0.23 $ (0.27) $ 0.51 $ (0.43) Discontinued Operations, Net of Tax (0.01) (0.40) (0.03) (0.39) Cumulative Effect of Change in Accounting Principle, Net of Tax - - - (0.05) ------------------------------------------------------------------------------------------------------ Basic Earnings (Loss) Per Share $ 0.22 $ (0.67) $ 0.48 $ (0.87) ------------------------------------------------------------------------------------------------------ Diluted Earnings (Loss) Per Share: Net Earnings (Loss) From Continuing Operations Before Cumulative Effect of Change in Accounting Principle $ 0.22 $ (0.27) $ 0.47 $ (0.43) Discontinued Operations, Net of Tax (0.01) (0.40) (0.02) (0.39) Cumulative Effect of Change in Accounting Principle, Net of Tax - - - (0.05) ------------------------------------------------------------------------------------------------------ Diluted Earnings (Loss) Per Share $ 0.21 $ (0.67) $ 0.45 $ (0.87) ------------------------------------------------------------------------------------------------------ Cash Dividends Per Share $ .0675 $ .0675 $ .1350 $ .1350 ------------------------------------------------------------------------------------------------------ See notes to condensed consolidated financial statements.
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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (As Restated, See Note 2) (dollar amounts in thousands) UNAUDITED Twenty-six Weeks Ended July 31, 2004 Aug. 2, 2003 ---------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net earnings (loss) $ 27,214 $ (45,249) Net loss from discontinued operations (1,383) (20,219) ---------------------------------------------------------------------------------------------------------------- Net earnings (loss) from continuing operations 28,597 (25,030) Adjustments to Reconcile Net Earnings (Loss) From Continuing Operations to Net Cash Provided by Continuing Operations: Cumulative effect of change in accounting principle, net of tax - 2,484 Depreciation and amortization 37,767 39,214 Accretion of asset disposal obligation 71 90 Stock compensation expense 847 - Deferred income taxes 20,553 (38,749) Deferred gain on sale lease back (119) (8) Loss on asset impairment - 1,371 Loss from sales of assets 360 34 Changes in operating assets and liabilities: Decrease in accounts receivable, prepaid expenses and other 3,711 9,289 Increase in merchandise inventories (42,889) (17,628) (Decrease) increase in accounts payable (3,493) 119,170 (Decrease) increase in accrued expenses (22,554) 40,593 (Decrease) increase in other long-term liabilities (779) 2,463 ---------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 22,072 133,293 Net cash (used in) provided by discontinued operations (1,728) 4,133 ---------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 20,344 137,426 ---------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (28,830) (21,420) Proceeds from sales of assets 1,453 806 Proceeds from sales of assets held for disposal 10,532 1,146 ---------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (16,845) (19,468) ---------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net borrowings under line of credit agreements 137 1,441 Repayments of short-term borrowings (7,216) - Reduction of long-term debt (84,425) (91,427) Other 3,283 (400) Dividends paid (7,813) (6,978) Proceeds from issuance of common stock 108,854 - Proceeds from exercise of stock options 6,049 4,085 Proceeds from dividend reinvestment plan 541 646 ---------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 19,410 (92,633) ---------------------------------------------------------------------------------------------------------------- Net Increase in Cash 22,909 25,325 ---------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at Beginning of Period 60,984 42,770 ---------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 83,893 $ 68,095 ---------------------------------------------------------------------------------------------------------------- Non-cash financing activities: Equipment Capital Leases $ 1,413 $ - ---------------------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements.
5 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (As Restated, See Note 2) NOTE 1. Condensed Consolidated Financial Statements The consolidated balance sheets as of July 31, 2004, the consolidated statements of operations for the thirteen and twenty-six week periods ended July 31, 2004 and August 2, 2003 and the consolidated statements of cash flows for the twenty-six week periods ended July 31, 2004 and August 2, 2003 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at July 31, 2004 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Restated Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. The results of operations for the thirteen and twenty-six week periods ended July 31, 2004 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the prior year's consolidated financial statements to comform to the current year's presentation. NOTE 2. Restatement of Financial Statements Subsequent to the issuance of the Company's fiscal 2003 financial statemnets, the Company's management reviewed its lease-related accounting policies and determined to correct its computation of depreciation, straight-line rent expense and the related deferred rent liability. As a result, on January 30, 2005, the Company's Board of Directors, including the Company's Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. The primary effect of the corrections is to accelerate the depreciation of leasehold improvements of leased properties where the initial lease term is shorter than the estimated useful economic life of those assets and rental expense on properties we occupied before payment of rents was required. The cumulative effect of the restatement through fiscal quarter ended July 31, 2004 is an increase in other current assets of $1,317,000, an increase in accumulated depreciation of $67,006,000, an increase in the deferred rent liability of $9,930,000 and a decrease in deferred income tax liability of $27,516,000. As a result, retained earnings at the end of fiscal quarter ended July 31, 2004 decreased by $48,103,000. Depreciation expense from continuing operations increased by $4,056,000 and $3,943,000 for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. Rent expense from continuing operations decreased by $470,000 and $594,000 for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. The restatement decreased reported diluted earnings per share and diluted loss per share by $0.03 and $0.01 for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. The cumulative effect of the restatement for all years prior to fiscal 2001 was $34,812,000, which was recorded as an adjustment to opening stockholders' equity at February 2, 2002. The restatement did not have any impact on the Company's previously reported cash flows, sales or comparable sales or on the Company's compliance with any covenant under the Company's line of credit facility or other debt instruments. The consolidated financial statements included in this Form 10-Q/A have been restated to reflect the adjustments described above. The Restatement has been set forth, for the periods presented, in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004 which we are filing concurrently with this Form 10-Q/A. 6 The following is a summary of the impact of the Restatement on (i) the Company's consolidated balance sheets at July 31, 2004 and January 31, 2004 and (ii) the Company's consolidated statements of operations for the fiscal quarters ended July 31, 2004 and August 2, 2003. We have not presented a summary of the impact of the Restatement on the consolidated statements of cash flows for any of the above-referenced fiscal years because the net impact for each such fiscal year is zero.
