-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LM+Hdy8B0UW1kEpLQBMLemPcMz7o/HBcC2QxvG75iC9C2Bbr2tlmVDvtX0eHRWfZ wQOpuPq/7XA54V/JK6CPng== 0000077449-03-000005.txt : 20030502 0000077449-03-000005.hdr.sgml : 20030502 20030502160200 ACCESSION NUMBER: 0000077449-03-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030502 FILED AS OF DATE: 20030502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEP BOYS MANNY MOE & JACK CENTRAL INDEX KEY: 0000077449 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 230962915 STATE OF INCORPORATION: PA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03381 FILM NUMBER: 03679847 BUSINESS ADDRESS: STREET 1: 3111 W ALLEGHENY AVE CITY: PHILADELPHIA STATE: PA ZIP: 19132 BUSINESS PHONE: 2152299000 10-K 1 rr200210k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-K (Mark One) (x) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 1, 2003 OR ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (NO FEE REQUIRED) For the transition period from to ------ ------ Commission file number 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 identification no.) incorporation or organization) 3111 West Allegheny Avenue, Philadelphia, PA 19132 - --------------------------------------------- --------- (Address of principal executive office) (Zip code) 215-430-9000 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ----------------------- Common Stock, $1.00 par value New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (x) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ----- ----- As of the close of business on April 5, 2003, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $386,587,362. As of April 5, 2003, there were 53,844,848 shares of the registrant's common stock outstanding. 2 DOCUMENTS INCORPORATED BY REFERENCE PART III Portions of the registrant's definitive proxy statement, which will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year, for the Company's Annual Meeting of Shareholders presently scheduled to be held on May 28, 2003. 3 This Annual Report on Form 10-K for the year ended February 1, 2003 at the time of filing with the Securities and Exchange Commission, modifies and supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities on or after the date of such filing, pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference this Annual Report. 4 PART I ITEM 1 BUSINESS GENERAL The Pep Boys - Manny, Moe & Jack and subsidiaries (the "Company") is a leading automotive retail and service chain. The Company operates in one industry, the automotive aftermarket. The Company is engaged principally in the sale of automotive parts, tires and accessories and the provision of automotive maintenance and service including the installation of parts, tires and accessories. The Company's primary operating unit is its SUPERCENTER format. As of February 1, 2003, the Company operated 629 stores consisting of 616 SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of 6,527 service bays, as well as 12 non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates approximately 12,867,000 gross square feet of retail space, including service bays. The SUPERCENTERS average approximately 20,700 square feet and the 12 PEP BOYS EXPRESS stores average approximately 9,600 square feet. The Company believes that its unique SUPERCENTER format offers the broadest capabilities in the industry and positions the Company to gain market share and increase its profitability by serving "do-it-yourself" (retail) and "do-it-for-me" (service labor, installed merchandise/commercial and tires) customers with the highest quality merchandise and service offerings. 5 As of February 1, 2003 the Company operated its stores in 36 states and Puerto Rico. The following table indicates by state the number of stores of the Company in operation at the end of fiscal 1999, 2000, 2001 and 2002 and the number of stores opened and closed by the Company during each of the last three fiscal years:
NUMBER OF STORES AT END OF FISCAL YEARS 1999 THROUGH 2002 1999 2000 2001 2002 Year Year Year Year State End Opened Closed End Opened Closed End Opened Closed End - ------ --- ------ ------ --- ------ ------ --- ------ ------ --- Alabama 1 - - 1 - - 1 - - 1 Arizona 23 - - 23 - - 23 - - 23 Arkansas 1 - - 1 - - 1 - - 1 California 136 - 1 135 - - 135 - 1 134 Colorado 8 - - 8 - - 8 - - 8 Connecticut 9 - 1 8 - - 8 - - 8 Delaware 6 - - 6 - - 6 - - 6 Florida 48 - 1 47 - - 47 - - 47 Georgia 26 - - 26 - - 26 - - 26 Illinois 25 - 1 24 - - 24 - - 24 Indiana 13 - 4 9 - - 9 - - 9 Kansas 2 - - 2 - - 2 - - 2 Kentucky 4 - - 4 - - 4 - - 4 Louisiana 12 - 2 10 - - 10 - - 10 Maine 1 - - 1 - - 1 - - 1 Maryland 19 - - 19 - - 19 - - 19 Massachusetts 10 - 2 8 - - 8 - - 8 Michigan 17 - 10 7 - - 7 - - 7 Minnesota 3 - - 3 - - 3 - - 3 Missouri 1 - - 1 - - 1 - - 1 Nevada 12 - - 12 - - 12 - - 12 New Hampshire 4 - - 4 - - 4 - - 4 New Jersey 28 - - 28 - - 28 1 - 29 New Mexico 8 1 1 8 - - 8 - - 8 New York 33 1 5 29 1 - 30 1 - 31 North Carolina 11 - - 11 - - 11 - - 11 Ohio 15 - 2 13 - - 13 - - 13 Oklahoma 6 - - 6 - - 6 - - 6 Oregon 3 - 3 - - - - - - - Pennsylvania 46 - - 46 - 1 45 - - 45 Puerto Rico 25 2 - 27 - - 27 - - 27 Rhode Island 3 - - 3 - - 3 - - 3 South Carolina 6 - - 6 - - 6 - - 6 Tennessee 7 - - 7 - - 7 - - 7 Texas 61 - 1 60 - - 60 - - 60 Utah 6 - - 6 - - 6 - - 6 Virginia 17 - - 17 - - 17 - - 17 Washington 6 1 5 2 - - 2 - - 2 ---- --- -- --- ---- -- ---- ---- -- ---- Total 662 5 39 628 1 1 628 2 1 629 === == == === == == === == === ===
6 DEVELOPMENT The Company's primary focus in fiscal 2002 was improving the performance of its existing stores. Accordingly, during fiscal 2002, the Company only opened 2 SUPERCENTERS and closed 1 SUPERCENTER. In fiscal 2003, the Company does not plan to open new stores and will continue to focus much of its energy on improving the performance of its existing stores. The Company anticipates spending approximately $36,400,000 in connection with maintaining and improving its stores and expects funding to come from net cash generated by operating activities. PRODUCTS AND SERVICES Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries a similar product line, with variations based on the number and type of cars registered in the markets where the store is located. A full complement of inventory at a typical SUPERCENTER includes an average of approximately 24,000 items (approximately 23,000 items at a PEP BOYS EXPRESS store). The Company's automotive product line includes: tires (not stocked at PEP BOYS EXPRESS stores); batteries; new and remanufactured parts for domestic and import vehicles; chemicals and maintenance items; car, truck, van and SUV accessories; and mobile electronics. In addition to offering a wide variety of high quality, name brand products, the Company sells an array of high quality products under various private label names. The Company sells tires under the names CORNELL (R) and FUTURA (R); and batteries under the name PROSTART (R). The Company also sells wheel covers under the name FUTURA (R); water pumps and cooling system parts under the name PROCOOL (R); air filters, anti-freeze, chemicals, cv axles, lubricants, oil, oil filters, oil treatments, transmission fluids, alloy wheels and wiper blades under the name PROLINE (R); shock absorbers under the name PRO RYDER (R); alternators, battery booster packs, and starters under the name PROSTART (R); power steering hoses and power steering pumps under the name PROSTEER (tm); brakes under the name PROSTOP (R); temperature gauges under the name PROTEMP (R); and paints under the name VARSITY (R). All products sold by the Company under various private label names accounted for approximately 33% of the Company's merchandise sales in fiscal 2002 and approximately 34% in fiscal 2001 and 36% in fiscal 2000. Revenues from the sale of tires accounted for 16.0% of the Company's total revenues in fiscal 2002 and approximately 17.0% in fiscal years 2001 and 2000. No other class of products accounted for as much as 10% of the Company's total revenues. 7 The Company has service bays in 617 of its 629 locations. Each service department performs virtually every type of automotive service (except body work) ranging from complete engine diagnostics and repair to computerized wheel alignment and balancing to tire, battery and accessory installation for both domestic and import vehicles. Revenues from maintaining or repairing automobiles and installing products, accounted for approximately 19.1%, 19.2% and 19.1% of the Company's total revenues in fiscal 2002, 2001 and 2000, respectively. The Company's commercial automotive parts delivery program, branded PEP EXPRESS PARTS (PEP) (R), is designed to increase the Company's market share with the professional installer and to leverage its inventory investment. The program satisfies the installed merchandise customer by taking advantage of the breadth and quality of the Company's parts inventory as well as its experience supplying its own service bays and mechanics. As of February 1, 2003, 495, or approximately 79%, of the Company's stores provide commercial parts delivery. The Company has a point-of-sale system in all of its stores which gathers sales and gross profit data by stock-keeping unit from each store on a daily basis. This information is then used by the Company to help formulate its pricing, marketing and merchandising strategies. The Company has an electronic parts catalog and an electronic commercial invoicing system in all of its stores. The Company has an electronic work order system in all of its service centers. This system creates a service history for each vehicle, provides customers with a comprehensive sales document and enables the Company to maintain a service customer database. The Company primarily uses an "Everyday Low Price" (EDLP) strategy in establishing its selling prices. Management believes that EDLP provides better value to its customers on a day-to-day basis, helps level customer demand and allows more efficient management of inventories. On occasion, the Company employs a promotional pricing strategy on select items to drive increased customer traffic. The Company uses various forms of advertising to promote its category-dominant product offering, its state-of-the-art automotive service and repair capabilities and its commitment to customer service and satisfaction. The Company's advertising vehicles include, but are not limited to, television and radio commercials, newspaper inserts and advertisements, and various in-store promotions. All or most of the gross cost of the advertising directed by the Company is customarily borne by the suppliers of the products advertised. In fiscal 2002, approximately 49% of the Company's total revenues were cash transactions (including personal checks), and the remainder were credit and debit card transactions and commercial credit accounts. The Company does not experience significant seasonal fluctuation in the generation of its revenues. 8 STORE OPERATIONS AND MANAGEMENT All Pep Boys stores are open seven days a week. Each SUPERCENTER generally has a manager, a service manager and one or more assistant managers. Each PEP BOYS EXPRESS store has a manager and one or more assistant managers. Stores with the PEP EXPRESS PARTS program have a commercial sales manager in addition to the management previously mentioned. A store manager's average length of service with the Company is approximately seven years. The Company coordinates the operation and merchandising of each store through a network of district and regional managers. The regional managers report to the Divisional Vice Presidents of Operations, who report to the Company's Vice President of Customer Satisfaction, who reports to the Company's Senior Vice President - Store Operations, who reports to the Company's President & Chief Financial Officer, who reports to the Company's Chairman of the Board & Chief Executive Officer. Supervision and control over the individual stores are facilitated by means of the Company's computer system, operational handbooks and regular visits to the individual stores by the district operations managers and loss prevention personnel. All of the Company's advertising, accounting, purchasing and most of its management information systems and administrative functions are conducted at its corporate headquarters in Philadelphia, Pennsylvania. Certain administrative functions for the Company's western, southwestern, southeastern, midwestern and Puerto Rico operations are performed at various regional offices of the Company. See "Properties." INVENTORY CONTROL AND DISTRIBUTION Most of the Company's merchandise is distributed to its stores from its warehouses primarily by dedicated and contract carriers. Target levels of inventory for each product have been established for each of the Company's warehouses and stores and are based upon prior shipment history, sales trends and seasonal demand. Inventory on hand is compared to the target levels on a weekly basis at each warehouse. If the inventory on hand at a warehouse is below the target levels, the Company's buyers order merchandise from its suppliers. Each Pep Boys store has an automatic inventory replenishment system that automatically orders additional inventory when a store's inventory on hand falls below the target level. In addition, the Company's centralized buying system, coupled with continued advancement in its warehouse and distribution systems, has enhanced the Company's ability to control its inventory. 9 SUPPLIERS During fiscal 2002, the Company's ten largest suppliers accounted for approximately 48% of the merchandise purchased by the Company. No single supplier accounted for more than 21% of the Company's purchases. The Company has no long-term contracts under which the Company is required to purchase merchandise. Management believes that the relationships the Company has established with its suppliers are generally good. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist, at substantially similar cost, for virtually all types of merchandise sold in its stores. COMPETITION The business of the Company is generally highly competitive. The Company encounters competition from nationwide and regional chains and from local independent merchants. The Company's competitors include general, full range, discount or traditional department stores which carry automotive parts and accessories and/or have automotive service centers, as well as specialized automotive retailers similar to the Company. Generally, the specialized automotive retailers focus on either the "do-it-yourself" or "do-it-for-me" areas of the business. The Company believes that its operation in both the "do-it-yourself" and "do-it-for-me" areas of the business positively differentiates it from most of its competitors. However, certain of its competitors are larger in terms of sales volume, store size, and/or number of stores, have access to greater capital and management resources and have been operating longer in particular geographic areas than the Company. Although the Company's competition varies by geographic area, the Company believes that it generally has a favorable competitive position in terms of depth and breadth of product line, price, quality of personnel and customer service. The Company believes that its warranty policies in connection with the higher priced items it sells, such as tires, batteries, brake linings and other major automotive parts and accessories, are comparable or superior to those of its competitors. REGULATION The Company is subject to federal, state and local provisions relating to the protection of the environment, including provisions with respect to the disposal of oil at its store locations. Estimated capital expenditures relating to compliance with such environmental provisions are not deemed material. 10 EMPLOYEES At February 1, 2003, the Company employed 21,705 persons as follows:
Full-time Part-time Total Description Numbers % Numbers % Numbers % ------- ---- ------- ---- ------- ---- Store Sales 6,464 44.3 5,173 72.6 11,637 53.6 Store Service 6,149 42.1 1,821 25.6 7,970 36.7 ------- ----- ----- ----- ------- ----- STORE TOTAL 12,613 86.4 6,994 98.2 19,607 90.3 Warehouses 764 5.3 106 1.5 870 4.0 Offices 1,205 8.3 23 .3 1,228 5.7 ------- ------ ------- ------- ------- ------ TOTAL EMPLOYEES 14,582 100.0 7,123 100.0 21,705 100.0 ====== ===== ===== ===== ====== =====
