Case 09-5 Part APit Stop Closed Auto World Inc. (Auto World), a calendar year-end SEC registrant, is a leadingautomotive retail and service chain. Auto World operates exclusively in the automotiveaftermarket industry. Auto World is engaged principally in the retail sale of automotiveparts, tires, and accessories, automotive repairs and maintenance, and the installation ofparts. Auto World has two primary operating unit formats: (1) Auto Boyz Retail Centers(Auto Boyz Centers) and (2) Pit Stop Service & Tire Centers (Pit Stop Centers). As ofApril 15, 2007, Auto World operated 120 stores consisting of 90 Auto Boyz Centers and30 Pit Stop Centers. Auto World operates approximately 1,800,000 gross square feet ofretail space. The Auto Boyz Centers average approximately 20,000 square feet per store.The 30 Pit Stop Centers offer service labor, installed merchandise, and tires. Auto Worldmaintains distinct advertising and branding policies for each format. The Auto BoyzCenters are usually placed in high-traffic areas within major metropolitan cities. AutoWorld invests heavily in marketing and advertising for the Auto Boyz Centers. Forexample, Auto World purchases commercial airtime on local and national televisionstations and relies heavily on local newspaper advertising, frequently including discountcoupons and promotions in newspaper distributions. Auto World typically places the PitStop Centers within 10 miles of the Auto Boyz Centers primarily to facilitate a closesupply line of parts, if needed. Auto World also relies on television and newspaperadvertising for the Pit Stop Centers.During the second quarter (on April 15, 2007), Auto World announced a decision to closeall 30 freestanding Pit Stop Centers by June 30, 2007, under a new restructuring plan.The following is a copy of the press release issued by Auto World. FOR IMMEDIATE RELEASEFROM: Cal Naughton, Jr., Investor Relations DATE: April 15, 2007 Auto World Inc. announced that it recently completed an exhaustive study of its current operating structure and determined that the most efficient delivery of retail products and automotive services to its customers would be under a one-stopshopping approach. As a result, Auto World plans to close its 30 freestanding Pit StopService & Tire Centers and begin providing these services out of its existing AutoBoyz Retail Centers. Ricky Bobby, chairman and chief executive officer, said,Overall, we have made considerable progress in the last three years in strengtheningour portfolio of businesses at Auto World. The actions we are announcing today willfurther enhance our ability to increase market share and improve sales and earnings atour company by providing our customers with one stop shopping for our do-ityourselfretail customers and our do-it-for-me customers.The 30 facilities are expected to be closed on or before June 30, 2007. It is also expected that Auto Worlds Auto Boyz Retail Centers will be fully prepared to take over all of the automotive service and tire business currently handled by the Pit Stop Service & Tire Centers by June 30, 2007, and that there will be minimal loss of customers during this transition. These actions are expected to generate significant cashflow in 2007 and to increase free cash flow in 2008 and beyond. In addition, theseactions are expected to yield improvements in operating earnings of approximately $58million in 2008 and approximately $67 million annually thereafter.In conjunction with these actions, Auto World currently estimates it will incurrestructuring and other charges totaling $52 million pre-tax. The majority of thesecharges are associated with the termination of operating leases. The amount of thischarge is preliminary and remains subject to change, pending the outcome ofnegotiations with landlords and other third parties. The company intends to record thecharges in the second quarter of the current fiscal year.Mr. Bobby continued, We have worked hard over the past few years to expand ourauto parts and service business, and these efforts have been successful. However, ourefforts to reverse significant performance declines within the freestanding Pit StopService & Tire Centers have not been successful. The accelerating deterioration in thefinancial performance of these freestanding stores has convinced us that it is in the bestinterest of our company and of our shareholders to cease operations in thesefreestanding stores. This will enable us to refocus our efforts to ensure that our mostproductive divisions and formats are best positioned to deliver the returns that we andour shareholders want.We are keenly aware of the effects of this decision, and we commend all ourassociates for their efforts and perseverance in recent years. We are working hard tomake sure that, where possible, we place these associates in other positions within thecompany.Mr. Bobby also commented, In this regard, we remain committed to the automotivebusiness and we expect to deliver significant additional profitable growth.After the closure of the Pit Stop Centers, Auto World estimates that there will becontinuing cash flows from the sale of automotive services and tires by the ongoing AutoBoyz Centers of approximately $600 million. Auto World estimates that the Pit StopCenters would have generated approximately $700 million of sales absent the disposaltransaction. Auto World undertook a marketing strategy to notify the existing Pit StopCenter customers via direct mail of the changes and of the location of the nearest AutoBoyz Center. In addition, Auto World offered bounce-back coupon promotions thatwould allow a customer to get a coupon redeemable at any Auto Boyz Center once the PitStop Centers close. Auto World also provided its Internet address to enable customers to schedule automotive service and order tires online at the nearest Auto Boyz Center. Other Relevant Facts For financial reporting purposes, Auto World has two operating and reportable segments in accordance with ASC 280, Segment Reporting. The segments are Auto Boyz and PitStop Service & Tire.Segment Information (in millions):2006 2005NET SALESAuto Boyz $1,158 $902Pit Stop Service & Tire 701 689Total net sales $1,859 $1,591OPERATING EARNINGSAuto Boyz $279 $208Pit Stop Service & Tire (172) (88)Total operating earnings $107 $120 For Q2 2007, Auto World determined that it meets the criteria in ASC 420-10,Exit or Disposal Cost Obligations: Overall, for recognizing an accrual related tothis event. Auto World determined that the Pit Stop Centers meet the definition of acomponent of an entity as that term is defined in ASC 205-20-20, Presentationof Financial Statements: Discontinued Operations, for reporting discontinuedoperations.Required: Should the Pit Stop Centers store closures be reported as a discontinued operationin Auto Worlds second quarter financial statements? (As part of your response,include a calculation of the level of significance of any continuing cash flowsafter the disposal transaction.) Discuss any additional issues you have identified and the professional literature you relied on in developing your recommendations and conclusions for resolving the issues.