(dollar amounts in thousands) As Previously July 31, 2004 Reported Adjustments As Restated ------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheet Other $ 76,113 $ 1,317 $ 77,430 Total Current Assets 843,289 1,317 844,606 Accumulated depreciation and amortization 806,867 67,006 873,873 Property and equipment, net 980,223 (67,006) 913,217 Total Assets 1,876,038 (65,689) 1,810,349 Other long-term liabilities 28,492 9,930 38,422 Deferred income taxes 68,013 (27,516) 40,497 Retained earnings 597,236 (48,103) 549,133 Total Stockholders'Equity 756,768 (48,103) 708,665 Total Liabilities and Stockholders' Equity 1,876,038 (65,689) 1,810,349
As Previously January 31, 2004 Reported Adjustments As Restated -------------------------------------------------------------------------------------------------------------------- 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
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As Previously Thirteen weeks ended July 31, 2004 Reported Adjustments As Restated -------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings Costs of Merchandise Sales $ 345,894 $ 1,355 $ 347,249 Costs of Service Revenue 80,256 445 80,701 Total Costs of revenue 426,150 1,800 427,950 Gross Profit from Merchandise Sales 142,822 (1,355) 141,467 Gross Profit from Service Revenue 24,454 (445) 24,009 Total Gross Profit 167,276 (1,800) 165,476 Operating Profit 30,582 (1,800) 28,782 Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle 23,252 (1,800) 21,452 Income Tax Expense 8,603 (666) 7,937 Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 14,649 (1,134) 13,515 Discontinued Operations, Net of Tax (852) - (852) Net Earnings 13,797 (1,134) 12,663 Basic Earnings Per Share: Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 0.25 (0.02) 0.23 Discontinued Operations, Net of Tax (0.01) - (0.01) Basic Earnings Per Share 0.24 (0.02) 0.22 Diluted Earnings Per Share: Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 0.23 (0.01) 0.22 Discontinued Operations, Net of Tax (0.01) - (0.01) Diluted Earnings Per Share 0.22 (0.01) 0.21
As Previously Twenty-six weeks ended July 31, 2004 Reported Adjustments As Restated -------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings Costs of Merchandise Sales $ 669,948 $ 2,675 $ 672,623 Costs of Service Revenue 158,367 885 159,252 Total Costs of revenue 828,315 3,560 831,875 Gross Profit from Merchandise Sales 279,649 (2,675) 276,974 Gross Profit from Service Revenue 51,595 (885) 50,710 Total Gross Profit 331,244 (3,560) 327,684 Operating Loss 64,988 (3,560) 61,428 Loss from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle 48,952 (3,560) 45,392 Income Tax Benefit 18,112 (1,317) 16,795 Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 30,840 (2,243) 28,597 Discontinued Operations, Net of Tax (1,383) - (1,383) Net Earnings 29,457 (2,243) 27,214 Basic Earnings Per Share: Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 0.55 (0.04) 0.51 Discontinued Operations, Net of Tax (0.03) - (0.03) Basic Earnings Per Share 0.52 (0.04) (0.48) Diluted Earnings Per Share: Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 0.50 (0.03) 0.47 Discontinued Operations, Net of Tax (0.02) - (0.02) Diluted Earnings Per Share 0.48 (0.03) 0.45
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As Previously Thirteen weeks ended August 2, 2003 Reported Adjustments As Restated -------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings Costs of Merchandise Sales $ 344,903 $ 498 $ 345,401 Costs of Service Revenue 80,881 434 81,315 Total Costs of revenue 425,784 932 426,716 Gross Profit from Merchandise Sales 106,382 (498) 105,884 Gross Profit from Service Revenue 23,864 (434) 23,430 Total Gross Profit 130,246 (932) 129,314 Operating Loss (12,803) (932) (13,735) Loss from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle (21,555) (932) (22,487) Income Tax Benefit (7,976) (333) (8,309) Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (13,579) (599) (14,178) Discontinued Operations, Net of Tax (22,802) 2,045 (20,757) Net Loss (36,381) 1,446 (34,935) Basic and Diluted Loss Per Share: Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (0.26) (0.01) (0.27) Discontinued Operations, Net of Tax (0.44) 0.04 (0.40) Basic and Diluted Loss Per Share (0.70) 0.03 (0.67)
As Previously Twenty-six weeks ended August 2, 2003 Reported Adjustments As Restated -------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings Costs of Merchandise Sales $ 635,243 $ 1,733 $ 636,976 Costs of Service Revenue 155,653 866 156,519 Total Costs of revenue 790,896 2,599 793,495 Gross Profit from Merchandise Sales 227,174 (1,733) 225,441 Gross Profit from Service Revenue 48,870 (866) 48,004 Total Gross Profit 276,044 (2,599) 273,445 Operating Loss (14,782) (2,599) (17,381) Loss from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle (33,185) (2,599) (35,784) Income Tax Benefit (12,279) (959) (13,238) Net Loss from Continuing Operations Before Cumulative Effect of Change in Accou (20,906) (1,640) (22,546) Discontinued Operations, Net of Tax (22,208) 1,989 (20,219) Net Loss (45,598) 349 (45,249) Basic and Diluted Loss Per Share: Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (0.40) (0.03) (0.43) Discontinued Operations, Net of Tax (0.43) 0.04 (0.39) Cumulative Effect of Change in Accounting Principle (0.05) - (0.05) Basic and Diluted Loss Per Share (0.88) 0.01 (0.87)
In addition, certain amounts in Notes 3,7,8,9,11,14 and 17 have been restated to reflect the Restatement adjustments described above. 9 NOTE 3. Accounting for Stock-Based Compensation The Company accounts for its stock-based employee compensation plans in accordance with the recognition and measurement principles of Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. For all stock options, no stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In the first quarter of 2004, the Company issued restricted stock unit awards to certain employees. The recorded expense for these awards under the intrinsic method was $149,000 ($94,000 net of tax) and $847,000 ($534,000 net of tax) for the thirteen and twenty-six weeks ended July 31, 2004, respectively. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
(dollar amounts in thousands, except per share amounts) Thirteen weeks ended Twenty-six weeks ended --------------------------------- ----------------------------------- July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003 ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss): As reported $ 12,663 $(34,935) $ 27,214 $ (45,249) Add: Stock compensation expense, net of tax 94 - 534 - Less: Total stock-based compensation expense determined under fair value-based method, net of tax (768) (636) (2,070) (1,447) ---------------------------------------------------------------------------------------------------------------------- Pro forma $ 11,989 $(35,571) $ 25,678 $ (46,696) ---------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per share: Basic: As reported $ .22 $ (.67) $ .48 $ (.87) Pro forma $ .21 $ (.69) $ .46 $ (.90) ---------------------------------------------------------------------------------------------------------------------- Diluted: As reported $ .21 $ (.67) $ .45 $ (.87) Pro forma $ .20 $ (.69) $ .43 $ (.90) ----------------------------------------------------------------------------------------------------------------------
10 The fair value of each option granted during the periods ending July 31, 2004 and August 2, 2003 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
July 31, 2004 August 2, 2003 ------------------------------------------------------------------ Dividend yield 1.67% 1.57% Expected volatility 41% 42% Risk-free interest rate range: high 4.7% 4.4% low 2.0% 1.5% Ranges of expected lives in years 3-8 4-8 ------------------------------------------------------------------
NOTE 4. New Accounting Standards In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. We have adopted the disclosure requirements of this statement. In March 2004, the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB Statements No. 123 and 95." The proposed standard would require companies to expense share-based payments to employees, including stock options, based on the fair value of the award at the grant date. The proposed statement would eliminate the intrinsic value method of accounting for stock-based compensation permitted by APB (Accounting Principles Board) No. 25, "Accounting for Stock Issued to Employees," which we currently follow. We will continue to monitor the actions of the FASB and assess the impact, if any, on our consolidated financial statements. NOTE 5. Merchandise Inventories Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out ("LIFO") method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management's estimates of expected fiscal year-end inventory levels and costs. Replacement cost, which approximates FIFO cost was $575,930,000 and $531,830,000 at July 31, 2004 and January 31, 2004, respectively. NOTE 6. Accrued Expenses The Company's accrued expenses for the periods ending July 31, 2004 and January 31, 2004 were as follows:
(dollar amounts in thousands) July 31, 2004 Jan. 31, 2004 --------------------------------------------------------------------- Medical and casualty risk participation reserve $ 127,075 $ 136,599 Accrued compensation and related taxes 42,963 51,043 Legal Reserves 1,367 26,576 Other 73,426 53,347 --------------------------------------------------------------------- Total $ 244,831 $ 267,565 ---------------------------------------------------------------------
11 NOTE 7. Other Current Assets The Company's other current assets for the periods ending July 31, 2004 and January 31, 2004 were as follows:
(dollar amounts in thousands) July 31, 2004 Jan. 31, 2004 --------------------------------------------------------------------- Reinsurance premiums receivable $ 62,678 $ 67,326 Income taxes receivable 14,298 13,517 Other 454 253 --------------------------------------------------------------------- Total $ 77,430 $ 81,096 ---------------------------------------------------------------------