The Company had no union employees as of February 1, 2003. At the end of fiscal 2001, the Company employed 16,049 full-time and 6,152 part-time employees and at the end of fiscal 2000, the Company employed 17,082 full-time and 6,054 part-time employees. 11 RISK FACTORS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contain statements that are forward-looking. Such statements may relate to trends in the automotive aftermarket, competition, business development activities, future capital expenditures, financing sources and availability, and the effects of regulation. 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 and 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, location and number of competitors' stores and product and labor costs. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. The Company refers to itself as "we" or "our" in the following risk factors. Risks Related to Pep Boys If we are unable to generate sufficient cash flows from our operations, our liquidity will suffer and we may be unable to satisfy our obligations. We require significant capital to fund our business. While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for fiscal 2003, circumstances could arise that would materially affect our liquidity. For example, cash flows from our operations could be affected by changes in consumer spending habits or the failure to maintain favorable vendor payment terms or our inability to successfully implement sales growth initiatives. We may be unsuccessful in securing alternative financing when needed, on terms that we consider acceptable, or at all. In September 2000, we entered into a $143.0 million real estate operating lease facility with leased property trusts established through an unconsolidated special purpose entity. As of February 1, 2003, the outstanding balance under the real estate operating lease facility was $132.0 million, which is off balance sheet, in accordance with generally accepted accounting principles. Recent changes in accounting standards for special purpose entities (now referred to as variable interest entities) will result in the consolidation of this entity with us, effective on August 3, 2003, unless we are able to refinance this lease facility in such a way that we will continue to account for this facility as off balance sheet in accordance with the new accounting guidance of FASB Interpretation 46, "Consolidation of Variable Interest Entities." We depend on our relationships with our vendors and a disruption of these relationships or of our vendors' operations could have a material adverse effect on our business and results of operations. Our business depends on developing and maintaining productive relationships with our vendors. Many factors outside our control may harm these relationships. For example, financial difficulties that some of our vendors may face may increase the cost of the products we purchase from them. In addition, our failure to promptly pay, or order sufficient quantities of inventory from, our vendors may increase the cost of products we purchase or may lead to vendors refusing to sell products to us at all. The recent trend towards consolidation among automotive parts suppliers may also disrupt our relationship with some vendors. To enhance our supply of top-quality, competitively-priced tires and batteries, we have selected a primary vendor who supplies over 90% of our needs in each of these two product categories. While each of these vendors is contractually obligated to satisfy all of our product needs in the respective categories and we maintain contingency plans to minimize the impact of a supply chain disruption from these vendors, there can be no assurance that these relationships can be maintained without disruption. A disruption of our vendor relationships or a disruption in our vendors' operations could have a material adverse effect on our business and results of operations. 12 We depend on our senior management team and our other personnel, and we face substantial competition for qualified personnel. Our success depends on the efforts of our senior management team. No assurance can be given that the loss of one or more of our executive officers would not have an adverse impact on us. Our continued success will also be dependent upon our ability to retain existing, and attract additional, qualified field personnel to meet our needs. We face substantial competition, both from within and outside of the automotive aftermarket to retain and attract qualified personnel. In addition, we believe that the number of qualified automotive service technicians in the industry is insufficient to meet demand. We are subject to environmental laws and may be subject to environmental liabilities that could have a material adverse effect on us in the future. We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal of hazardous substances contained in the products we sell and use in our service bays, the recycling of batteries, tires and used lubricants, and the ownership and operation of real property. As a result of investigations undertaken in connection with a number of our store acquisitions and financings, we are aware that soil or groundwater may be contaminated at some of our properties. There can be no assurance that compliance with environmental laws and regulations will not have a material adverse effect on us in the future. Over the year we intend to install a new point-of-sale information system, and if the systems integration is not completed on schedule, within budget, or at all, we may be at a competitive disadvantage relative to our competitors. We are currently developing and intend, over the next year, to introduce a fully integrated web-enabled system in all of our stores that we expect will improve our stores' operating efficiency and product sourcing. With our outside vendors, we are currently developing the software and designing the hardware architecture to implement this system and expect to begin a store by store roll-out by the end of 2003. There can be no assurance that the development and introduction of our new store system will be completed on schedule, within budget, or at all. In addition to increased demand on capital which would be caused by difficulties in the development and introduction of our new store system, delays in its introduction could lead to a competitive disadvantage relative to our competitors. Risks Related to Our Industry Our industry is highly competitive, and price competition in some categories of the automotive aftermarket or a loss of trust in our participation in the "do-it-for-me" market, could cause a material decline in our revenues and earnings. The automotive aftermarket retail and service industry is highly competitive and subjects us to a wide variety of competitors. We compete primarily with the following types of businesses in each category of the automotive aftermarket: 13 Do-It-Yourself Retail * automotive parts and accessories stores * automobile dealers that supply manufacturer replacement parts and accessories * mass merchandisers and wholesale clubs that sell automotive products Do-It-For-Me Service Labor * regional and local full service automotive repair shops * automobile dealers that provide repair and maintenance services * national and regional (including franchised) tire retailers that provide additional automotive repair and maintenance services * national and regional (including franchised) specialized automotive (such as exhaust, brake and transmission) repair facilities that provide additional automotive repair and maintenance services Installed Merchandise/Commercial * mass merchandisers, wholesalers and jobbers (some of which are associated with national parts distributors or associations) Tire Sales * national and regional (including franchised) tire retailers * mass merchandisers and wholesale clubs that sell tires A number of our competitors have more financial resources, are more geographically diverse or have better name recognition than us, which might place us at a competitive disadvantage to those competitors. Because we seek to offer competitive prices, if our competitors reduce their prices we may be forced to reduce our prices, which could cause a material decline in our revenues and earnings and hinder our ability to service our debt. With respect to the service labor category, the majority of consumers are unfamiliar with their vehicle's mechanical operation and, as a result, often select a service provider based on trust. Potential occurrences of negative publicity associated with the Pep Boys brand, the products we sell or installation or repairs performed in our service bays, whether or not factually accurate, could cause consumers to lose confidence in our products and services in the short or long term, and cause them to choose our competitors for their automotive service needs. Vehicle miles driven may decrease, resulting in a decline of our revenues and negatively affecting our results of operations. Our industry depends on the number of vehicle miles driven. Factors that may cause the number of vehicle miles and our revenues and our results of operations to decrease include: * the weather-as vehicle maintenance may be deferred during periods of inclement weather * the economy-as during periods of poor economic conditions, customers may defer vehicle maintenance or repair, and during periods of good economic conditions, consumers may opt to purchase new vehicles rather than service the vehicles they currently own and replace worn or damaged parts * gas prices-as increases in gas prices may deter consumers from using their vehicles * travel patterns-as changes in travel patterns may cause consumers to rely more heavily on train and airplane transportation 14 EXECUTIVE OFFICERS OF THE COMPANY The following table indicates the names, ages, years with the Company and positions (together with the year of election to such positions) of the executive officers of the Company:
- ----------------------------------------------------------------------------------------------------------------------------------- Years with Position with the Company and Name Age Company Date of Election to Position - ----- --- ------- ---------------------------- Mitchell G. Leibovitz 57 24 Chairman of the Board since 1994; Chief Executive Officer since 1990 George Babich, Jr. 51 7 President since 2002; Chief Financial Officer since 2000 Mark L. Page 46 27 Senior Vice President - Store Operations since 1993 Frederick A. Stampone 47 20 Senior Vice President since 1987; Chief Administrative Officer since 1993; Secretary since 1988 Don Casey 51 3 Senior Vice President - Merchandise Supply Chain since 2000
Messrs. Leibovitz, Page and Stampone have been executive officers of the Company for more than the past five years. In December 2002, the Company's Board of Directors determined that, after 24 years of valued and loyal service to the Company, it was in the best interests of the Company, its shareholders and Mr. Leibovitz to plan for Mr. Leibovitz's eventual retirement and to initiate the process of seeking his successor. In connection therewith, the Company notified Mr. Leibovitz of its intention not to renew his employment agreement. Mr. Leibovitz' successor, Lawrence N. Stevenson, was appointed Chief Executive Officer on April 28, 2003. Mr. Babich was elected to his current position effective March 16, 2002. From March 2001 until March 2002, Mr. Babich served as Executive Vice President and Chief Financial Officer. From March 2000 until March 2001, Mr. Babich served as Senior Vice President - Finance and Chief Financial Officer. From September 1996 through March 2000, Mr. Babich served as Vice President - Finance. Mr. Casey rejoined the Company as Senior Vice President-Merchandising in July 2000. From June 1999 through June 2000, Mr. Casey was Vice President of Purchasing and Supply Chain for Discount Auto Parts, Inc. From February 1987 through May 1999, Mr. Casey served in various merchandising positions of increasing seniority with the Company. Each of the officers serves at the pleasure of the Board of Directors of the Company. 15 ITEM 2 PROPERTIES The Company owns its five-story, approximately 300,000 square foot corporate headquarters in Philadelphia, Pennsylvania. The Company also owns the following administrative regional offices -- approximately 4,000 square feet of space in each of Melrose Park, Illinois and Bayamon, Puerto Rico. In addition, the Company leases approximately 4,000 square feet of space for administrative regional offices in each of Decatur, Georgia and Richardson, Texas. The Company owns a three-story, approximately 60,000 square foot structure in Los Angeles, California in which it occupies 7,200 square feet and leases the remainder to tenants. Of the 629 store locations operated by the Company at February 1, 2003, 343 are owned and 286 are leased. The following table sets forth certain information regarding the owned and leased warehouse space utilized by the Company for its 629 store locations at February 1, 2003:
Warehouse Products Square Owned or Stores States Location Warehoused Footage Leased Serviced Serviced - --------- ---------- ------- ------ -------- ------- Los Angeles, CA All except 216,000 Owned 164 AZ, CA, NM, tires NV, UT, WA Los Angeles, CA Tires/parts 73,000 Leased 164 AZ, CA, NM, NV, UT, WA Los Angeles, CA All except 137,000 Leased 164 AZ, CA, NM, tires NV, UT, WA Atlanta, GA All 392,000 Owned 139 AL, FL, GA, LA, NC, PR, SC, TN, VA Mesquite, TX All 244,000 Owned 96 AR, AZ, CO, LA, NM, OK, TX Plainfield, IN All 403,000 Leased 91 IL, IN, KS, KY, MI, MN, MO, NY, OH, OK, PA, TN, VA Chester, NY All 400,400 Leased 139 CT, DE, MA, ---------- MD, ME, NH, NJ, NY, PA, RI, VA Total 1,865,400 ==========
The Company anticipates that its existing warehouse space will accommodate inventory necessary to support store expansion and any increase in stock-keeping units through the end of fiscal 2003. 16 ITEM 3 LEGAL PROCEEDINGS The Company's California subsidiary is a defendant in a consolidated action entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack" that is currently pending in the California Superior Court in Orange County. The two consolidated actions were originally filed on March 29, 2000 and July 25, 2000. Plaintiffs are former and current store management employees who claim that they were improperly classified as exempt from the overtime provisions of California law and seek to be compensated for all overtime hours worked. Plaintiffs filed a Motion to certify the case as a class action to represent all persons employed in California as salaried store managers, assistant store managers, service managers and assistant service managers since March 29, 1996. Plaintiffs' Motion to certify the case as a class action was previously granted by the trial court. The Company's appeals of that decision through the California Supreme Court were unsuccessful. The Company is now preparing to move the trial court for reconsideration of its decision to certify the class. No trial date has been set for the underlying case. The Company intends to vigorously defend this action and believes that it is not material to the Company's financial position. An adverse outcome in this action, however, may have a material adverse effect on the Company's results of operations for the year in which a judgment, if any, is rendered. 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 allege 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. The Company became aware of a Federal Trade Commission investigation regarding the accuracy of advertising claims concerning the product's effectiveness. The plaintiffs further allege that they were negotiating with the manufacturer of the product to obtain the exclusive distribution rights throughout the United States and that those negotiations failed. Plaintiffs are seeking damages including payment for the product that they allege Pep Boys ordered and expenses and loss of sales in Puerto Rico and the United States resulting from the alleged breach. The Company believes that the claims are without merit and continues to vigorously defend this action. The Company is also party to various other lawsuits and claims, including purported class actions, arising in the normal course of business. In the opinion of management, these lawsuits and claims, are not, singularly or in the aggregate, material to the Company's financial position or results of operations. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended February 1, 2003. 17 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of The Pep Boys - Manny, Moe & Jack is listed on the New York Stock Exchange under the symbol "PBY." There were 3,029 registered shareholders of the Company's common stock as of February 1, 2003. The following table sets forth for the periods listed, the high and low sale prices and the cash dividends paid on the Company's common stock.
- --------------------------------------------------------------------------------------------------------------- MARKET PRICE PER SHARE Market Price Per Share Cash Dividends Fiscal year ended February 1, 2003 High Low Per Share - ----------------------------------- ---- --- --------- First Quarter $19.38 $13.55 $.0675 Second Quarter 19.04 10.75 .0675 Third Quarter 15.23 8.75 .0675 Fourth Quarter 12.64 10.06 .0675 Fiscal year ended February 2, 2002 - ---------------------------------- First Quarter $ 7.00 $ 4.40 $.0675 Second Quarter 13.97 5.35 .0675 Third Quarter 13.70 8.80 .0675 Fourth Quarter 18.48 11.88 .0675
It is the present intention of the Company's Board of Directors to continue to pay regular quarterly cash dividends; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company and other factors which the Board of Directors deems relevant. EQUITY COMPENSATION PLANS The following table sets forth The Company's shares authorized for issuance under its equity compensation plans at February 1, 2003:
Equity Equity compensation compensation plans approved plans not approved by shareholders by shareholders Total - -------------------------------------------------------------------------------------- Number of securities to be issued upon exercise of outstanding options 6,898,170 - 6,898,170 Weighted average exercise price of outstanding options $ 16.57 $ - $ 16.57 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in top row) 2,390,104 - 2,390,104 - --------------------------------------------------------------------------------------
18 ITEM 6 SELECTED FINANCIAL DATA The following tables sets forth the selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein. SELECTED FINANCIAL DATA (UNAUDITED) (dollar amounts in thousands, except per share amounts)
Year ended Feb. 1, 2003 Feb. 2, 2002 Feb. 3, 2001 Jan. 29, 2000 Jan. 30, 1999 - -------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Merchandise sales $ 1,756,675 $ 1,765,643 $ 1,957,480 $ 1,954,010 $ 1,991,340 Service revenue 415,813 418,917 460,988 440,523 407,368 Total revenues 2,172,488 2,184,560 2,418,468 2,394,533 2,398,708 Gross profit from merchandise sales 529,848 (1) 515,235 (2) 452,038 (3) 538,957 492,443 (4) Gross profit from service revenue 104,263 (1) 103,006 (2) 79,813 (3) 84,078 79,453 Total gross profit 634,111 (1) 618,241 (2) 531,851 (3) 623,035 571,896 (4) Selling, general and administrative expenses 520,446 (1) 513,946 (2) 559,883 (3) 528,838 517,827 (4) Operating profit (loss) 113,665 (1) 104,295 (2) (28,032) (3) 94,197 54,069 (4) Non-operating income 3,097 3,444 2,245 2,327 2,145 Interest expense 46,858 51,335 57,882 51,557 48,930 Earnings (Loss) before income taxes and extraordinary items 69,904 (1) 56,404 (2) (83,669) (3) 44,967 7,284 (4) Net earnings (loss) before extraordinary items 44,039 (1) 36,100 (2) (53,148) (3) 29,303 4,974 (4) Extraordinary items (239) (765) 2,054 - - Net earnings (loss) 43,800 (1) 35,335 (2) (51,094) (3) 29,303 4,974 (4) BALANCE SHEET DATA Working capital $ 130,680 $ 115,201 $ 122,741 $ 185,206 $ 251,935 Current ratio 1.24 to 1 1.21 to 1 1.22 to 1 1.35 to 1 1.51 to 1 Merchandise inventories $ 488,882 $ 519,473 $ 547,735 $ 582,898 $ 527,397 Property and equipment - net 1,088,037 1,117,486 1,194,235 1,335,749 1,330,256 Total assets 1,799,910 1,806,135 1,898,084 2,064,948 2,089,993 Long-term debt (includes all convertible debt) 525,577 544,418 654,194 784,024 691,714 Stockholders' equity 649,992 617,790 594,766 658,284 811,784 DATA PER COMMON SHARE Basic earnings (loss) before extraordinary items $ .85 (1) $ .70 (2) $ (1.04) (3) $ .58 $ .08 (4) Basic earnings (loss) .85 (1) .69 (2) (1.00) (3) .58 .08 (4) Diluted earnings (loss) before extraordinary items .82 (1) .69 (2) (1.04) (3) .58 .08 (4) Diluted earnings (loss) .82 (1) .68 (2) (1.00) (3) .58 .08 (4) Cash dividends .27 .27 .27 .27 .26 Stockholders' equity 12.59 12.01 11.60 12.91 13.18 Common share price range: high 19.38 18.48 7.69 21.63 26.69 low 8.75 4.40 3.31 7.13 12.38 OTHER STATISTICS Return on average stockholders' equity 6.9% 5.8% (8.2)% 4.0% 0.6% Common shares issued and outstanding 51,644,578 51,430,861 51,260,663 50,994,099 61,615,140 Capital expenditures $ 43,911 $ 25,375 $ 57,336 $ 104,446 $ 167,876 Number of retail outlets 629 628 628 662 638 Number of service bays 6,527 6,507 6,498 6,895 6,608 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes pretax charges of $2,529 related to the Profit Enhancement Plan of which $2,014 reduced gross profit from merchandise sales, $491 reduced gross profit from service revenue and $24 was included in selling, general and administrative expenses. (2) Includes pretax charges of $5,197 related to the Profit Enhancement Plan of which $4,169 reduced gross profit from merchandise sales, $813 reduced gross profit from service revenue and $215 was included in selling, general and administrative expenses. (3) Includes pretax charges of $74,945 related to the Profit Enhancement Plan of which $67,085 reduced the gross profit from merchandise sales, $5,232 reduced gross profit from service revenue and $2,628 was included in selling, general and administrative expenses. (4) Includes pretax charges of $29,451 ($20,109 net of tax or $.33 per share-basic and diluted), $27,733 of which reduced gross profit from merchandise sales with the remaining $1,718 included in selling, general and administrative expenses. These charges were associated with the closure and sale of 109 Express stores. 19 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements arise principally from the capital expenditures related to existing stores, offices and warehouses, the need to finance the acquisition, construction and equipping of new stores and to purchase inventory. The primary capital expenditures for fiscal 2002 were attributed to capital maintenance of the Company's existing stores and offices. The Company opened two new stores in fiscal 2002, compared with one new store in fiscal 2001 and five new stores in fiscal 2000. In fiscal 2002, the Company increased its levels of capital expenditures 73.1% compared to fiscal 2001. In fiscal 2002, with a decrease in net inventory levels offset, in part, by the increase in capital expenditures, the Company decreased its debt by $41,574,000 and increased its cash and cash equivalents by $26,789,000. In fiscal 2001, with a decrease in net inventory levels coupled with decreased levels of capital expenditures, the Company decreased its debt by $143,913,000 and increased its cash and cash equivalents by $7,986,000. In fiscal 2000, with an increase in net inventory levels offset, in part, by decreased levels of capital expenditures, the Company increased its debt by $28,739,000 and decreased its cash and cash equivalents by $10,490,000. The following table indicates the Company's principal cash requirements for the past three fiscal years:
(dollar amounts Fiscal Fiscal Fiscal in thousands) 2002 2001 2000 Total - --------------------------------------------------------------------------------------------------------------- Cash Requirements: Capital expenditures $ 43,911 $ 25,375 $ 57,336 $126,622 Net inventory (decrease) increase(1) (14,559) (39,592) 80,148 25,997 - --------------------------------------------------------------------------------------------------------------- Total $ 29,352 $ (14,217) $137,484 $152,619 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities (excluding the change in net inventory) $123,841 $128,301 $ 99,739 $351,881 - ---------------------------------------------------------------------------------------------------------------
(1) Net inventory (decrease) increase is the change in inventory less the change in accounts payable. In fiscal 2002, merchandise inventories decreased as the Company continued its focus on improving inventory management. Additionally, the Company decreased the average number of stock-keeping units per store to approximately 24,000 in fiscal 2002, compared to 25,000 in fiscal 2001 and 26,000 in fiscal 2000. In fiscal 2001, merchandise inventories decreased as the Company maintained its net store count and completed the exit of the two distribution centers closed in fiscal 2000 as part of the Profit Enhancement Plan. In fiscal 2000, merchandise inventories decreased as the Company decreased its net store count by 34 and closed the two distribution centers. The Company's working capital was $130,680,000 at February 1, 2003, $115,201,000 at February 2, 2002 and $122,741,000 at February 3, 2001. The Company's long-term debt, as a percentage of its total capitalization, was 45% at February 1, 2003, 47% at February 2, 2002 and 52% at February 3, 2001. As of February 1, 2003, the Company had an available line of credit totaling $139,047,000. The Company has no plans to open any new stores in fiscal 2003. Management estimates capital expenditures relating to existing stores, warehouses and offices during fiscal 2003 will be approximately $55,000,000. The Company anticipates that its net cash provided by operating activities and its existing line of credit will exceed its principal cash requirements for capital expenditures and net inventory in fiscal 2003. 20
The following tables represent the Company's total contractual obligations and commercial commitments as of February 1, 2003: (dollar amounts in thousands) Due in less Due in Due in Due after Obligation Total than 1 year 1-3 years 3-5 years 5 years - --------------------------------------------------------------------------------------------- Long-term debt (1) $ 626,711 $101,183 $226,579 $298,703 $ 246 Operating leases 500,640 46,640 80,119 72,800 301,081 Capital leases 748 699 49 - - Unconditional purchase obligation 23,393 5,993 17,400 - - Other 4,900 4,900 - - - - --------------------------------------------------------------------------------------------- Total Cash Obligations $1,156,392 $159,415 $324,147 $371,503 $301,327 - ---------------------------------------------------------------------------------------------
(1) Long-term debt includes current maturities.
(dollar amounts in thousands) Due in less Due in Due in Due after Commercial Commitments Total than 1 year 1-3 years 3-5 years 5 years - --------------------------------------------------------------------------------------------- Import letters of credit $ 2,399 $ 2,399 $ - $ - $ - Standby letters of credit 40,480 40,480 - - - Surety bonds 9,375 9,375 - - - - --------------------------------------------------------------------------------------------- Total Commercial Commitments $ 52,254 $ 52,254 $ - $ - $ - - ---------------------------------------------------------------------------------------------
The other commitment due in the next year of $4,900,000 is related to the non-renewal of the Chairman and CEO's employment agreement. The letters of credit are used primarily to secure the Company's insurance claims and are renewable on an annual basis. The operating leases shown above are exclusive of any lease obligations for stores for which reserves were created in conjunction with the Profit Enhancement Plan. The Company anticipates that its net cash provided by operating activities, its existing line of credit and its access to capital markets will exceed its cash obligations presented in the tables above. In January 2003, the Company reclassified $6,000,000 of other notes payable, due January 1, 2004, to current liabilities on the consolidated balance sheet. In the third quarter of fiscal 2002, the Company retired $42,875,000 aggregate principal amount of the remaining $43,005,000 of the Medium-Term Notes with an original maturity date of September 2007. These notes were redeemed at the option of the holders. The Company repurchased these notes with a portion of the proceeds from the sale of the 4.25% Senior Convertible Notes. The after-tax extraordinary loss was $110,000. In the second quarter of fiscal 2002, the Company reclassified the $75,000,000, 6.625% notes with a stated maturity date of May 15, 2003 to current liabilities on the consolidated balance sheet. The Company anticipates being able to repurchase these notes with cash from operations and its existing line of credit. In the second quarter of fiscal 2002, the Company retired $49,915,000 aggregate principal amount of the $50,000,000 Medium-Term Notes with an original maturity date of July 2007. These notes were redeemed at the option of the holders. The Company repurchased these notes with a portion of the proceeds from the sale of the 4.25% Senior Convertible Notes. The after-tax extraordinary loss was $129,000. 21 On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries, 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 notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes is payable by the Company on June 1 and December 1 of each year, beginning December 1, 2002. The proceeds from the sale of the notes were used to retire debt. In fiscal 2001, the Company repurchased the remaining $241,504,000 face value of its Liquid Yield Option Notes (LYONs). The book value of the repurchased LYONs was $161,812,000 and the net after-tax extraordinary loss was $765,000. In June 2001, the Company obtained $90,000,000 in a Senior Secured Credit Facility. The facility, which is secured by certain equipment and real estate with a total book value as of February 1, 2003 of $89,960,000, was issued in two tranches. Tranche A is a term loan for $45,000,000 with an interest rate based on London Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is structured as a two-year term loan payable in equal installments with the final payment due in 2003. Tranche B is a term loan for $45,000,000 with an interest rate of LIBOR plus 3.95%. Tranche B is structured as a five-year term loan payable in equal installments with the final payment due in 2006. The Senior Secured Credit Facility is subject to certain financial covenants. The Company used the proceeds from the facility to repurchase the outstanding LYONs that were put back to the Company in fiscal 2001. 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 is being accounted for as an operating lease and the gain of $3,817,000 from the sale of the certain operating assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. The Company used the proceeds from the sale to retire debt. In fiscal 2000, the Company repurchased $30,200,000 face value of its LYONs at a price of $520 per LYON. The book value of the repurchased LYONs was $19,226,000 and the after-tax extraordinary gain was $2,025,000. In September 2000, the Company entered into a new revolving credit agreement. The new revolving credit agreement provides up to $225,000,000 of borrowing availability, which is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days prior to each anniversary date, the Company may request and, upon agreement with the bank, extend the maturity of this facility an additional year. The interest rate on any loan is equal to the LIBOR plus 1.75%, and increases in 0.25% increments as the excess availability falls below $50,000,000. The revolver is subject to financial covenants. The Company recorded an after-tax extraordinary loss related to the restructuring of its revolving line of credit of $931,000 in the third quarter of fiscal 2000. 22 In September 2000, the Company entered into a $143,000,000 real estate operating lease facility with leased property trusts, established as an unconsolidated special-purpose entity. The real estate operating lease facility, which has an interest rate of LIBOR plus 1.85%, replaces $143,000,000 of leases, which had an interest rate of LIBOR plus 2.27%. The Company, as a result of replacing the existing operating leases, recorded a pretax charge to fiscal 2000 earnings of $1,630,000 of unamortized lease costs, which was recorded in the costs of merchandise sales of the consolidated statement of operations. The $143,000,000 real estate operating lease facility has a four-year term with a guaranteed residual value. At February 1, 2003, the Company had approximately $132,000,000 of real estate leased under the facility and the maximum amount of the residual guarantee relative to the real estate under the lease is approximately $92,372,000. The Company expects the fair market value of the leased real estate, subject to the purchase option or sale to a third party, to substantially reduce or eliminate the Company's payment under the residual guarantee at the end of the lease term. In September 2000, the Company retired $70,000,000 of Senior Notes, at par, using the proceeds from the $225,000,000 revolving line of credit. The retired notes were issued in a private placement in February 1999 in two tranches. The first tranche was for $45,000,000 and had a coupon of 8.45% with a maturity of 2011. The second tranche was for $25,000,000 and had a coupon of 8.30% with a maturity of 2009. In June 2000, the Company repurchased $5,995,000 face value of the $49,000,000 Medium-Term Note. The after-tax extraordinary gain was $960,000. PENSION PLANS The Company has a defined benefit pension plan covering its full-time employees hired on or before February 1, 1992 and an unfunded Supplemental Executive Retirement Plan (SERP). The pension expense for fiscal 2002, 2001 and 2000 was $3,243,000, $1,754,000 and $1,477,000, respectively. This expense is calculated based upon a number of actuarial assumptions, including an expected return on plan assets of 8.5% and a discount rate of 6.75%. In developing the expected return on asset assumptions, the Company evaluated input from its actuaries, including their review of asset class return expectations. The discount rate utilized by the Company is based on a review of AA bond performance. The Company intends to change the expected rate of return on plan assets to 6.75% for fiscal 2003. Due to the effect of the unrecognized actuarial losses and based upon an expected return on plan assets of 6.75%, a discount rate of 6.75% and various other assumptions, the Company estimates the pension expense, exclusive of settlement accounting discussed below, will approximate $3,750,000 for both plans in fiscal 2003. The Company will continue to evaluate its actuarial assumptions and adjust as necessary. In fiscal 2002, the Company contributed $6,975,000 to the defined benefit pension plan. Based upon the current funded status of the defined benefit pension plan, cash contributions are not anticipated in fiscal 2003. In fiscal 2003, the Company anticipates an approximate settlement of $12,200,000 related to the SERP obligation for the Chairman and CEO. This obligation will result in an expense for settlement accounting under Statement of Financial Accounting Standards (SFAS) No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," of approximately $4,900,000 in fiscal 2003. 