NOTE 8. Restructuring Building upon the Profit Enhancement Plan launched in October 2000, the Company conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon the Company's profitability. These actions, including the disposal and sublease of the properties, were substantially completed by July 31 ,2004 and costs were approximately $66,752,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". Reserve Summary The following chart details the reserve balances through July 31, 2004. The reserve includes remaining rent on leases net of sublease income, other contractual obligations associated with leased properties and employee severance. (dollar amounts Lease Contractual in thousands) Severance Expenses Obligations Total --------------------------------------------------------------------------------- Reserve balance at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204 Provision for present value of liabilities - 80 90 170 Changes in assumptions about future sublease income, lease termination and severance - 272 - 272 Cash payments (215) (473) (302) (990) --------------------------------------------------------------------------------- Reserve balance at July 31, 2004 $ 158 $ 2,247 $ 251 $ 2,656 ---------------------------------------------------------------------------------
12 Note 9. Discontinued Operations In accordance with SFAS No. 144, the Company's discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company's corporate restructuring. Additionally, the Company has classified certain assets as assets held for disposal on its consolidated balance sheets. As of July 31, 2004 and January 31, 2004, these assets were as follows: (Dollar amounts in thousands) July 31, 2004 Jan. 31, 2004 ------------------------------------------------------------------------------- Land $ 2,012 $ 8,954 Building and improvements 1,106 7,975 ------------------------------------------------------------------------------- Assets held for disposal $ 3,118 $ 16,929 -------------------------------------------------------------------------------
Six of the Company's closed stores remained unsold as of July 31, 2004. Three of the properties are without signed agreements of sale and were reclassified in the second quarter of fiscal 2004 to assets held for use at market value, which is lower than cost adjusted for depreciation. The other three properties have signed agreements of sale as of July 31, 2004 and therefore will remain in assets held for disposal until the completion of those sales. During the second quarter of 2004, the Company sold assets held for disposal for proceeds of $3,652,000 resulting in a loss of $157,000 which was recorded in discontinued operations on the consolidated statement of operations. During the first quarter of 2004, the Company sold assets held for disposal for proceeds of $6,879,000 resulting in a gain of $172,000 which was recorded in discontinued operations on the consolidated statement of operations. 13 NOTE 10. Pension and Savings Plan Pension expense includes the following: Thirteen weeks ended Twenty-six weeks ended (dollar amounts in thousands) Pension Benefits Pension Benefits ----------------------------------------------------------------------- ----------------------- 7/31/2004 8/2/2003 7/31/2004 8/2/2003 ----------------------------------------------------------------------- ----------------------- Service cost $ 111 $ 153 $ 219 $ 306 Interest Cost 745 764 1,451 1,528 Expected return on plan assets (574) (516) (1,149) (1,032) Amortization of transition obligation 41 68 82 137 Amortization of prior service cost 91 155 182 308 Amortization of net loss (gain) 422 431 866 861 FAS 88 settlement - - - 5,231 -------- -------- --------- --------- Net periodic benefit cost $ 836 $ 1,055 $ 1,651 $ 7,339 ======== ======== ========= =========
The Company previously disclosed in its financial statements for the fiscal year ended January 31, 2004 that it expected to contribute $1,055,000 to its pension plan in fiscal 2004. As of July 31, 2004, $903,000 of contributions have been made. The Company anticipates no change in expected total contributions for fiscal 2004. The Company has 401(k) savings plans which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant's contributions or 3% of the participant's compensation. The Company's savings plans' contribution expense was $780,000 and $1,225,000 for the thirteen weeks ending July 31, 2004 and August 31, 2003, respectively, and $1,807,000 and $2,275,000 for the twenty-six weeks ending July 31, 2004 and August 31, 2003, respectively. On January 31, 2004, the Company amended and restated its Executive Supplemental Retirement Plan (SERP). This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants. All vested participants will continue to accrue benefits according to the previous defined benefit formula. The Company's contribution expense for the defined contribution portion of the plan was $212,000 and $429,000 for the thirteen and twenty-six weeks ending July 31, 2004, respectively. 14 NOTE 11. Net Earnings Per Share
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (in thousands, except per share amounts) UNAUDITED Thirteen weeks ended Twenty-six weeks ended ----------------------------------- ---------------------------------- July 31, 2004 Aug. 2, 2003 July 31, 2004 Aug. 2, 2003 -------------- --------------- -------------- ------------ (a) Net earnings (loss) from continuing operations before cumulative effect of change in accounting principle $ 13,515 $(14,178) $ 28,597 $(22,546) Adjustment for interest on convertible senior notes, net of income tax effect 1,001 - 2,003 - --------------------------------------------------------------------------------------------------------------------------------- (b) Adjusted net earnings (loss) from continuing operations before cumulative effect of change in accounting principle $ 14,516 $(14,178) $ 30,600 $(22,546) --------------------------------------------------------------------------------------------------------------------------------- (c) Average number of common shares outstanding during period 57,875 51,816 56,410 51,733 Common shares assumed issued upon conversion of convertible senior notes 6,697 - 6,697 - Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price 1,749 - 1,847 - --------------------------------------------------------------------------------------------------------------------------------- (d) Average number of common shares assumed outstanding during period 66,321 51,816 64,954 51,733 --------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share: Net Earnings (Loss) From Continuing Operations Before Cumulative Effect of Change in Accounting Principle (a/c) $ 0.23 $ (0.27) $ 0.50 $ (0.43) Discontinued Operations, Net of Tax (0.01) (0.40) (0.02) (0.39) Cumulative Effect of Change in Accounting Principle, Net of Tax - - - (0.05) --------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share $ 0.22 $ (0.67) $ 0.48 $ (0.87) --------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss)Per share: Net Earnings (Loss) From Continuing Operations Before Cumulative Effect of Change in Accounting Principle (b/d) $ 0.22 $ (0.27) $ 0.47 $ (0.43) Discontinued Operations, Net of Tax (0.01) (0.40) (0.02) (0.39) Cumulative Effect of Change in Accounting Principle, Net of Tax - - - (0.05) --------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share $ 0.20 $ (0.67) $ 0.45 $ (0.87) ---------------------------------------------------------------------------------------------------------------------------------
Adjustments for the convertible senior notes were anti-dilutive during the thirteen and twenty-six week periods ended August 2, 2003 and therefore excluded from the computation of diluted EPS. Options to purchase 944,000 and 939,000 shares of common stock were outstanding at July 31, 2004 and August 2, 2003, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares on such dates. 15 NOTE 12. Warranty Reserve The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by its vendors, with the Company covering any costs above the vendor's stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions. Components of the reserve for warranty costs for the twenty-six week period ending July 31, 2004 are as follows:
(dollar amounts in thousands) ------------------------------------------------------------------------ Beginning balance at January 31, 2004 $ 614 Additions related to current period sales 4,024 Warranty costs incurred in current period (2,727) Adjustments to accruals related to prior year sales - ------------------------------------------------------------------------ Ending Balance at July 31, 2004 $ 1,911 ------------------------------------------------------------------------
NOTE 13. Debt and Financing Arrangements In the second quarter of 2004, the Company reclassified $100,000,000 aggregate principal amount of 7.00% notes with a stated maturity date of June 1, 2005 to current liabilities on the consolidated balance sheet. In the second quarter of fiscal 2004, the Company prepaid $5,000,000 aggregate principal amount of 6.71% Medium-Term Notes with a stated maturity date of November 3, 2004. In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773,000 over four years. The minimum required purchases for 2004 and 2005 (the remaining two years of this commitment) are $8,112,000 and $7,457,000, respectively. During the second quarter of fiscal 2004, it was determined that the Company would be unable to meet this obligation for the 2004 contract year which ends on November 30, 2004. As a result, the Company recorded a $1,579,000 charge to selling, general and administrative expenses in the quarter ending July 31, 2004 related to the anticipated shortfall in this purchase commitment. In May 2001, the Company sold certain operating assets for $14,000,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease was accounted for as an operating lease and the gain of $3,817,000 from the sale of certain operating assets was deferred at the time of sale. In May 2004, the Company repurchased these assets for $5,468,000. The remaining deferred gain of $3,729,000 was netted against the purchase price of the repurchased assets resulting in a net book value of $1,739,000 recorded on the consolidated balance sheet as of July 31, 2004 for the repurchased assets. In the first quarter of fiscal 2004, the Company prepaid $20,919,000 aggregate principal amount of its Senior Secured Credit Facility with a stated maturity date of July 1, 2006. In the first quarter of fiscal 2004, the Company retired $32,000,000 aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a stated maturity date of March 3, 2004. In the first quarter of fiscal 2004, the Company entered into arrangements with certain of its vendors and banks to extend payment terms on certain merchandise purchases. Under this program, the bank makes payments to the vendor based upon a negotiated discount rate between the parties and the Company makes its payment of the full payable to the bank at the extended payment term. As of July 31, 2004, all obligations under these arrangements were fully satisfied and the agreement was terminated. 16 NOTE 14. Supplemental Guarantor Information - Convertible Senior Notes On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of 4.25% Convertible Senior Notes. The notes are jointly and severally and fully and unconditionally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The following are consolidating balance sheets of the Company as of July 31, 2004 and January 31, 2004 and the related consolidating statements of operations for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003 and condensed consolidating statements of cash flows for the twenty-six weeks ended July 31, 2004 and August 2, 2003:
CONSOLIDATING BALANCE SHEET (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor July 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 64,968 $ 9,229 $ 9,696 $ - $ 83,893 Accounts receivable, net 21,729 18,626 - - 40,355 Merchandise inventories 205,549 390,902 - - 596,451 Prepaid expenses 25,628 15,224 8,780 (16,918) 32,714 Deferred income taxes 7,075 (1,234) 4,804 - 10,645 Other 19,347 8,411 49,672 - 77,430 Assets held for disposal 2,453 665 - - 3,118 ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 346,749 441,823 72,952 (16,918) 844,606 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 87,405 175,794 - - 263,199 Buildings and improvements 311,968 596,171 - - 908,139 Furniture, fixtures and equipment 288,910 307,587 - - 596,497 Construction in progress 19,197 58 - - 19,255 ----------------------------------------------------------------------------------------------------------------------------- 707,480 1,079,610 - - 1,787,090 Less accumulated depreciation and amortization 376,038 497,835 - - 873,873 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - Net 331,442 581,775 - - 913,217 ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,481,807 - 1,203,717 (2,685,524) - Intercompany receivable - 451,033 353,729 (804,762) - Other 49,251 3,275 - - 52,526 ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,209,249 $ 1,477,906 $ 1,630,398 $ (3,507,204) $ 1,810,349 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 335,881 $ 9 $ - $ - $ 335,890 Accrued expenses 38,572 84,854 138,323 (16,918) 244,831 Current maturities of long-term debt and obligations under capital leases 147,258 - - - 147,258 ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 521,711 84,863 138,323 (16,918) 727,979 ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 144,604 123 - - 144,727 Convertible long-term debt 150,000 - - - 150,000 Other long-term liabilities 11,614 26,808 - - 38,422 Intercompany liabilities 644,503 160,259 - (804,762) - Deferred income taxes 28,132 12,365 - - 40,497 Deferred gain on sale leaseback 20 39 - - 59 Stockholders' Equity: Common stock 68,557 1,501 101 (1,602) 68,557 Additional paid-in capital 284,465 240,359 200,398 (440,757) 284,465 Retained earnings 549,133 951,589 1,291,576 (2,243,165) 549,133 Common stock subscriptions receivable (144) - - - (144) Accumulated other comprehensive income 1,098 - - - 1,098 ----------------------------------------------------------------------------------------------------------------------------- 903,109 1,193,449 1,492,075 (2,685,524) 903,109 Less: Cost of shares in treasury 135,180 - - - 135,180 Cost of shares in benefits trust 59,264 - - - 59,264 ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 708,665 1,193,449 1,492,075 (2,685,524) 708,665 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,209,249 $ 1,477,906 $ 1,630,398 $ (3,507,204) $ 1,810,349 -----------------------------------------------------------------------------------------------------------------------------
17
CONSOLIDATING BALANCE SHEET (dollar amounts in thousands) Non- Subsidiary guarantor January 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 43,929 $ 9,070 $ 7,985 $ - $ 60,984 Accounts receivable, net 14,573 15,989 - - 30,562 Merchandise inventories 191,111 362,451 - - 553,562 Prepaid expenses 25,860 16,714 17,656 (20,750) 39,480 Deferred income taxes 7,224 8,354 5,248 - 20,826 Other 17,891 7,457 55,748 - 81,096 Assets held for disposal 8,083 8,846 - - 16,929 ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 308,671 428,881 86,637 (20,750) 803,439 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 87,484 176,423 - - 263,907 Buildings and improvements 308,066 591,048 - - 899,114 Furniture, fixtures and equipment 286,472 300,135 - - 586,607 Construction in progress 12,800 - - - 12,800 ----------------------------------------------------------------------------------------------------------------------------- 694,822 1,067,606 - - 1,762,428 Less accumulated depreciation and amortization 363,652 475,567 - - 839,219 ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - Net 331,170 592,039 - - 923,209 ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,440,412 - 1,162,965 (2,603,377) - Intercompany receivable - 410,107 356,382 (766,489) - Other 48,240 3,158 - - 51,398 ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,128,493 $ 1,434,185 $ 1,605,984 $ (3,390,616) $ 1,778,046 ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 342,575 $ 9 $ - $ - $ 342,584 Accrued expenses 43,670 85,790 158,855 (20,750) 267,565 Current maturities of long-term debt and obligations under capital leases 117,063 - - - 117,063 ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 503,308 85,799 158,855 (20,750) 727,212 ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 257,983 33 - - 258,016 Convertible long-term debt, less current maturities 150,000 - - - 150,000 Other long-term liabilities 12,287 26,914 - - 39,201 Intercompany liabilities 607,168 159,321 - (766,489) - Deferred income taxes 26,856 3,120 - - 29,976 Deferred gain on sale leaseback 1,157 2,750 - - 3,907 Stockholders' Equity: Common stock 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital 177,317 240,359 200,398 (440,757) 177,317 Retained earnings 531,933 914,388 1,246,630 (2,161,018) 531,933 Accumulated other comprehensive loss (15) - - - (15) ----------------------------------------------------------------------------------------------------------------------------- 773,146 1,156,248 1,447,129 (2,603,377) 773,146 Less: Cost of shares in treasury 144,148 - - - 144,148 Cost of shares in benefits trust 59,264 - - - 59,264 ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 569,734 1,156,248 1,447,129 (2,603,377) 569,734 ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,128,493 $ 1,434,185 $ 1,605,984 $ (3,390,616) $ 1,778,046 -----------------------------------------------------------------------------------------------------------------------------
18
CONSOLIDATING STATEMENT OF OPERATIONS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended July 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 169,204 $ 319,512 $ - $ - $ 488,716 Service Revenue 36,331 68,379 - - 104,710 Other Revenue - - 7,079 (7,079) - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 205,535 387,891 7,079 (7,079) 593,426 ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 121,495 225,754 - - 347,249 Costs of Service Revenue 27,942 52,759 - - 80,701 Costs of Other Revenue - - 10,326 (10,326) - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 149,437 278,513 10,326 (10,326) 427,950 ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 47,709 93,758 - - 141,467 Gross Profit from Service Revenue 8,389 15,620 - - 24,009 Gross Loss from Other Revenue - - (3,247) 3,247 - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 56,098 109,378 (3,247) 3,247 165,476 ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 48,621 84,741 85 3,247 136,694 ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 7,477 24,637 (3,332) - 28,782 Non-operating (Expense) Income (4,890) 12,670 5,104 (12,414) 470 Interest Expense 13,440 6,774 - (12,414) 7,800 ----------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings From Continuing Operations Before Income Taxes (10,853) 30,533 1,772 - 21,452 Income Tax (Benefit) Expense (4,016) 11,298 655 - 7,937 Equity in Earnings of Subsidiaries 19,671 - 20,774 (40,445) - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings From Continuing Operations 12,834 19,235 21,891 (40,445) 13,515 Discontinued Operations, Net of Tax (171) (681) - - (852) ----------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 12,663 $ 18,554 $ 21,891 $ (40,445) $ 12,663 -----------------------------------------------------------------------------------------------------------------------------
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CONSOLIDATING STATEMENT OF OPERATIONS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended August 2, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 154,518 $ 296,767 $ - $ - $ 451,285 Service Revenue 36,402 68,343 - - 104,745 Other Revenue - - 6,676 (6,676) - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 190,920 365,110 6,676 (6,676) 556,030 ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 119,831 225,570 - - 345,401 Costs of Service Revenue 28,919 52,396 - - 81,315 Costs of Other Revenue - - 10,762 (10,762) - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 148,750 277,966 10,762 (10,762) 426,716 ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 34,687 71,197 - - 105,884 Gross Profit from Service Revenue 7,483 15,947 - - 23,430 Gross Loss from Other Revenue - - (4,086) 4,086 - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 42,170 87,144 (4,086) 4,086 129,314 ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 40,251 98,635 77 4,086 143,049 ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 1,919 (11,491) (4,163) - (13,735) Non-operating (Expense) Income (4,492) 12,305 4,557 (11,519) 851 Interest Expense 14,897 6,225 - (11,519) 9,603 ----------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings From Continuing Operations Before Income Taxes (17,470) (5,411) 394 - (22,487) Income Tax (Benefit) Expense (6,421) (2,035) 147 - (8,309) Equity in Earnings of Subsidiaries (19,896) - (3,602) 23,498 - ----------------------------------------------------------------------------------------------------------------------------- Net Loss From Continuing Operations (30,945) (3,376) (3,355) 23,498 (14,178) Discontinued Operations, Net of Tax (3,990) (16,767) - - (20,757) ----------------------------------------------------------------------------------------------------------------------------- Net Loss $ (34,935) $ (20,143) $ (3,355) $ 23,498 $ (34,935) -----------------------------------------------------------------------------------------------------------------------------