23 EFFECTS OF INFLATION The Company uses the LIFO method of inventory valuation. Thus, the cost of merchandise sold approximates current cost. Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on revenues or results of operations during fiscal 2002, fiscal 2001 or fiscal 2000. IMPAIRMENT CHARGES During fiscal 2000, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that the carrying value may not be fully recoverable. An impairment charge of $5,735,000 was recorded for these stores in costs of merchandise sales on the consolidated statement of operations. The charge reflects the difference between carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. Management's judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates. PROFIT ENHANCEMENT PLAN In the third quarter of fiscal 2000, the Company comprehensively reviewed its field, distribution and Store Support Center infrastructure and the performance of each of its stores. As a result, the Company implemented a number of changes that have improved its performance. These changes included the closure of 38 under-performing stores and two distribution centers and reductions in store operating hours and the Store Support Center infrastructure. PLAN UPDATE The Company is progressing towards the disposal of the 38 stores (11 owned and 27 leased), two distribution centers and two development parcels that were closed or abandoned in connection with the Profit Enhancement Plan. As of February 1, 2003, the Company had disposed of 22 of the closed stores, the two distribution centers and the two development parcels. During fiscal 2002, the Company decided to lease rather than sell three of the closed stores due to changes in the real estate market. As a result, the Company reclassified these three owned properties as assets held for use. The Company estimates that the remaining closed stores (one owned and 12 leased) will be disposed of by the end of the third quarter of fiscal 2003. ASSETS HELD FOR DISPOSAL As of February 1, 2003, the assets held for disposal included the building and land of one remaining closed store owned by the Company, which has a carrying value of $1,146,000. This property was sold in the first quarter of fiscal 2003. The Company has sold nine of the 13 owned properties originally held for sale, which included the two development parcels. Additionally, the Company decided to lease rather than sell three of the closed stores due to changes in the real estate market. As a result, the Company reclassified these three owned properties as assets held for use at their estimated market value. The market value of each such property was lower than cost adjusted for depreciation. In fiscal 2002, the Company sold six and reclassified three (as assets held for use) of the 13 owned properties. The six properties were sold for $8,446,000, net of commissions, and resulted in a loss of $666,000, which was recorded in costs of merchandise sales on the consolidated statement of operations. In addition, the Company adjusted the carrying values of certain assets held for disposal, which resulted in a net decrease of $160,000, which was recorded in costs of merchandise sales on the consolidated statement of operations. 24 In fiscal 2001, the Company sold three of the 13 owned properties for $4,103,000, net of commissions, and resulted in a loss of $691,000, which was recorded in costs of merchandise sales and selling, general and administrative expenses on the consolidated statement of operations. In addition, the Company recorded a downward revision in the estimated values for certain properties of $1,496,000 in fiscal 2001. This expense was recorded in costs of merchandise sales on the consolidated statement of operations. In fiscal 2001, the Company recorded a loss for equipment held for disposal of $162,000, which was due primarily to a reduction in the Company's estimated proceeds. In fiscal 2000, the Company recorded charges related to the write-down of assets to fair value of $58,754,000. These charges were associated with the closure of the 38 stores, two distribution centers, the write-off of certain equipment and the abandonment of two development parcels. LEASE RESERVE As of February 1, 2003, the Company was able to sublease eight and exit the lease of an additional seven of the 27 leased stores. The Company expects the remaining 12 closed stores that are leased to be subleased or otherwise disposed of by the end of the third quarter of fiscal 2003. The Company increased the lease reserve $901,000 during fiscal 2002. This increase is due primarily to an increase in the time that it is expected to take to sublease certain properties, offset, in part, by an increase in the estimated sublease rates. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. The Company increased the lease reserve $1,644,000 during fiscal 2001. This change in the reserve was a result of a $3,834,000 increase due primarily to an increase in the estimated amount of time it was expected to take the Company to sublease certain properties and a decrease in estimated sublease rates. The reserve increase was offset, in part, by a $2,190,000 decrease due primarily to lower than estimated commissions and lease exit costs on subleases for certain properties. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $7,916,000 for leases of properties included in the Profit Enhancement Plan. The Company increased the reserve by $113,000 during the remainder of fiscal 2000. These changes in the reserve were a result of a $1,176,000 increase due to an increase in the estimated lease payments related to the closed stores. The increase was offset, in part, by a $1,063,000 decrease due primarily to an increase in the estimated sublease rates coupled with lower lease-related expenses. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit the Company's continuing activities. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed. These disposals are expected to be completed by the end of the third quarter of fiscal 2003. In fiscal 2002, the Company increased the on-going expense reserve by $802,000. This increase is due primarily to an increase in the length of time that it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations. 25 In fiscal 2001, the Company increased the on-going expense reserve by $595,000. This increase was due primarily to a $1,214,000 increase in the reserve due to an increase in the estimated time it was expected to take to sublease, sell or otherwise dispose of the remaining properties offset, in part, by a $619,000 decrease due to lower than anticipated cost for utilities and security. This adjustment was recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $3,944,000 for on-going expenses associated with the properties included in the Profit Enhancement Plan. The Company increased the on-going expense reserve by $361,000 during the remainder of fiscal 2000. This increase was due to an increase in the estimated time it was expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue and selling, general and administrative expenses on the consolidated statement of operations. SEVERANCE RESERVE In fiscal 2001, the severance reserve was completed. Therefore, there was no activity to this reserve in fiscal 2002. In fiscal 2001, the Company reversed $69,000 of severance because certain employees who originally expected to receive severance failed to qualify to receive payments. In addition, final severance payments were lower than estimated. Each of these reversals was recorded through the line it was originally charged in the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $1,694,000 for severance associated with the Profit Enhancement Plan. During the remainder of fiscal 2000, the Company reversed $272,000 of severance due to certain employees' acceptance into other positions within the Company and other employees failing to qualify to receive payments. Each reversal was recorded through the line it was originally charged in the consolidated statement of operations. The total number of employees separated due to the Profit Enhancement Plan was approximately 1,000. The 1,000 employees were composed of 76% store employees, 13% distribution employees, and 11% Store Support Center and field administrative employees. The total severance paid in connection with the Profit Enhancement Plan was $1,353,000. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company, such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. There were no expenses of this nature incurred in fiscal 2002. In fiscal 2001, expenses of this nature incurred were $678,000. These expenses related to the completion of the removal of inventory and equipment from the closed distribution centers. In fiscal 2000, expenses of this nature incurred were $3,611,000. These expenses were for inventory and equipment handling related to the closure of the 38 stores and the two distribution centers. The fiscal 2000 expenses were offset by a recovery of certain benefit expenses related to the reduction in workforce. 26 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Following are tables summarizing expenses related to the Profit Enhancement Plan for fiscal 2002, 2001 and 2000. The details and reasons for the original charge and changes to the charge are as described above in the respective reserve categories.
(dollar amounts in thousands) Income Statement Fiscal Fiscal Fiscal Classification 2002 2001 2000 - ----------------------------------------------------------------- Costs of merchandise sales $2,014 $4,169 $67,085 Costs of service revenue 491 813 5,232 Selling, general and administrative 24 215 2,628 - ----------------------------------------------------------------- Total Expenses $2,529 $5,197 $74,945 - -----------------------------------------------------------------
At the end of the third quarter of fiscal 2000, the Company set up a reserve liability account, which is included in accrued expenses on the consolidated balance sheet. This liability account tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve:
(dollar amounts Lease Fixed On-going in thousands) Expenses Assets Severance Expenses Total - ----------------------------------------------------------------------------------------- Reserve Balance at Feb. 3, 2001 $ 7,054 $ - $ 209 $ 2,960 $ 10,223 Addition 3,834 2,440 - 1,214 7,488 Utilization (5,548) (2,349) (140) (2,235) (10,272) Adjustment (2,190) (91) (69) (619) (2,969) - ----------------------------------------------------------------------------------------- Reserve Balance at Feb. 2, 2002 3,150 - - 1,320 4,470 Addition 1,825 826 - 802 3,453 Utilization (2,959) (826) - (1,680) (5,465) Adjustment (924) - - - (924) - ----------------------------------------------------------------------------------------- Reserve Balance at Feb. 1, 2003 $ 1,092 $ - $ - $ 442 $ 1,534 - -----------------------------------------------------------------------------------------
27 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 - ----------------------------------------------------------------------------------------------------------------------------------- Feb. 1, 2003 Feb. 2, 2002 Feb. 3, 2001 Fiscal 2002 vs. Fiscal 2001 vs. Year ended (Fiscal 2002) (Fiscal 2001) (Fiscal 2000) Fiscal 2001 Fiscal 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales 80.9% 80.8% 80.9% (0.5)% (9.8)% Service Revenue(1) 19.1 19.2 19.1 (0.7) (9.1) - ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 100.0 (0.6) (9.7) - ----------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales(2) 69.8 (3) 70.8 (3) 76.9 (3) (1.9) (16.9) Costs of Service Revenue(2) 74.9 (3) 75.4 (3) 82.7 (3) (1.4) (17.1) - ----------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 70.8 71.7 78.0 (1.8) (17.0) - ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 30.2 (3) 29.2 (3) 23.1 (3) 2.8 14.0 Gross Profit from Service Revenue 25.1 (3) 24.6 (3) 17.3 (3) 1.2 29.1 - ----------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 29.2 28.3 22.0 2.6 16.2 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 24.0 23.5 23.2 1.3 (8.2) - ----------------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 5.2 4.8 (1.2) 9.0 472.1 Non-operating Income 0.2 0.2 0.1 (10.1) 53.4 Interest Expense 2.2 2.3 2.4 (8.7) (11.3) - ----------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 3.2 2.7 (3.5) 23.9 167.4 - ----------------------------------------------------------------------------------------------------------------------------------- Income Taxes 37.0 (4) 36.0 (4) 36.5 (4) 27.4 166.5 - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) Before Extraordinary Items 2.0 1.7 (2.2) 22.0 167.9 - ----------------------------------------------------------------------------------------------------------------------------------- Extraordinary Items, Net of Tax - - 0.1 (68.8) (137.2) - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) 2.0 1.7 (2.1) 24.0 169.2 - -----------------------------------------------------------------------------------------------------------------------------------
(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 (loss) before income taxes. 28 FISCAL 2002 VS. FISCAL 2001 Total revenues for fiscal 2002 decreased 0.6%. This decrease was due primarily to a decrease in comparable store revenues (revenues generated by stores in operation during the same period) of 0.7%, offset slightly by an increase in the number of stores in operation in fiscal 2002 versus fiscal 2001. Comparable store service revenue decreased 0.9%, while comparable store merchandise sales decreased 0.6%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 30.2% in fiscal 2002 from 29.2% in fiscal 2001. This increase was due primarily to higher merchandise margins, as a percentage of merchandise sales, offset, in part, by a charge related to the Profit Enhancement Plan of $2,014,000 in fiscal 2002 versus $4,169,000 in fiscal 2001. The improved merchandise margins were a result of a combination of an improvement in the mix of sales, selectively higher retail pricing, lower product acquisition costs and improved inventory controls. Selling, general and administrative expenses increased, as a percentage of total revenues, to 24.0% in fiscal 2002 from 23.5% in fiscal 2001. This increase, as a percentage of total revenues, was due primarily to obligations associated with the non-renewal of the Chairman and CEO's employment agreement and related search fees, coupled with $4,905,000, or 72%, higher net media expense. The increase in selling, general and administrative expenses, as a percentage of total revenues, was offset, in part, by a decrease in store operating expenses. The increase in net media expense was due to increases in radio and circular advertising expenses, offset, in part, by a decrease in television advertising expense and an increase in cooperative advertising. The decrease in store expenses, as a percentage of total revenues, was due primarily to decreases in store payroll, as a percentage of total revenues. Interest expense decreased $4,477,000, or 8.7%, due primarily to lower debt levels coupled with lower average interest rates on the Company's borrowings. 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, and a decrease in interest expense, offset by an increase in selling, general and administrative expenses, as a percentage of total revenues, and a net charge related to the Profit Enhancement Plan of $1,593,000 in fiscal 2002 versus $3,326,000 in fiscal 2001. FISCAL 2001 VS. FISCAL 2000 Total revenues for fiscal 2001, which included 52 weeks, decreased 9.7% compared to fiscal 2000, which included 53 weeks, due primarily to less stores in operation during fiscal 2001 versus fiscal 2000 coupled with a decrease in comparable store revenues (revenues generated by stores in operation during the same months of each period) of 6%. Total revenues for fiscal 2001 compared to fiscal 2000, excluding the extra week, decreased by 8% on an overall basis and remained at a decrease of 6% on a comparable store basis. Comparable store merchandise sales decreased 6% while comparable store service revenue decreased 5% compared to fiscal 2000 on a 52 week basis. This decline in total and comparable revenue reflected the impact of the closure of the 38 stores and other steps taken in October 2000 in conjunction with implementing the Company's Profit Enhancement Plan. 29 Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 29.2% in fiscal 2001 from 23.1% in fiscal 2000. This increase, as a percentage of merchandise sales, was due primarily to Profit Enhancement Plan charges recorded in fiscal 2001 of $4,169,000 compared to charges recorded in fiscal 2000 of $67,085,000 and $5,735,000 associated with the Profit Enhancement Plan and asset impairments, respectively. Higher merchandise margins and a decrease in warehousing costs, as a percentage of merchandise sales, offset, in part, by an increase in store occupancy costs, as a percentage of merchandise sales, also contributed to the increase in gross profit from merchandise sales. The improved merchandise margins, as a percentage of merchandise sales, were a result of a combination of improvement in the mix of sales, selectively higher retail pricing and lower product acquisition costs. The decrease in warehousing costs, as a percentage of merchandise sales, were a result of the effects of a supply chain initiative implemented in late fiscal 2000 to improve efficiencies. The increase in store occupancy costs, as a percentage of merchandise sales, was a result of higher utilities costs, particularly in California. Gross profit from service revenue increased, as a percentage of service revenue, to 24.6% in fiscal 2001 from 17.3% in fiscal 2000. This increase, as a percentage of service revenue, was due primarily to a decrease in service personnel costs, as a percentage of service revenue, coupled with Profit Enhancement Plan charges recorded in fiscal 2001 of $813,000 compared to $5,232,000 recorded in fiscal 2000. The decrease in service center personnel costs, as a percentage of service revenue, was a result of the steps taken in the Profit Enhancement Plan. Selling, general and administrative expenses increased, as a percentage of total revenues, to 23.5% in fiscal 2001 from 23.2% in fiscal 2000. This increase, as a percentage of total revenues, was due primarily to an increase in media expenses from fiscal 2000 to fiscal 2001 of $6,828,000 or 0.3% of total revenues, offset, in part, by a decrease in general office expense, as a percentage of total revenues, and Profit Enhancement Plan charges recorded in fiscal 2001 of $215,000 compared to $2,628,000 recorded in fiscal 2000. The increase in media expense, as a percentage of total revenues, was a result of lower vendor reimbursements. The decrease in general office expense, as a percentage of total revenues, was a result of lower legal expense, as a percentage of total revenues. Interest expense in fiscal 2001 was $6,547,000 or 11.3% lower than fiscal 2000 due primarily to lower debt levels coupled with lower average interest rates. Net earnings increased, as a percentage of total revenues, due primarily to a net Profit Enhancement Plan charge recorded in fiscal 2001 of $3,326,000 compared to net charges recorded in fiscal 2000 of $47,609,000 and $3,643,000 associated with Profit Enhancement Plan and asset impairments, respectively. Also contributing to the net earnings increase, as a percentage of total revenues, were increases in both gross profit from merchandise sales and service revenue, as a percentage of merchandise sales and service revenue, respectively, and a decrease in interest expense, as a percentage of total revenues. These gross profit increases were offset, in part, by an increase in selling, general and administrative expenses, as a percentage of total revenues, coupled with a net extraordinary loss of $765,000 in fiscal 2001 compared to a $2,054,000 net extraordinary gain in fiscal 2000. 30 RECENTLY ADOPTED ACCOUNTING STANDARDS In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends SFAS No. 123 to require more prominent and frequent disclosures in financial statements pertaining to the effect on reported net income with respect to stock-based compensation. These provisions are effective for fiscal years ending after December 15, 2002. The Company adopted the provisions of SFAS No. 148 with respect to the disclosure requirements in the fourth quarter of fiscal 2002. In November 2002, the FASB issued Financial Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements regarding certain guarantees that it has issued, and requires the guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In addition, FIN 45 requires a reconciliation of changes in an entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted this statement in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor." This consensus addresses the accounting issues pertaining to cash consideration received by a reseller from a vendor, and is applicable for new arrangements or modification of existing arrangements entered into after December 31, 2002. The Company has adopted the provisions of this consensus in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of at the date an entity commits to an exit plan. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted this statement in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In fiscal 2001, the EITF issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." This consensus deals with accounting for certain types of sales incentives and other consideration offered by companies to their customers. This pronouncement is effective in fiscal years beginning after December 15, 2001. The Company adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the reporting provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements. 31 In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business combinations should be accounted for using the purchase method of accounting; use of the pooling-of-interests method is prohibited. The provisions of the statement apply to all business combinations initiated after June 30, 2001. SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. Adoption of SFAS 142 will result in an entity ceasing amortization of goodwill. All of the provisions of the statement are effective in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements as it does not have goodwill or other acquired tangible assets on its consolidated balance sheet. NEW ACCOUNTING STANDARDS In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46, an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of any expected losses from the variable interest entity's activities, is entitled to receive any expected residual returns of the variable interest entity, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and applies in the first fiscal period beginning after June 15, 2003, for variable interest entities created prior to February 1, 2003. The Company has adopted the guidance of FIN 46 for newly created variable interest entities in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. The Company will adopt FIN 46 for variable interest entities created prior to February 1, 2003 in the third quarter of fiscal 2003. The adoption of FIN 46 will apply to the $132,000,000 of real estate leased by the Company under its $143,000,000 operating lease facility, which would qualify as a variable interest entity under this interpretation. If this operating lease facility exists as of August 3, 2003, the Company would consolidate this entity and record a liability of $132,000,000 and the corresponding assets, net of accumulated depreciation. The Company is planning to refinance this facility prior to August 3, 2003, so that it is not required to consolidate this entity under FIN 46. In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." As a result of rescinding FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, "Reporting the Results of Operations." This statement also amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company will adopt the provisions of SFAS No. 145 during the first quarter of fiscal 2003. For the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001, the Company recorded extraordinary items pertaining to the extinguishment of debt, net of tax, of $(239,000), $(765,000) and $2,054,000, respectively. Accordingly, reclassifications of these items to earnings before extraordinary items will be made throughout fiscal 2003 to maintain comparability for the reported periods. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company will adopt the provisions of SFAS No. 143 in the first quarter of fiscal 2003, and will recognize an asset of $2,844,000, accumulated depreciation of $2,247,000, a liability of $4,540,000 and a cumulative effect of a change in accounting principle before taxes of $3,943,000 ($2,484,000, net of tax) on its consolidated financial statements. 32 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 and senior secured credit facility, changes in the lenders' prime rate or LIBOR could affect the rates at which the Company could borrow funds thereunder. At February 1, 2003, the Company had outstanding borrowings of $43,135,000 against these credit facilities. The table below summarizes the fair value and contract terms of fixed rate debt instruments held by the Company at February 1, 2003:
(dollar amounts Average in thousands) Amount Interest Rate - ---------------------------------------------------------------- Fair value at February 1, 2003 $550,491 Expected maturities: 2003 81,000 6.6% 2004 108,000 6.7 2005 100,000 7.0 2006 143,000 6.9 2007 150,215 4.3 - -----------------------------------------------------------------
At February 2, 2002, the Company held fixed rate debt instruments with an aggregate fair value of $491,120. 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. 33 The Company believes that the following represent its more critical estimates and assumptions used in the preparation of the consolidated financial statements, although not inclusive: *The Company evaluates whether inventory is stated at the lower of cost or market based on historical experience with the carrying value and life of inventory. The assumptions used in this evaluation are based on current market conditions and the Company believes inventory is stated at the lower of cost or market in the consolidated financial statements. In addition, historically the Company has been able to return excess items to vendors for credit. Future changes by vendors in their policies or willingness to accept returns of excess inventory could require a revision in the estimates. *The Company has risk participation arrangements with respect to casualty and health care insurance. The amounts included in the Company's costs related to these arrangements are estimated and can vary based on changes in assumptions, claims experience or the providers included in the associated insurance programs. *The Company records reserves for future product returns and warranty claims. The reserves are based on current sales of products and historical claim experience. If claims experience differs from historical levels, revisions in the Company's estimates may be required. FORWARD-LOOKING STATEMENTS Certain information contained herein may contain statements that are forward-looking. Such statements may relate to trends in the automotive aftermarket, competition, business development activities, future capital expenditures, financing sources and availability, and the effects of regulation. 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 and 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, 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. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The material in Item 7 of this filing titled "Quantitative and Qualitative Disclosures about Market Risk" are hereby incorporated herein by reference. 34 ITEM 8 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Pep Boys - Manny, Moe & Jack We have audited the accompanying consolidated balance sheets of The Pep Boys - Manny, Moe & Jack and subsidiaries (the "Company") as of February 1, 2003 and February 2, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 1, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Pep Boys - Manny, Moe & Jack and subsidiaries as of February 1, 2003 and February 2, 2002, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 13, 2003 (March 26, 2003 as to Note 14) 35
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 1, February 2, 2003 2002 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 42,770 $ 15,981 Accounts receivable, less allowance for uncollectible accounts of $422 and $725 17,916 18,052 Merchandise inventories 488,882 519,473 Prepaid expenses 43,746 42,170 Deferred income taxes 13,723 9,303 Other 56,687 52,308 Assets held for disposal 1,146 16,007 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 664,870 673,294 - ---------------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 279,109 277,726 Buildings and improvements 936,770 922,065 Furniture, fixtures and equipment 604,531 583,918 Construction in progress 19,450 10,741 - ---------------------------------------------------------------------------------------------------------------------------------- 1,839,860 1,794,450 Less accumulated depreciation and amortization 751,823 676,964 - ---------------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment - Net 1,088,037 1,117,486 - ---------------------------------------------------------------------------------------------------------------------------------- Other 47,003 15,355 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,799,910 $ 1,806,135 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 200,053 $ 216,085 Accrued expenses 232,255 217,393 Current maturities of long-term debt and obligations under capital leases 101,882 124,615 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 534,190 558,093 - ---------------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 375,577 544,418 Convertible long-term debt, less current maturities 150,000 - Other long-term liabilities 25,156 23,880 Deferred income taxes 60,663 57,510 Deferred gain on sale leaseback 4,332 4,444 Commitments and Contingencies Stockholders' Equity: Common stock, par value $1 per share: Authorized 500,000,000 shares; Issued 63,910,577 63,911 63,911 Additional paid-in capital 177,244 177,244 Retained earnings 630,847 601,944 Accumulated other comprehensive loss (151) - - ---------------------------------------------------------------------------------------------------------------------------------- 871,851 843,099 Less cost of shares in treasury - 10,070,729 shares and 10,284,446 shares 162,595 166,045 Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264 - ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 649,992 617,790 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,799,910 $ 1,806,135 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 36