20
CONSOLIDATING STATEMENT OF OPERATIONS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Twenty-six weeks ended July 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 329,466 $ 620,131 $ - $ - $ 949,597 Service Revenue 73,249 136,713 - - 209,962 Other Revenue - - 14,149 (14,149) - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 402,715 756,844 14,149 (14,149) 1,159,559 ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 235,844 436,779 - - 672,623 Costs of Service Revenue 54,488 104,764 - - 159,252 Costs of Other Revenue - - 17,490 (17,490) - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 290,332 541,543 17,490 (17,490) 831,875 ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 93,622 183,352 - - 276,974 Gross Profit from Service Revenue 18,761 31,949 - - 50,710 Gross Loss from Other Revenue - - (3,341) 3,341 - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 112,383 215,301 (3,341) 3,341 327,684 ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 95,563 167,157 195 3,341 266,256 ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 16,820 48,144 (3,536) - 61,428 Non-operating (Expense) Income (9,365) 24,982 10,194 (24,749) 1,062 Interest Expense 29,448 12,399 - (24,749) 17,098 ----------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings From Continuing Operations Before Income Taxes (21,993) 60,727 6,658 - 45,392 Income Tax (Benefit) Expense (8,138) 22,470 2,463 - 16,795 Equity in Earnings of Subsidiaries 41,393 - 40,753 (82,146) - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings From Continuing Operations 27,538 38,257 44,948 (82,146) 28,597 Discontinued Operations, Net of Tax (324) (1,059) - - (1,383) ----------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 27,214 $ 37,198 $ 44,948 $ (82,146) $ 27,214 -----------------------------------------------------------------------------------------------------------------------------
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CONSOLIDATING STATEMENT OF OPERATIONS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Twenty-six weeks ended August 2, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 296,765 $ 565,652 $ - $ - $ 862,417 Service Revenue 71,577 132,946 - - 204,523 Other Revenue - - 13,351 (13,351) - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 368,342 698,598 13,351 (13,351) 1,066,940 ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 221,036 415,940 - - 636,976 Costs of Service Revenue 54,875 101,644 - - 156,519 Costs of Other Revenue - - 17,967 (17,967) - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 275,911 517,584 17,967 (17,967) 793,495 ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 75,729 149,712 - - 225,441 Gross Profit from Service Revenue 16,702 31,302 - - 48,004 Gross Loss from Other Revenue - - (4,616) 4,616 - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 92,431 181,014 (4,616) 4,616 273,445 ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 84,009 202,046 155 4,616 290,826 ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 8,422 (21,032) (4,771) - (17,381) Non-operating (Expense) Income (8,588) 24,337 9,815 (23,663) 1,901 Interest Expense 32,875 11,092 - (23,663) 20,304 ----------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings From Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle (33,041) (7,787) 5,044 - (35,784) Income Tax (Benefit) Expense (12,186) (2,920) 1,868 - (13,238) Equity in Earnings of Subsidiaries (20,047) - (1,478) 21,525 - ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle (40,902) (4,867) 1,698 21,525 (22,546) Discontinued Operations, Net of Tax (3,448) (16,771) - - (20,219) Cumulative Effect of Change in Accounting Principle, Net of Tax (899) (1,585) - - (2,484) ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings $ (45,249) $ (23,223) $ 1,698 $ 21,525 $ (45,249) -----------------------------------------------------------------------------------------------------------------------------
22
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (dollar amount in thousands) (unaudited) Non- Subsidiary guarantor Twenty-six weeks ended July 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated --------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net earnings $ 27,214 $ 37,199 $ 44,946 $ (82,145) $ 27,214 Net loss from discontinued operations (324) (1,059) - - (1,383) --------------------------------------------------------------------------------------------------------------------------------- Net Earnings from Continuing Operations 27,538 38,258 44,946 (82,145) 28,597 Adjustments to Reconcile Net Earnings from Continuing Operations to Net Cash (Used In) Provided by Continuing Operations: Non-cash operating activities (24,575) 42,217 (40,308) 82,145 59,479 Change in operating assets and liabilities (28,908) (31,516) (5,580) - (66,004) --------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by continuing operations (25,945) 48,959 (942) - 22,072 Net Cash used in discontinued operations (137) (1,591) - - (1,728) --------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Operating Activities (26,082) 47,368 (942) - 20,344 Cash Flows from Investing Activities: Net Cash Used in Investing Activities (11,501) (5,344) - - (16,845) Cash Flows from Financing Activities: Net Cash Provided by (Used in) Financing Activities 58,622 (41,865) 2,653 - 19,410 --------------------------------------------------------------------------------------------------------------------------------- Net Increase in Cash 21,039 159 1,711 - 22,909 Cash and Cash Equivalents at Beginning of Period 43,929 9,070 7,985 - 60,984 --------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 64,968 $ 9,229 $ 9,696 $ - $ 83,893 ---------------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (dollar amount in thousands) (unaudited) Non- Subsidiary guarantor Twenty-six weeks ended August 2, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated --------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net (loss) earnings $ (45,249) $ (23,336) $ 1,701 $ 21,635 $ (45,249) Net loss from discontinued operations (3,091) (17,128) - - (20,219) --------------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings from continuing operations (42,158) (6,208) 1,701 21,635 (25,030) Adjustments to Reconcile Net (Loss) Earnings from Continuing Operations to Net Cash Provided by Continuing Operations: Non-cash operating activities 28,078 (4,053) 2,046 (21,635) 4,436 Change in operating assets and liabilities 80,447 68,293 5,147 - 153,887 --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 66,367 58,032 8,894 - 133,293 Net Cash provided by discontinued operations 2,201 1,932 - - 4,133 --------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 68,568 59,964 8,894 - 137,426 Cash Flows from Investing Activities: Net Cash Used in Investing Activities (17,000) (2,468) - - (19,468) Cash Flows from Financing Activities: Net Cash (Used in) Provided by Financing Activities (36,048) (57,045) 460 - (92,633) --------------------------------------------------------------------------------------------------------------------------------- Net Increase in Cash 15,520 451 9,354 - 25,325 Cash and Cash Equivalents at Beginning of Period 32,654 9,714 402 - 42,770 --------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 48,174 $ 10,165 $ 9,756 $ - $ 68,095 ---------------------------------------------------------------------------------------------------------------------------------
23 NOTE 15. Contingencies An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company's motion for summary judgment was granted and the case was dismissed. The plaintiff has appealed. The Company continues to believe that the claims are without merit and to vigorously defend this matter. The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. NOTE 16. Sale of Common Stock On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share) at a price of $24.75 per share for net proceeds of $108,854,000. NOTE 17. Comprehensive Income The following are the components of comprehensive income (loss): Thirteen weeks ended Twenty-six weeks ended --------------------------------- ---------------------------------- (Amounts in thousands) July 31, 2004 August 2, 2003 July 31, 2004 August 2, 2003 ----------------------------------------------------------------------------------------------------- Net earnings (loss) $ 12,663 $ (34,935) $ 27,214 $ (45,249) Other comprehensive income, net of tax: Derivative financial instrument adjustments 53 3,900 1,113 3,900 ----------------------------------------------------------------------------------------------------- Comprehensive income (loss) $ 12,716 $ (31,035) $ 28,327 $ (41,349) ----------------------------------------------------------------------------------------------------- The components of accumulated other comprehensive income (loss) are: July 31, January 31, 2004 2004 ----------- ------------- Derivative financial instrument adjustment, net of tax $ 2,502 $ 1,389 Minimum pension liability adjustment, net of tax (1,404) (1,404) ----------- ------------- $ 1,098 $ (15) ----------- -------------