CONSOLIDATED STATEMENTS OF OPERATIONS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 1, February 2, February 3, Year ended 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $1,756,675 $1,765,643 $1,957,480 Service Revenue 415,813 418,917 460,988 - ---------------------------------------------------------------------------------------------------------------------------------- Total Revenues 2,172,488 2,184,560 2,418,468 - ---------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 1,226,827 1,250,408 1,505,442 Costs of Service Revenue 311,550 315,911 381,175 - ---------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 1,538,377 1,566,319 1,886,617 - ---------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 529,848 515,235 452,038 Gross Profit from Service Revenue 104,263 103,006 79,813 - ---------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 634,111 618,241 531,851 - ---------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 520,446 513,946 559,883 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 113,665 104,295 (28,032) Non-operating Income 3,097 3,444 2,245 Interest Expense 46,858 51,335 57,882 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Income Taxes 69,904 56,404 (83,669) Income Tax Expense (Benefit) 25,865 20,304 (30,521) - ---------------------------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) Before Extraordinary Items 44,039 36,100 (53,148) Extraordinary Items, Net of Tax of $(140), $(430) and $1,180 (239) (765) 2,054 Net Earnings (Loss) $ 43,800 $ 35,335 $ (51,094) - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share: Before Extraordinary Items $ .85 $ .70 $ (1.04) Extraordinary Items, Net of Tax - (.01) .04 - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) per Share $ .85 $ .69 $ (1.00) - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) per Share: Before Extraordinary Items $ .82 $ .69 $ (1.04) Extraordinary Items, Net of Tax - (.01) .04 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) per Share $ .82 $ .68 $ (1.00) - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) Accumulated Additional Other Total Common Stock Paid-in Retained Treasury Stock Comprehensive Benefits Stockholders' Shares Amount Capital Earnings Shares Amount Loss Trust Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 29, 2000 63,910,577 $63,911 $177,247 $649,487 (10,721,208) $(173,097) $ - $(59,264) $658,284 Comprehensive loss - Net loss (51,094) Total Comprehensive Loss (51,094) Cash dividends ($.27 per share) (13,793) (13,793) Dividend reinvestment plan (3) (2,932) 266,564 4,304 1,369 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 3, 2001 63,910,577 63,911 177,244 581,668 (10,454,644) (168,793) - (59,264) 594,766 Comprehensive income - Net earnings 35,335 Total Comprehensive Income 35,335 Cash dividends ($.27 per share) (13,864) (13,864) Exercise of stock options and related tax benefits (94) 17,000 275 181 Dividend reinvestment plan (1,101) 153,198 2,473 1,372 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 2, 2002 63,910,577 63,911 177,244 601,944 (10,284,446) (166,045) - (59,264) 617,790 Comprehensive income - Net earnings 43,800 Minimum pension liability adjustment, net of tax (151) Total Comprehensive Income 43,649 Cash dividends ($.27 per share) (13,911) (13,911) Exercise of stock options and related tax benefits (21) (632) 111,000 1,792 1,139 Dividend reinvestment plan 21 (354) 102,717 1,658 1,325 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, February 1, 2003 63,910,577 $63,911 $177,244 $630,847 (10,070,729) $(162,595) $ (151) $(59,264) $649,992 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 38
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) February 1, February 2, February 3, Year ended 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Earnings (Loss) $ 43,800 $ 35,335 $ (51,094) Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by Operating Activities: Extraordinary item, net of tax 239 765 (2,054) Depreciation and amortization 79,551 84,693 99,308 Deferred income taxes (1,176) 7,424 (24,575) Deferred gain on sale leaseback (112) (26) - Accretion of bond discount - 3,256 6,425 Loss on assets held for disposal 826 2,349 53,740 Loss on asset impairment - - 5,735 (Gain) Loss from sale of assets (1,913) (1,090) 3,651 Changes in operating assets and liabilities: (Increase) Decrease in accounts receivable, prepaid expenses and other (13,409) (18,726) 9,802 Decrease in merchandise inventories 30,591 28,262 35,163 (Decrease) Increase in accounts payable (16,032) 11,330 (115,311) Increase (Decrease) in accrued expenses 14,759 12,095 (2,255) Increase in other long-term liabilities 1,276 2,226 1,056 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 138,400 167,893 19,591 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (43,911) (25,375) (57,336) Proceeds from sales of assets 11,058 26,760 14,380 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Investing Activities (32,853) 1,385 (42,956) - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net (payments) borrowings under line of credit agreements (70,295) (56,876) 117,535 Repayment of life insurance policy loan (20,686) - - Payments on capital lease obligations (642) - - Reduction of long-term debt (121,938) (18,571) (75,028) Reduction of convertible debt - (161,056) (17,208) Net proceeds from issuance of notes 146,250 87,522 - Dividends paid (13,911) (13,864) (13,793) Proceeds from exercise of stock options 1,139 181 - Proceeds from dividend reinvestment plan 1,325 1,372 1,369 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (78,758) (161,292) 12,875 - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 26,789 7,986 (10,490) Cash and Cash Equivalents at Beginning of Year 15,981 7,995 18,485 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 42,770 $ 15,981 $ 7,995 - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Income taxes $ 22,856 $ 6,570 $ - Interest, net of amounts capitalized 44,840 47,081 53,415 Non-cash financing activities: Equipment capital leases 1,301 89 - - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 39 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 1, 2003, February 2, 2002 and February 3, 2001 (dollar amounts in thousands, except per share amounts) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS The Pep Boys - Manny, Moe & Jack and subsidiaries (the "Company") is engaged principally in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores. The Company currently operates stores in 36 states and Puerto Rico. FISCAL YEAR END The Company's fiscal year ends on the Saturday nearest to January 31. Fiscal 2002 and 2001 were comprised of 52 weeks, while fiscal 2000 was comprised of 53 weeks. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES The preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost (last-in, first-out) or market. If the first-in, first-out method of valuing inventories had been used by the Company, the inventory valuation difference would have been immaterial on both February 1, 2003 and February 2, 2002. CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments with a maturity of three months or less when purchased. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 to 40 years; furniture, fixtures and equipment, 3 to 10 years. SOFTWARE CAPITALIZATION In 1998, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In accordance with this standard, certain direct development costs associated with internal-use software are capitalized, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection with the construction of certain long-term assets. Capitalized interest amounted to $44, $1 and $489 in fiscal 2002, 2001 and 2000, respectively. REVENUE RECOGNITION The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold. Service revenues are recognized upon completion of the service. The Company records revenue net of an allowance for estimated future returns. Return activity is immaterial to revenue and results of operations in all periods presented. 40 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 fiscal years ending February 1, 2003 and February 2, 2002 are as follows:
- ------------------------------------------------------------------------ Beginning balance at February 3, 2001 $ 553 Additions related to current year sales 12,006 Warranty costs incurred in current year (10,282) Adjustments to accruals related to prior year sales - - ------------------------------------------------------------------------ Ending Balance at February 2, 2002 2,277 Additions related to current year sales 8,813 Warranty costs incurred in current year (10,179) Adjustments to accruals related to prior year sales - - ------------------------------------------------------------------------ Ending Balance at February 1, 2003 $ 911 - ------------------------------------------------------------------------
SERVICE REVENUE Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. COSTS OF REVENUES 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. PENSION EXPENSE The Company reports all information on its pension and savings plan benefits in accordance with Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities. 41 ADVERTISING The Company expenses the production costs of advertising the first time the advertising takes place. The Company nets cooperative advertising reimbursements against costs incurred. Net advertising expense for fiscal 2002, 2001 and 2000 was $11,733, $6,828 and $0, respectively. No advertising costs were recorded as assets as of February 1, 2003 or February 2, 2002. STORE OPENING COSTS The costs of opening new stores are expensed as incurred. IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are either held and used or to be disposed of. The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds the fair value. In addition, the Company reports assets to be disposed of at the lower of the carrying amount or the fair market value less selling costs. During fiscal 2000, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that the carrying value may not be fully recoverable. An impairment charge of $5,735 was recorded for these stores in costs of merchandise sales on the consolidated statement of operations. The charge reflects the difference between carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. EARNINGS PER SHARE Earnings per share for all periods have been computed in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing earnings by the weighted average number of common shares outstanding during the year plus the assumed conversion of dilutive convertible debt and incremental shares that would have been outstanding upon the assumed exercise of dilutive stock options. 42 ACCOUNTING FOR STOCK-BASED COMPENSATION At February 1, 2003, the Company has two stock-based employee compensation plans, which are described in full in Note 10, "Stock Option Plans." The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. 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. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
February 1, February 2, February 3, 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------- Net earnings (loss): As reported $ 43,800 $ 35,335 $ (51,094) Less: Total stock-based compensation expense determined under fair value-based method, net of tax (3,510) (3,892) (4,217) - ----------------------------------------------------------------------------------------------------------- Pro forma $ 40,290 $ 31,443 $ (55,311) - ----------------------------------------------------------------------------------------------------------- Net earnings (loss) per share: Basic: As reported $ .85 $ .69 $ (1.00) Pro forma $ .78 $ .62 $ (1.08) - ----------------------------------------------------------------------------------------------------------- Diluted: As reported $ .82 $ .68 $ (1.00) Pro forma $ .75 $ .61 $ (1.08) - -----------------------------------------------------------------------------------------------------------
The fair value of each option granted during fiscal 2002, 2001 and 2000 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
- ------------------------------------------------------------------------------- February 1, February 2, February 3, Year ended 2003 2002 2001 - ------------------------------------------------------------------------------- Dividend yield 1.44% 1.29% .90% Expected volatility 41% 39% 40% Risk-free interest rate range: high 5.4% 5.5% 6.7% low 2.3% 2.8% 5.8% Ranges of expected lives in years 4-8 4-8 4-8 - -------------------------------------------------------------------------------
43 COMPREHENSIVE INCOME Comprehensive income is reported in accordance with SFAS No. 130, "Reporting Comprehensive Income." Other comprehensive income includes minimum pension liability adjustments. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company accounts for derivative instruments and hedging activities in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Interpretation Number (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements regarding certain guarantees that it has issued, and requires the guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In addition, FIN 45 requires a reconciliation of changes in an entity's product warranty liabilities. SEGMENT INFORMATION The Company reports segment information in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company operates in one industry, the automotive aftermarket. In accordance with SFAS No. 131, the Company aggregates all of its stores and reports one operating segment. Sales by major product categories are as follows:
February 1, February 2, February 3, Year ended 2003 2002 2001 - ---------------------------------------------------------------------------------------- Parts and accessories $1,409,398 $1,404,104 $1,547,020 Tires 347,277 361,539 410,460 - ---------------------------------------------------------------------------------------- Total merchandise sales 1,756,675 1,765,643 1,957,480 Service 415,813 418,917 460,988 - ---------------------------------------------------------------------------------------- Total Revenues $2,172,488 $2,184,560 $2,418,468 ========================================================================================
Parts and accessories includes batteries, new and rebuilt parts, chemicals, mobile electronics, tools, and various car, truck, van and sport utility vehicle accessories as well as other automotive related items. Service consists of the labor charge for installing merchandise or maintaining or repairing vehicles. 44 RECENTLY ADOPTED ACCOUNTING STANDARDS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends SFAS No. 123 to require more prominent and frequent disclosures in financial statements pertaining to the effect on reported net income with respect to stock-based compensation. These provisions are effective for fiscal years ending after December 15, 2002. The Company adopted the provisions of SFAS No. 148 with respect to the disclosure requirements in the fourth quarter of fiscal 2002. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements regarding certain guarantees that it has issued, and requires the guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In addition, FIN 45 requires a reconciliation of changes in an entity's product warranty liabilities. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted this statement in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor." This consensus addresses the accounting issues pertaining to cash consideration received by a reseller from a vendor, and is applicable for new arrangements or modification of existing arrangements entered into after December 31, 2002. The Company has adopted the provisions of this consensus in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred instead of at the date an entity commits to an exit plan. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company has adopted this statement in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. In fiscal 2001, the EITF issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." This consensus deals with accounting for certain types of sales incentives and other consideration offered by companies to their customers. This consensus is effective in fiscal years beginning after December 15, 2001. The Company adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This SFAS supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements. 45 In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS 141, all business combinations should be accounted for using the purchase method of accounting; use of the pooling-of-interests method is prohibited. The provisions of the statement apply to all business combinations initiated after June 30, 2001. SFAS 142 applies to all acquired intangible assets whether acquired singly, as part of a group, or in a business combination. Adoption of SFAS 142 will result in ceasing amortization of goodwill. All of the provisions of the statement are effective in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company adopted this statement in the first quarter of fiscal 2002 with no material effect on its consolidated financial statements as it does not have goodwill or other acquired tangible assets on its consolidated balance sheet. NEW ACCOUNTING STANDARDS In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46, an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of any expected losses from the variable interest entity's activities, is entitled to receive any expected residual returns of the variable interest entity, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and applies in the first fiscal period beginning after June 15, 2003, for variable interest entities created prior to February 1, 2003. The Company has adopted the guidance of FIN 46 for newly created variable interest entities in the fourth quarter of fiscal 2002 with no material effect on its consolidated financial statements. The Company will adopt FIN 46 for variable interest entities created prior to February 1, 2003 in the third quarter of fiscal 2003. The adoption of FIN 46 will apply to the $132,000 of real estate leased by the Company under its $143,000 operating lease facility, which would qualify as a variable interest entity under this interpretation. If this operating lease facility exists as of August 3, 2003, the Company would consolidate this entity and record a liability of $132,000 and the corresponding assets, net of accumulated depreciation. The Company is planning to refinance this facility prior to August 3, 2003, so that it is not required to consolidate this entity under FIN 46. In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." As a result of rescinding FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, "Reporting the Results of Operations." This statement also amends FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company will adopt the provisions of SFAS No. 145 during the first quarter of fiscal 2003. For the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001, the Company recorded extraordinary items pertaining to the extinguishment of debt, net of tax, of $(239), $(765), and $2,054, respectively. Accordingly, reclassifications of these items to earnings before extraordinary items will be made throughout fiscal 2003 to maintain comparability for the reported periods. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company will adopt the provisions of SFAS No. 143 in the first quarter of fiscal 2003, and will recognize an asset of $2,844, accumulated depreciation of $2,247, a liability of $4,540 and a cumulative effect of a change in accounting principle before taxes of $3,943 ($2,484, net of tax) on its consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to provide comparability with the current year's presentation. 46 NOTE 2 - DEBT