24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Restated The discussion and analysis below for the Company should be read in conjunction with (i) the financial statements and the notes to such financial statements included elsewhere in this Form 10-Q/A and (ii) the financial statements and the notes to such financial statements included in Item 8, "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. All applicable disclosures in the following discussion have been modified to reflect the Restatement as described below. Restatement ----------- Following a review of our lease-related accounting policies, we have determined to correct our computation of depreciation, straight-line rent expense and the related deferred rent liability. As a result, on January 30, 2005, our Board of Directors, including our Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. These non-cash adjustments, will not have any impact on our previously reported cash flows, sales, comparable sales or our compliance with any financial covenant under our revolving credit facility or other debt instruments. The primary effect of the corrections is to accelerate the depreciation of leasehold improvements of leased properties where the initial lease term is shorter than the estimated useful economic life of those assets and rental expense on properties we occupied before payment of rents was required. The cumulative effect of the restatement through fiscal quarter ended July 31, 2004 is an increase in other current assets of $1,317,000, an increase in accumulated depreciation of $67,006,000, an increase in the deferred rent liability of $9,930,000 and a decrease in deferred income tax liability of $27,516,000. As a result, retained earnings at the end of fiscal quarter ended July 31, 2004 decreased by $48,103,000. Depreciation expense from continuing operations increased by $4,056,000 and $3,943,000 for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. Rent expense from continuing operations decreased by $470,000 and $594,000 for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. The restatement decreased reported diluted earnings per share and diluted loss per share by $0.03 and $0.01 for the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. The cumulative effect of the restatement for all years prior to fiscal 2001 was $34,812,000, which was recorded as an adjustment to opening stockholders' equity at February 2, 2002. The restatement did not have any impact on the Company's previously reported cash flows, sales or comparable sales or on the Company's compliance with any covenant under the Company's line of credit facility or other debt instruments. Management's Discussion and Analysis of Financial Condition and results of Operations has been revised for the effects of the Restatement. See note 2 to the consolidated financial statements. OVERVIEW -------- The Pep Boys - Manny, Moe & Jack is a leader in the automotive aftermarket with 595 stores located throughout 36 states and Puerto Rico. All of our stores feature the nationally-recognized Pep Boys brand name, established through more than 80 years of providing high-quality automotive merchandise and services, and are company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, accessories, tires and parts under one roof, positioning us to achieve our goal of becoming the category dominant one-stop shop for automotive maintenance and accessories. For the thirteen and twenty-six weeks ended July 31, 2004, our comparative sales increased by 6.9% and 8.8%, respectively, compared to (1.7)% and (3.5)% for the thirteen and twenty-six weeks ended August 2, 2003, respectively. This increase in comparable sales is due primarily to new product offerings and increased overall foot traffic at our stores. On March 24, 2004, we successfully completed a common stock offering for net proceeds of $108,854,000. We have used the proceeds from this stock sale to repay the outstanding balance under our revolving credit facility (which was used along with cash to repay the $57,000,000 aggregate principal amount of medium term notes that matured on March 3, 2004 and March 10, 2004) and to prepay $20,919,000 aggregate principal amount outstanding under our senior secured (equipment and real estate) credit facility. The remaining balance will be applied to store redesigns. During the second quarter of fiscal 2004, we continued to reinvest in our existing stores to completely redesign their interiors and enhance their exterior appeal. Our new interior design features four distinct merchandising worlds: accessories (fashion, electronic and performance merchandise), maintenance (hard parts and chemicals), garage (repair shop and travel) and service (including tire, wheel and accessory installation). We believe that this layout provides customers with a clear and concise way of finding what they need and will promote cross-selling. The most important of these changes is to move all of our service desks and waiting areas inside the retail stores adjacent to our tire offering displays. Modifications to the exterior of our stores are designed to increase customer traffic. The following discussion explains the material changes in our results of operations for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003 and the significant developments affecting our financial condition since January 31, 2004. We strongly recommend that you read our audited financial statements and footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004. 25 LIQUIDITY AND CAPITAL RESOURCES - July 31, 2004 ------------------------------------------------ For the twenty-six weeks ended July 31, 2004, we increased our cash and cash equivalents by $22,909,000 from the balance at January 31, 2004. This increase was due primarily to the net proceeds from our March 24, 2004 common stock offering offset, in part, by a decrease in accounts payable, an increase in merchandise inventories, reductions of long-term debt and the payment of the legal settlement discussed below in the first quarter of 2004. We have used the $108,854,000 net proceeds from the common stock offering to repay the outstanding balance under our existing line of credit (which was used along with cash from operations to repay the $57,000,000 aggregate principal amount of medium term notes that matured on March 3, 2004 and March 10, 2004) and to prepay $20,919,000 aggregate principal amount outstanding under our senior secured (equipment and real estate) credit facility in the first quarter of 2004. The remaining balance will be applied to store redesigns. Our cash requirements arise principally from capital expenditures related to existing stores, offices and warehouses and from the purchase of inventory. The primary capital expenditures for the twenty-six weeks ended July 31, 2004 were attributed to capital maintenance of our existing stores and offices including store redesigns. During this period, we invested $28,830,000 in property and equipment, which is a 35% increase from the amount invested in the same period in the previous fiscal year. We estimate that capital expenditures related to existing stores, warehouses and offices during the remainder of fiscal 2004 will be approximately $64,522,000, related primarily to the redesign of our existing stores. We anticipate that our net cash provided by operating activities, the net proceeds from our common stock offering and our existing line of credit will exceed our principal cash requirements for capital expenditures and inventory purchases in fiscal 2004. Working Capital increased from $76,227,000 at January 31, 2004 to $116,627,000 at July 31, 2004. At July 31, 2004, we had stockholders' equity of $708,665,000 and long-term debt, net of current maturities, of $294,727,000. Our long-term debt was 29% of our total capitalization at July 31, 2004 and 42% at January 31, 2004. As of July 31, 2004, we had an available line of credit totaling $183,704,000. In the second quarter of 2004, we reclassified $100,000,000 aggregate principal amount of 7.00% notes with a stated maturity date of June 1, 2005 to current liabilities on the consolidated balance sheet. We anticipate that we will repurchase these notes with cash from operations and borrowing against our existing line of credit. In the second quarter of fiscal 2004, we prepaid $5,000,000 aggregate principal amount of 6.71% Medium-Term Notes with a stated maturity date of November 3, 2004 from cash from operations. In October 2001, we entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773,000 over four years. The minimum required purchases for 2004 and 2005 (the remaining two years of this commitment) are $8,112,000 and $7,457,000 respectively. During the second quarter of fiscal 2004, it was determined that we would be unable to meet this obligation for the 2004 contract year which ends on November 30, 2004. As a result, we recorded a $1,579,000 charge to selling, general and administrative expenses in the quarter ended July 31, 2004 related to the anticipated shortfall in this purchase commitment. In May 2001, we sold certain operating assets for $14,000,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease was accounted for as an operating lease and the gain of $3,817,000 from the sale of certain operating assets was deferred at the time of sale. In May 2004, we repurchased these assets for $5,468,000. The remaining deferred gain of $3,729,000 was netted against the purchase price of the repurchased assets resulting in a net book value of $1,739,000 recorded on the consolidated balance sheet as of July 31, 2004 for the repurchased assets. In the first quarter of fiscal 2004, we prepaid $20,919,000 aggregate principal amount of our senior secured (equipment and real estate) credit facility with a stated maturity date of July 1, 2006. This prepayment was funded out of cash from operations and our existing revolving credit facility. 