LONG-TERM DEBT - ------------------------------------------------------------------------------------------------------------ February 1, 2003 February 2, 2002 - ------------------------------------------------------------------------------------------------------------ Medium-term notes, 6.7% to 6.9%, due March 2004 through March 2006 $100,000 $100,000 7% notes due June 2005 100,000 100,000 6.92% Term enhanced remarketable securities, due July 2016 100,000 100,000 6.625% notes due May 2003 75,000 75,000 Medium-term notes, 6.4% to 6.7%, due November 2004 through September 2007 51,215 144,005 Senior secured credit facility, payable through July 2003 and July 2006 42,588 71,625 Other notes payable, 3.8% to 8% 7,361 7,472 Capital lease obligations, payable through July 2004 748 89 Revolving credit agreement 547 70,842 - ------------------------------------------------------------------------------------------------------------ 477,459 669,033 Less current maturities 101,882 124,615 - ------------------------------------------------------------------------------------------------------------ Total Long-Term Debt $375,577 $544,418 - ------------------------------------------------------------------------------------------------------------
In January 2003, the Company reclassified $6,000 of other notes payable, due January 1, 2004, to current liabilities on the consolidated balance sheet. In the third quarter of fiscal 2002, the Company retired $42,875 aggregate principal amount of the remaining $43,005 of the Medium-Term Notes with an original maturity date of September 2007. These notes were redeemed at the option of the holders. The after-tax extraordinary loss was $110. In the second quarter of fiscal 2002, the Company reclassified the $75,000, 6.625% notes with a stated maturity date of May 15, 2003 to current liabilities on the consolidated balance sheet. In the second quarter of fiscal 2002, the Company retired $49,915 aggregate principal amount of the $50,000 Medium-Term Note with an original maturity date of July 2007. These notes were redeemed at the option of the holders. The after-tax extraordinary loss was $129. In June 2001, the Company obtained $90,000 in a Senior Secured Credit Facility. The Facility, which is secured by certain equipment and real estate with a total book value as of February 1, 2003 of $89,960, was issued in two tranches. Tranche A is a term loan for $45,000 with an interest rate based on London Interbank Offered Rate (LIBOR) plus 3.65%. Tranche A is structured as a two-year term loan payable in equal installments with the final payment due in fiscal 2003. The weighted average interest rate on Tranche A was 5.5% at February 1, 2003 and 6.7% at February 2, 2002. Tranche B is a term loan for $45,000 with an interest rate of LIBOR plus 3.95%. Tranche B is structured as a five-year term loan payable in equal installments with the final payment due in 2006. The weighted average interest rate on Tranche B was 5.8% at February 1, 2003 and 6.9% at February 2, 2002. The Senior Secured Credit Facility is subject to certain financial covenants. In September 2000, the Company entered into a new revolving credit agreement. The new revolving credit agreement provides up to $225,000 of borrowing availability, which is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to September 10, 2004. Sixty days prior to each anniversary date, the Company may request and, upon agreement with the bank, extend the maturity of this facility an additional year. The interest rate on any loan is equal to the LIBOR plus 1.75%, and increases in 0.25% increments as the excess availability falls below $50,000. The revolver is subject to financial covenants. This revolver replaces the previous revolver the Company had with nine major banks, which provided up to $200,000 in borrowings. The Company recorded an after-tax extraordinary loss related to the extinguishment of its previous revolving credit agreement of $931. The weighted average interest rate on borrowings under the revolving credit agreement was 3.8% and 6.2% at February 1, 2003 and February 2, 2002, respectively. 47 In June 2000, the Company repurchased $5,995 face value of the $49,000 Medium-Term Note. The after-tax extraordinary gain was $960. In February 1998, the Company established a Medium-Term Note program which permitted the Company to issue up to $200,000 of Medium-Term Notes. Under this program the Company sold $100,000 principal amount of Senior Notes, ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006. Additionally, in July 1998, under this note program, the Company sold $100,000 of Term Enhanced ReMarketable Securities with a stated maturity date of July 2017. The Company also sold a call option with the securities, which allows the securities to be remarketed to the public in July 2006 under certain circumstances. If the securities are not remarketed, the Company will be obligated to repay the principal amount in full in July 2017. The level yield to maturity on the securities is approximately 6.85% and the coupon rate is 6.92%. The other notes payable have a weighted average interest rate of 5.7% at February 1, 2003 and 4.9% at February 2, 2002, and mature at various times through August 2016. Certain of these notes are collateralized by land and buildings with an aggregate carrying value of approximately $7,116 and $7,260 at February 1, 2003 and February 2, 2002, respectively.
CONVERTIBLE DEBT - ------------------------------------------------------------------------------------------------------------ February 1, 2003 February 2, 2002 - ------------------------------------------------------------------------------------------------------------ 4.25% Senior convertible notes, due June 2007 $150,000 $ - Less current maturities - - - ------------------------------------------------------------------------------------------------------------ Total Long-Term Convertible Debt $150,000 $ - - ------------------------------------------------------------------------------------------------------------
On May 21, 2002, the Company issued $150,000 aggregate principal amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries, 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 notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes is payable by the Company on June 1 and December 1 of each year, beginning December 1, 2002. In fiscal 2001, the Company repurchased the remaining $241,504 face value of its Liquid Yield Option Notes (LYONs). The book value of the repurchased LYONs was $161,812 and the net after-tax extraordinary loss was $765. In fiscal 2000, the Company repurchased $30,200 face value of its LYONs. The book value of the repurchased LYONs was $19,226 and the after-tax extraordinary gain was $2,025. On September 20, 1996, the Company issued $271,704 principal amount (at maturity) of LYONs with a price to the public of $150,000. The net proceeds to the Company were $146,250. These notes were retired in fiscal 2001 as stated above. 48 Several of the Company's debt agreements require the maintenance of certain financial ratios and compliance with covenants. Approximately $37,319 of the Company's net worth was not restricted by these covenants as of February 1, 2003. The Company was in compliance with all such ratios and covenants at February 1, 2003. The annual maturities of all long-term debt and capital lease commitments for the next five years are:
Long-Term Capital Year Debt Leases Total - ------------------------------------------------------------------------------ 2003 $ 101,183 $ 699 $ 101,882 2004 117,562 49 117,611 2005 109,017 - 109,017 2006 148,468 - 148,468 2007 150,235 - 150,235 Thereafter 246 - 246 - ------------------------------------------------------------------------------ Total $ 626,711 $ 748 $ 627,459 - ------------------------------------------------------------------------------
The Company was contingently liable for outstanding letters of credit in the amount of approximately $42,879 at February 1, 2003. The Company was also contingently liable for surety bonds in the amount of approximately $9,375 at February 1, 2003. NOTE 3 - ACCRUED EXPENSES The Company's accrued expenses for fiscal years ended February 1, 2003 and February 2, 2002 were as follows:
February 1, February 2, Year ended 2003 2002 - ----------------------------------------------------------- Medical and casualty insurance $ 124,571 $ 111,136 Accrued compensation and related taxes 49,923 45,494 Other 57,761 60,763 - ----------------------------------------------------------- Total $ 232,255 $ 217,393 - -----------------------------------------------------------
49 NOTE 4 - LEASE AND OTHER COMMITMENTS In May 2001, the Company sold certain operating assets for $14,000. 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 is being accounted for as an operating lease and the gain of $3,817 from the sale of the certain operating assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. In January 2001, the Company sold certain assets for $10,464. The assets were leased back from the purchaser on a month to month renewable term basis with a residual guarantee given by the Company at the end of the lease term. The resulting lease is being accounted for as an operating lease and the gain of $593 from the sale of the certain assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales on the consolidated statement of operations. In September 2000, the Company entered into a $143,000 real estate operating lease facility with leased property trusts, established as an unconsolidated special-purpose entity. The real estate operating lease facility, which has an interest rate of LIBOR plus 1.85%, replaces $143,000 of leases, which had an interest rate of LIBOR plus 2.27%. The Company, as a result of replacing the existing operating leases, recorded a pretax charge to fiscal 2000 earnings of $1,630 of unamortized lease costs, which was recorded in the costs of merchandise sales section of the consolidated statement of operations. The $143,000 real estate operating lease facility has a four-year term with a guaranteed residual value. At February 1, 2003, the Company had approximately $132,000 of real estate leased under the facility and the maximum amount of the residual guarantee relative to the real estate under the lease is approximately $92,372. The Company expects the fair market value of the leased real estate, subject to the purchase option or sale to a third party, to substantially reduce or eliminate the Company's payment under the residual guarantee at the end of the lease term. 50 The Company leases certain property and equipment under operating leases and capital leases which contain renewal and escalation clauses. Future minimum rental commitments for noncancelable operating leases and capital leases in effect as of February 1, 2003 are shown in the table below. All amounts are exclusive of lease obligations and sublease rentals applicable to stores for which reserves in conjunction with the Profit Enhancement Plan have previously been established. The aggregate minimum rental commitments for such leases having terms of more than one year are approximately:
- ------------------------------------------------------------------------------- Operating Capital Year Leases Leases - ------------------------------------------------------------------------------- 2003 $ 46,640 $ 734 2004 43,485 49 2005 36,634 - 2006 36,487 - 2007 36,313 - Thereafter 301,081 - -------- -------- Aggregate minimum lease commitments $500,640 783 ======== Less: Interest on capital leases 35 ------- Present Value of Net Minimum Lease Commitments $ 748 ======== - -------------------------------------------------------------------------------
Rental expenses incurred for operating leases in fiscal 2002, 2001 and 2000 were $64,266, $64,434 and $63,206, respectively. In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773 over four years. As of February 1, 2003, the Company was obligated to purchase an outstanding balance of $23,393. The minimum required purchases for each of the remaining three years of this commitment are as follows: 2003 - $5,993; 2004 - $9,943; 2005 - $7,457. The Company has a commitment due in the next year of $4,900 related to the non-renewal of the Chairman and CEO's employment agreement. NOTE 5 - STOCKHOLDERS' EQUITY SHARE REPURCHASE - TREASURY STOCK On February 1, 1999, the Company repurchased 11,276,698 of its common shares outstanding pursuant to a Dutch Auction self-tender offer at a price of $16.00 per share. The repurchased shares included 1,276,698 common shares which were repurchased as a result of the Company exercising its option to purchase an additional 2% of its outstanding shares. Expenses related to the share repurchase were approximately $1,638 and were included as part of the cost of the shares acquired. A portion of the treasury shares will be used by the Company to provide benefits to employees under its compensation plans and in conjunction with the Company's dividend reinvestment program. As of February 1, 2003, the Company has reflected 10,070,729 shares of its common stock at a cost of $162,595 as "cost of shares in treasury" on the Company's consolidated balance sheet. 51 RIGHTS AGREEMENT On December 31, 1997, the Company distributed as a dividend one common share purchase right on each of its common shares. The rights will not be exercisable or transferable apart from the Company's common stock until a person or group, as defined in the rights agreement (dated December 5, 1997), without the proper consent of the Company's Board of Directors, acquires 15% or more, or makes an offer to acquire 15% or more of the Company's outstanding stock. When exercisable, the rights entitle the holder to purchase one share of the Company's common stock for $125. Under certain circumstances, including the acquisition of 15% of the Company's stock by a person or group, the rights entitle the holder to purchase common stock of the Company or common stock of an acquiring company having a market value of twice the exercise price of the right. The rights do not have voting power and are subject to redemption by the Company's Board of Directors for $.01 per right anytime before a 15% position has been acquired and for 10 days thereafter, at which time the rights become nonredeemable. The rights expire on December 31, 2007. BENEFITS TRUST On April 29, 1994, the Company established a flexible employee benefits trust with the intention of purchasing up to $75,000 worth of the Company's common shares. The repurchased shares will be held in the trust and will be used to fund the Company's existing benefit plan obligations including healthcare programs, savings and retirement plans and other benefit obligations. The trust will allocate or sell the repurchased shares through 2023 to fund these benefit programs. As shares are released from the trust, the Company will charge or credit additional paid-in capital for the difference between the fair value of shares released and the original cost of the shares to the trust. For financial reporting purposes, the trust is consolidated with the accounts of the Company. All dividend and interest transactions between the trust and the Company are eliminated. In connection with the Dutch Auction self-tender offer, 37,230 shares were tendered at a price of $16.00 per share in fiscal 1999. At February 1, 2003, the Company has reflected 2,195,270 shares of its common stock at a cost of $59,264 as "cost of shares in benefits trust" on the Company's consolidated balance sheet. NOTE 6 - PROFIT ENHANCEMENT PLAN In the third quarter of fiscal 2000, the Company comprehensively reviewed its field, distribution and Store Support Center infrastructure and the performance of each of its stores. As a result, the Company implemented a number of changes that have improved its performance. These changes included the closure of 38 under-performing stores and two distribution centers and reductions in store operating hours and the Store Support Center infrastructure. PLAN UPDATE The Company is progressing towards the disposal of the 38 stores (11 owned and 27 leased), two distribution centers and two development parcels that were closed or abandoned in connection with the Profit Enhancement Plan. As of February 1, 2003, the Company had disposed of 22 of the closed stores, the two distribution centers and the two development parcels. During fiscal 2002, the Company decided to lease rather than sell three of the closed stores due to changes in the real estate market. As a result, the Company reclassified these three owned properties as assets held for use. The Company estimates that the remaining closed stores (one owned and 12 leased) will be disposed of by the end of the third quarter of fiscal 2003. ASSETS HELD FOR DISPOSAL As of February 1, 2003, the assets held for disposal included the building and land of one remaining closed store owned by the Company, which has a carrying value of $1,146. This property was sold in the first quarter of fiscal 2003. The Company has sold nine of the 13 owned properties originally held for sale, which included the two development parcels. Additionally, the Company decided to lease rather than sell three of the closed stores due to changes in the real estate market. As a result, the Company reclassified these three owned properties as assets held for use at their estimated market value. The market value of each such property was lower than cost adjusted for depreciation. 