26 In the first quarter of fiscal 2004, we retired $32,000,000 aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a stated maturity date of March 3, 2004. These notes were retired with cash from operations and our existing line of credit. In the first quarter of fiscal 2004, we entered into arrangements with certain of our vendors and banks to extend payment terms on certain merchandise purchases. Under this program, the bank makes payments to the vendor based upon a negotiated discount rate between the parties and we make our payment of the full payable to the bank at the extended payment term. As of July 31, 2004, all obligations under these arrangements were fully satisfied and the agreement was terminated. In the third quarter of 2003, we reached an agreement, through binding arbitration, to settle the consolidated action entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack". The two consolidated actions, originally filed on March 29, 2000 and July 25, 2000 in the California Superior Court in Orange County, involved former and current store management employees who claimed that they were improperly classified as exempt from the overtime provisions of California law and sought to be compensated for all overtime hours worked. We paid the settlement in the first quarter of fiscal 2004 from cash from operations and our existing line of credit. OFF-BALANCE SHEET ARRANGEMENTS ------------------------------ There have been no material changes to off-balance sheet arrangements as reflected in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004. RESTRUCTURING ------------- Building upon the Profit Enhancement Plan launched in October 2000, we conducted a comprehensive review of our operations including individual store performance, the entire management infrastructure and our merchandise and service offerings. On July 31, 2003, we announced several initiatives aimed at realigning our business and continuing to improve upon our profitability. These actions, including the disposal and sublease of the properties, were substantially completed by July 31 ,2004 and costs were approximately $66,752,000. We are accounting for these initiatives in accordance with the provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". Reserve Summary The following chart details the reserve balances through July 31, 2004. The reserve includes remaining rent on leases net of sublease income, other contractual obligations associated with leased properties and employee severance. (dollar amounts Lease Contractual in thousands) Severance Expenses Obligations Total --------------------------------------------------------------------------------- Reserve balance at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204 Provision for present value of liabilities - 80 90 170 Changes in assumptions about future sublease income, lease termination and severance - 272 - 272 Cash payments (215) (473) (302) (990) --------------------------------------------------------------------------------- Reserve balance at July 31, 2004 $ 158 $ 2,247 $ 251 $ 2,656 ---------------------------------------------------------------------------------
27 In accordance with SFAS No. 144, our discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of our corporate restructuring. Additionally, we have classified certain assets as assets held for disposal on its consolidated balance sheets. As of July 31, 2004 and January 31, 2004, these assets were as follows: (Dollar amounts in thousands) July 31, 2004 Jan. 31, 2004 ------------------------------------------------------------------------------- Land $ 2,012 $ 8,954 Building and improvements 1,106 7,975 ------------------------------------------------------------------------------- Assets held for disposal $ 3,118 $ 16,929 -------------------------------------------------------------------------------
Six of our closed stores remained unsold as of July 31, 2004. Three of the properties are without signed agreements of sale and were reclassified in the second quarter of fiscal 2004 to assets held for use at market value, which is lower than cost adjusted for depreciation. The other three properties have signed agreements of sale as of July 31, 2004 and therefore will remain in assets held for disposal until the completion of those sales. During the second quarter of 2004, we sold assets held for disposal for proceeds of $3,652,000 resulting in a loss of $157,000 which was recorded in discontinued operations on the consolidated statement of operations. During the first quarter of 2004, we sold assets held for disposal for proceeds of $6,879,000 resulting in a gain of $172,000 which was recorded in discontinued operations on the consolidated statement of operations. 28 Results of Operations - The following table presents for the periods indicated certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change ---------------------------------------------------------------------------------------------------------------- Thirteen weeks ended July 31, 2004 Aug. 2, 2003 Fiscal 2004 vs. (Fiscal 2004) (Fiscal 2003) Fiscal 2003 ---------------------------------------------------------------------------------------------------------------- Merchandise Sales 82.4% 81.2% 8.3 % Service Revenue (1) 17.6 18.8 0.0 ---------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 6.7 ---------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales (2) 71.1 (3) 76.5 (3) 0.5 Costs of Service Revenue (2) 77.1 (3) 77.6 (3) (0.8) ---------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 72.1 76.7 0.3 ---------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 28.9 (3) 23.5 (3) 33.6 Gross Profit from Service Revenue 22.9 (3) 22.4 (3) 2.5 ---------------------------------------------------------------------------------------------------------------- Total Gross Profit 27.9 23.3 28.0 ---------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 23.0 25.7 (4.4) ---------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 4.9 (2.5) 309.6 Non-operating Income 0.0 0.1 (44.8) Interest Expense 1.3 1.7 (18.8) ---------------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations Before Income Taxes 3.6 (4.1) 195.4 Income Tax Expense (Benefit) 37.0 (4) 37.0 (4) 195.5 ---------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from Continuing Operations 2.3 (2.6) 195.3 Discontinued Operations, Net of Tax (0.2) (3.7) 95.9 Net Earnings (Loss) 2.1 (6.3) 136.2 ---------------------------------------------------------------------------------------------------------------- (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.
29 Thirteen Weeks Ended July 31, 2004 vs. Thirteen Weeks Ended August 2, 2003 ----------------------------------------------------------------------------- Total revenues for the second quarter increased 6.7%. This increase was due primarily to an increase in comparable revenues (revenues generated by locations in operation during the same period) of 6.9%. Comparable merchandise sales increased 8.4% while comparable service revenue increased 0.3%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 28.9% in fiscal 2004 from 23.5% in fiscal 2003. This was a 33.6% or $35,583,000 increase from the prior year. This increase, as a percentage of merchandise sales, was due primarily to an increase in merchandise margins and a decrease in store occupancy costs offset, in part, by an increase in warehousing costs. The increase in merchandise margins was primarily due to the impact of a $24,580,000 inventory write-down made in the second quarter of fiscal 2003 associated with the corporate restructuring. The decrease in store occupancy costs, as a percentage of merchandise sales, was due to the impact of a charge made in 2003 for an asset impairment of $2,121,000 coupled with lower rent, utilities and building maintenance expenses, as a percentage of merchandise sales. The increase in warehousing costs, as a percentage of merchandise sales, was a result of increased hauling and public storage costs. Selling, general and administrative expenses decreased, as a percentage of total revenues, to 23.0% in fiscal 2004 from 25.7% in fiscal 2003. This decrease, as a percentage of total revenues, was due primarily to a decrease in general office costs offset, in part, by an increase in net media expenses. The decrease in general office costs was due primarily to the impact of charges made in the second quarter 2003 of $6,500,000 and $5,613,000 for litigation expenses and costs associated with the corporate restructuring, respectively. The increase in net media expense, as a percentage of total revenues, was due primarily to a decrease in cooperative advertising. Interest expense decreased 18.8% or $1,803,000 due primarily to lower debt levels. Results from discontinued operations for the second quarter of 2004 was a loss of $852,000 (net of tax) compared to a loss of $20,757,000 (net of tax) in the second quarter of fiscal 2003. The loss recorded in the second quarter of fiscal 2004 is primarily related to changes in estimated market values for assets held for disposal and lease and maintenance costs related to stores closed in the second quarter of fiscal 2003. The loss in fiscal 2003 was due primarily to the charge associated with the closure of those stores. Net earnings increased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales, as a percentage of merchandise sales, a decrease in selling, general and administrative expenses and interest expense, as a percentage of total revenues, and the decrease in the loss from discontinued operations. 30 Results of Operations - The following table presents for the periods indicated certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change ---------------------------------------------------------------------------------------------------------------- Twenty-six weeks ended July 31, 2004 Aug. 2, 2003 Fiscal 2004 vs. (Fiscal 2004) (Fiscal 2003) Fiscal 2003 ---------------------------------------------------------------------------------------------------------------- Merchandise Sales 81.9% 80.8% 10.1 % Service Revenue (1) 18.1 19.2 2.7 ---------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 8.7 ---------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales (2) 70.8 (3) 73.9 (3) 5.9 Costs of Service Revenue (2) 75.8 (3) 76.5 (3) 2.3 ---------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 71.7 74.4 5.2 ---------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 29.2 (3) 26.1 (3) 21.9 Gross Profit from Service Revenue 24.2 (3) 23.5 (3) 3.8 ---------------------------------------------------------------------------------------------------------------- Total Gross Profit 28.3 25.6 18.7 ---------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 23.0 27.3 (8.4) ---------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 5.3 (1.7) 515.6 Non-operating Income 0.1 0.2 (44.1) Interest Expense 1.5 1.9 (15.8) ---------------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle 3.9 (3.4) 236.8 Income Tax (Benefit) Expense 37.0 (4) 37.0 (4) 236.8 ---------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from Continuing Operations and Cumulative Effect of Change in Accounting Principle 2.4 (2.1) 236.8 Discontinued Operations, Net of Tax (0.1) (1.9) 93.8 Cumulative Effect of Change in Accounting Principle, Net of Tax 0.0 (0.2) 100.0 Net Earnings (Loss) 2.3 (4.2) 159.7 ---------------------------------------------------------------------------------------------------------------- (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.
31 Twenty-six Weeks Ended July 31, 2004 vs. Twenty-six Weeks Ended August 2, 2003 ------------------------------------------------------------------------------- Total revenues for the first twenty-six weeks increased 8.7%. This increase was due primarily to an increase in comparable revenues (revenues generated by locations in operation during the same period) of 8.8%. Comparable merchandise sales increased 10.3%, while comparable service revenue increased 2.8%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 29.2% in fiscal 2004 from 26.1% in fiscal 2003. This was a 21.9% or $51,533,000 increase from the prior year. This increase, as a percentage of merchandise sales, was due primarily to an increase in merchandise margins and a decrease in store occupancy costs offset, in part, by an increase in warehousing costs. The increase in merchandise margins was primarily due to the impact of a $24,580,000 inventory write-down made in the second quarter of fiscal 2003 associated with the corporate restructuring. The decrease in store occupancy costs, as a percentage of merchandise sales, was due to the impact of a charge made in 2003 for an asset impairment of $2,121,000 coupled with lower rent, utilities and building maintenance expenses, as a percentage of merchandise sales. The increase in warehousing costs, as a percentage of merchandise sales, was a result of increased hauling and public storage costs. Selling, general and administrative expenses decreased, as a percentage of total revenues, to 23.0% in fiscal 2004 from 27.3% in fiscal 2003. This was an 8.4% or $24,570,000 decrease from the prior year. This decrease, as a percentage of total revenues, was due primarily to a decrease in general office costs and employee benefits offset, in part, by an increase in net media expenses. The decrease in general office costs was due primarily to the impact of charges made in fiscal 2003 of $26,500,000 and $5,613,000 for litigation expenses and costs associated with the corporate restructuring, respectively. The decrease in employee benefits is due primarily to the impact of a charge made in 2003 for the settlement of a retirement plan obligation. The increase in net media expense, as a percentage of total revenues was due primarily to a decrease in cooperative advertising. Interest expense decreased 15.8% or $3,206,000 due primarily to lower debt levels. Results from discontinued operations for 2004 was a loss of $1,383,000 (net of tax) compared to a loss of $20,219,000 (net of tax) in 2003. The change was due primarily to the discontinued stores being in operation through the second quarter of 2003. The loss in 2004 is primarily related to changes in estimated market values of assets held for disposal and lease and maintenance costs related to stores closed in the second quarter of 2003. The loss in fiscal 2003 was due primarily to the charge associated with the closure of those stores. Net earnings increased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales, as a percentage of merchandise sales, a decrease in selling, general and administrative expenses and a decrease in interest expense, as a percentage of total revenues coupled with a decrease in the loss from discontinued operations and the impact of a net charge for the cumulative effect of a change in accounting principle for the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" recorded in fiscal 2003. 32 INDUSTRY COMPARISON -------------------- The Company operates in the U.S. automotive aftermarket, which is split into two areas: the Do-It-For-Me ("DIFM") (service labor, installed merchandise and tires) market and the Do-It-Yourself ("DIY") (retail merchandise) market. Generally, the specialized automotive retailers focus on either the "DIY" or "DIFM" areas of the business. The Company believes that its operation in both the "DIY" and "DIFM" areas of the business positively differentiates it from most of its competitors. Although the Company manages its store performance at a store level in aggregation, management believes that the following presentation shows the comparison against competitors within the two areas. The Company competes in the "DIY" area of the business through its retail sales floor and commercial sales business (Retail Business). The Company considers its Service Business (labor and installed merchandise and tires) to compete in the DIFM area of the industry. The following table presents the revenues and gross profit for each area of the business. Thirteen weeks ended Twenty-six weeks ended ---------------------------- ----------------------------- July 31, 2004 Aug. 31, 2003 July 31, 2004 Aug. 31, 2003 ------------- ------------- ------------- ------------- (Dollar amounts in thousands) Amount Amount Amount Amount ----------------------------------------------------------------------------------------------------------------------------- Retail Revenues $ 359,612 $ 307,955 $ 696,661 $ 594,308 Service Center Revenues 233,814 248,075 462,898 472,632 ----------------------------------------------------------------------------------------------------------------------------- Total Revenues $ 593,426 $ 556,030 $ 1,159,559 $ 1,066,940 ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Retail Revenues (1) $ 99,035 $ 63,964 $ 196,214 $ 140,040 Gross Profit from Service Center Revenues (1) 66,441 65,350 131,470 133,405 ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit $ 165,476 $ 129,314 $ 327,684 $ 273,445 ----------------------------------------------------------------------------------------------------------------------------- (1) Gross Profit from Retail Revenues includes the cost of products sold, buying, warehousing and store occupancy costs. Gross Profit from Service Business Revenues includes the cost of installed products sold, buying, warehousing, service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.
33 NEW ACCOUNTING STANDARDS ------------------------ In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. We have adopted the disclosure requirements of this statement. In March 2004, the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB Statements No. 123 and 95." The proposed standard would require companies to expense share-based payments to employees, including stock options, based on the fair value of the award at the grant date. The proposed statement would eliminate the intrinsic value method of accounting for stock-based compensation permitted by APB (Accounting Principles Board) No. 25, "Accounting for Stock Issued to Employees," which we currently follow. We will continue to monitor the actions of the FASB and assess the impact, if any, on our consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES ------------------------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to "Critical Accounting Policies and Estimates" as reported in the Company's Form 10-K/A for the year ended January 31, 2004, which disclosures are hereby incorporated by reference. FORWARD-LOOKING STATEMENTS -------------------------- Certain statements contained herein constitute "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. The words "guidance," "expect," "anticipate," "estimates," "forecasts" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include management's expectations regarding future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. The Company's actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond the control of the Company, including the strength of the national and regional economies, retail and commercial consumers' ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, the location and number of competitors' stores, product and labor costs and the additional factors described in the Company's filings with the Securities and Exchange Commission (SEC). The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. 34 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement, changes in the London Interbank Offered Rate (LIBOR) could affect the rates at which the Company could borrow funds thereunder. At July 31, 2004, the Company had outstanding borrowings of $187,000 under this facility. Additionally, we have $132,000,000 of real estate operating leases which vary based on changes in LIBOR. We have entered into an interest rate swap, which was designated as a cash flow hedge to convert the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1,2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. As of July 31, 2004, the fair value of the interest rate swap was $3,961,000 ($2,502,000 net of tax) and this change in value was included in accumulated other comprehensive income on the consolidated balance sheet. Item 4. Controls and Procedures EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's management, with the participation of the Company's principal executive officer and principal financial officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In connection with the restatement and the filing of this Form 10-Q/A, the Company's management, with the participation of the Company's chief executive officer and principal financial officer, re-evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective as of the end of the period covered by this report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No change in the Company's internal control over financial reporting occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 35 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company's motion for summary judgment was granted and the case was dismissed. The plaintiff has appealed. The Company continues to believe that the claims are without merit and to vigorously defend this matter. The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 36 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders An annual meeting of shareholders was held on June 2, 2004. The shareholders elected the directors shown below. Directors Elected at Annual Meeting of Shareholders ---------------------------------------------------- Name Votes For Votes Withheld ---- --------- -------------- Benjamin Strauss 42,690,487 16,227,167 Bernard J. Korman 44,635,995 14,281,657 J. Richard Leaman, Jr. 44,545,663 14,371,990 Malcolmn D. Pryor 43,378,654 15,538,999 Peter A. Bassi 43,506,989 15,410,665 Jane Scaccetti 44,558,394 14,359,259 John T. Sweetwood 44,673,554 14,244,099 William Leonard 43,544,111 15,373,543 Lawrence N. Stevenson 57,917,928 999,726 M. Shan Atkins 58,128,501 789,156 .................................................................... The shareholders also voted on the appointment of the Company's independent auditors, Deloitte & Touche, LLP, with 58,153,631 affirmative votes, 700,407 negative votes and 63,607 abstentions. .................................................................... The shareholders also voted on an amendment to the Company's Annual Incentive Bonus Plan with 57,108,522 affirmative votes, 1,315,507 negative votes and 493,604 abstentions. .................................................................... The shareholders also voted on a shareholder proposal regarding the Company's Shareholder Rights Plan with 36,594,682 affirmative votes, 12,493,001 negative votes, 655,463 abstentions and 9,174,499 broker nonvotes. .................................................................... 37 Item 5. Other Information None. Item 6. Exhibits (31.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32.1) Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.2) Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 38 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE PEP BOYS - MANNY, MOE & JACK -------------------------------- (Registrant) Date: March 2, 2005 by: /s/ Harry F. Yanowitz ----------------------- -------------------------- Harry F. Yanowitz Senior Vice President and Chief Financial Officer 39 INDEX TO EXHIBITS ----------------- (31.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32.1) Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.2) Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 40