52 In fiscal 2002, the Company sold six and reclassified three (as assets held for use) of the 13 owned properties. The six properties were sold for $8,446, net of commissions, and resulted in a loss of $666, which was recorded in costs of merchandise sales on the consolidated statement of operations. In addition, the Company adjusted the carrying values of certain assets held for disposal, which resulted in a net decrease of $160, which was recorded in costs of merchandise sales on the consolidated statement of operations. In fiscal 2001, the Company sold three of the 13 owned properties for $4,103, net of commissions, and resulted in a loss of $691, which was recorded in costs of merchandise sales and selling, general and administrative expenses on the consolidated statement of operations. In addition, the Company recorded a downward revision in the estimated values for certain properties of $1,496 in fiscal 2001. This expense was recorded in costs of merchandise sales on the consolidated statement of operations. In fiscal 2001, the Company recorded a loss for equipment held for disposal of $162, which was due primarily to a reduction in the Company's estimated proceeds. In fiscal 2000, the Company recorded charges related to the write-down of assets to fair value of $58,754. These charges were associated with the closure of the 38 stores, two distribution centers, the write-off of certain equipment and the abandonment of two development parcels. LEASE RESERVE As of February 1, 2003, the Company was able to sublease eight and exit the lease of an additional seven of the 27 leased stores. The Company expects the remaining 12 closed stores that are leased to be subleased or otherwise disposed of by the end of the third quarter of fiscal 2003. The Company increased the lease reserve $901 during fiscal 2002. This increase is due primarily to an increase in the time that it is expected to take to sublease certain properties, offset, in part, by an increase in the estimated sublease rates. The effect of these adjustments was recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. The Company increased the lease reserve $1,644 during fiscal 2001. This change in the reserve was a result of a $3,834 increase due primarily to an increase in the estimated amount of time it was expected to take the Company to sublease certain properties and a decrease in estimated sublease rates. The reserve increase was offset, in part, by a $2,190 decrease due primarily to lower than estimated commissions and lease exit costs on subleases for certain properties. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $7,916 for leases of properties included in the Profit Enhancement Plan. The Company increased the reserve by $113 during the remainder of fiscal 2000. These changes in the reserve were a result of a $1,176 increase due to an increase in the estimated lease payments related to the closed stores. The increase was offset, in part, by a $1,063 decrease due primarily to an increase in the estimated sublease rates coupled with lower lease-related expenses. The effects of these adjustments were recorded in costs of merchandise sales and costs of service revenue on the consolidated statement of operations. ON-GOING EXPENSES The on-going expense reserve represents exit activity costs which are not associated with or do not benefit the Company's continuing activities. These costs are necessary to maintain the remaining closed stores until sold, sublet or otherwise disposed. The on-going costs reserve includes general maintenance costs such as utilities, security, telephone, real estate taxes and personal property taxes which will be incurred until the properties are disposed. The reserve for on-going costs will diminish as sites are sold, sublet or otherwise disposed. These disposals are expected to be completed by the end of the third quarter of fiscal 2003. 53 In fiscal 2002, the Company increased the on-going expense reserve by $802. This increase is due primarily to an increase in the length of time that it is expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of operations. In fiscal 2001, the Company increased the on-going expense reserve by $595. This increase was due primarily to a $1,214 increase in the reserve due to an increase in the estimated time it was expected to take to sublease, sell or otherwise dispose of the remaining properties offset, in part, by a $619 decrease due to lower than anticipated cost for utilities and security. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of operations. In fiscal 2000, the Company recorded a reserve of $3,944 for on-going expenses associated with the properties included in the Profit Enhancement Plan. The Company increased the on-going expense reserve by $361 during the remainder of fiscal 2000. This increase was due to an increase in the estimated time it was expected to take to sublease, sell or otherwise dispose of the remaining properties. This adjustment was recorded in costs of merchandise sales, costs of service revenue, and selling, general and administrative expenses on the consolidated statement of operations. SEVERANCE RESERVE In fiscal 2001, the severance reserve was completed. Therefore, there was no activity to this reserve in fiscal 2002. In fiscal 2001, the Company reversed $69 of severance because certain employees who originally expected to receive severance failed to qualify to receive payments. In addition, final severance payments were lower than estimated. Each of these reversals was recorded through the line it was originally charged in the consolidated statements of operations. In fiscal 2000, the Company recorded a reserve of $1,694 for severance associated with the Profit Enhancement Plan. During the remainder of fiscal 2000, the Company reversed $272 of severance due to certain employees' acceptance into other positions within the Company and other employees failing to qualify to receive payments. Each reversal was recorded through the line it was originally charged in the consolidated statements of operations. The total number of employees separated due to the Profit Enhancement Plan was approximately 1,000. The 1,000 employees were composed of 76% store employees, 13% distribution employees, and 11% Store Support Center and field administrative employees. The total severance paid in connection with the Profit Enhancement Plan was $1,353. NON-RESERVABLE EXPENSES Non-reservable expenses are those costs which could not be reserved, but were incurred as a result of the Profit Enhancement Plan. These expenses related to costs incurred which had a future economic benefit to the Company, such as the transferring of inventory and equipment out of properties closed by the Profit Enhancement Plan. There were no expenses of this nature incurred in fiscal 2002. In fiscal 2001, expenses of this nature incurred were $678. These expenses related to the completion of the removal of inventory and equipment from the closed distribution centers. In fiscal 2000, expenses of this nature incurred were $3,611. These expenses were for inventory and equipment handling related to the closure of the 38 stores and the two distribution centers. The fiscal 2000 expenses were offset by a recovery of certain benefit expenses related to the reduction in workforce. 54 PROFIT ENHANCEMENT PLAN EXPENSE SUMMARY Following are tables summarizing expenses related to the Profit Enhancement Plan for fiscal 2002, 2001 and 2000. The details and reasons for the original charge and changes to the charge are as described above in the respective reserve categories.
Income Statement Fiscal Fiscal Fiscal Classification 2002 2001 2000 - ----------------------------------------------------------------- Costs of merchandise sales $2,014 $4,169 $67,085 Costs of service revenue 491 813 5,232 Selling, general and administrative 24 215 2,628 - ----------------------------------------------------------------- Total Expenses $2,529 $5,197 $74,945 - -----------------------------------------------------------------
At the end of the third quarter of fiscal 2000, the Company set up a reserve liability account, which is included in accrued expenses on the consolidated balance sheet. This liability account tracks all accruals including remaining rent on leases net of sublease income, severance, and on-going expenses for the closed properties. The following chart reconciles the change in reserve:
Lease Fixed On-going Expenses Assets Severance Expenses Total - ----------------------------------------------------------------------------------------- Reserve Balance at Feb. 3, 2001 $ 7,054 $ - $ 209 $ 2,960 $ 10,223 Addition 3,834 2,440 - 1,214 7,488 Utilization (5,548) (2,349) (140) (2,235) (10,272) Adjustment (2,190) (91) (69) (619) (2,969) - ----------------------------------------------------------------------------------------- Reserve Balance at Feb. 2, 2002 3,150 - - 1,320 4,470 Addition 1,825 826 - 802 3,453 Utilization (2,959) (826) - (1,680) (5,465) Adjustment (924) - - - (924) - ----------------------------------------------------------------------------------------- Reserve Balance at Feb. 1, 2003 $ 1,092 $ - $ - $ 442 $ 1,534 - -----------------------------------------------------------------------------------------
55 NOTE 7 - SUPPLEMENTAL GUARANTOR INFORMATION - CONVERTIBLE SENIOR NOTES On May 21, 2002, the Company issued $150,000 aggregate principal amount of 4.25% Convertible Senior Notes. The notes are jointly and severally 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 February 1, 2003 and February 2, 2002 and the related consolidating statements of operations and consolidating statements of cash flows for the fiscal years ended February 1, 2003, February 2, 2002 and February 3, 2001:
CONSOLIDATING BALANCE SHEET Non- Subsidiary guarantor Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 32,654 $ 9,714 $ 402 $ - $ 42,770 Accounts receivable, net 8,122 9,794 - - 17,916 Merchandise inventories 166,166 322,716 - - 488,882 Prepaid expenses 29,176 16,308 17,637 (19,375) 43,746 Deferred income taxes 6,812 (819) 7,730 - 13,723 Other 107 - 56,580 - 56,687 Assets held for disposal - 1,146 - - 1,146 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 243,037 358,859 82,349 (19,375) 664,870 - ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 92,540 186,569 - - 279,109 Buildings and improvements 313,927 622,843 - - 936,770 Furniture, fixtures and equipment 286,922 317,609 - - 604,531 Construction in progress 14,764 4,686 - - 19,450 - ----------------------------------------------------------------------------------------------------------------------------- 708,153 1,131,707 - - 1,839,860 Less accumulated depreciation and amortization 326,820 425,003 - - 751,823 - ----------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment - Net 381,333 706,704 - - 1,088,037 - ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,455,877 - 1,121,299 (2,577,176) - Intercompany receivable - 631,438 335,640 (967,078) - Other 41,972 5,031 - - 47,003 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,122,219 $ 1,702,032 $ 1,539,288 $ (3,563,629) $ 1,799,910 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 200,044 $ 9 $ - $ - $ 200,053 Accrued expenses 59,625 48,567 143,438 (19,375) 232,255 Current maturities of long-term debt and obligations under capital leases 101,882 - - - 101,882 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 361,551 48,576 143,438 (19,375) 534,190 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 375,216 361 - - 375,577 Convertible long-term debt, less current maturities 150,000 - - - 150,000 Other long-term liabilities 5,955 19,201 - - 25,156 Intercompany liabilities 544,877 422,201 - (967,078) - Deferred income taxes 33,322 27,341 - - 60,663 Deferred gain on sale leaseback 1,306 3,026 - - 4,332 Stockholders' Equity: Common stock 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital 177,244 240,359 200,398 (440,757) 177,244 Retained earnings 630,847 939,466 1,195,351 (2,134,817) 630,847 Accumulated other comprehensive loss (151) - - - (151) - ----------------------------------------------------------------------------------------------------------------------------- 871,851 1,181,326 1,395,850 (2,577,176) 871,851 Less: Cost of shares in treasury 162,595 - - - 162,595 Cost of shares in benefits trust 59,264 - - - 59,264 - ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 649,992 1,181,326 1,395,850 (2,577,176) 649,992 - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,122,219 $ 1,702,032 $ 1,539,288 $ (3,563,629) $ 1,799,910 - -----------------------------------------------------------------------------------------------------------------------------
56
CONSOLIDATING BALANCE SHEET Non- Subsidiary guarantor Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 4,796 $ 10,874 $ 311 $ - $ 15,981 Accounts receivable, net 17,124 928 - - 18,052 Merchandise inventories 176,696 342,777 - - 519,473 Prepaid expenses 42,384 (15,815) 17,851 (2,250) 42,170 Deferred income taxes 6,581 (4,220) 6,942 - 9,303 Other 3 - 67,305 (15,000) 52,308 Assets held for disposal 2,755 13,252 - - 16,007 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 250,339 347,796 92,409 (17,250) 673,294 - ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 92,661 185,065 - - 277,726 Buildings and improvements 308,444 613,621 - - 922,065 Furniture, fixtures and equipment 273,028 310,890 - - 583,918 Construction in progress 5,380 5,361 - - 10,741 - ----------------------------------------------------------------------------------------------------------------------------- 679,513 1,114,937 - - 1,794,450 Less accumulated depreciation and amortization 293,704 383,260 - - 676,964 - ----------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment - Net 385,809 731,677 - - 1,117,486 - ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,388,724 - 1,050,494 (2,439,218) - Intercompany receivable - 567,825 301,321 (869,146) - Other 13,355 2,000 - - 15,355 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,038,227 $ 1,649,298 $ 1,444,224 $ (3,325,614) $ 1,806,135 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 216,076 $ 9 $ - $ - $ 216,085 Accrued expenses 56,065 48,093 130,485 (17,250) 217,393 Current maturities of long-term debt and obligations under capital leases 124,615 - - - 124,615 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 396,756 48,102 130,485 (17,250) 558,093 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 497,603 46,815 - - 544,418 Other long-term liabilities 6,339 17,541 - - 23,880 Intercompany liabilities 488,066 381,080 - (869,146) - Deferred income taxes 30,357 27,153 - - 57,510 Deferred gain on sale leaseback 1,316 3,128 - - 4,444 Stockholders' Equity: Common stock 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital 177,244 240,359 200,398 (440,757) 177,244 Retained earnings 601,944 883,619 1,113,240 (1,996,859) 601,944 - ----------------------------------------------------------------------------------------------------------------------------- 843,099 1,125,479 1,313,739 (2,439,218) 843,099 Less: Cost of shares in treasury 166,045 - - - 166,045 Cost of shares in benefits trust 59,264 - - - 59,264 - ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 617,790 1,125,479 1,313,739 (2,439,218) 617,790 - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,038,227 $ 1,649,298 $ 1,444,224 $ (3,325,614) $ 1,806,135 - -----------------------------------------------------------------------------------------------------------------------------
57
CONSOLIDATING STATEMENT OF OPERATIONS Non- Subsidiary guarantor Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 603,294 $ 1,153,381 $ - $ - $ 1,756,675 Service Revenue 145,365 270,448 - - 415,813 Other Revenue - - 26,075 (26,075) - - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 748,659 1,423,829 26,075 (26,075) 2,172,488 - ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 419,006 807,821 - - 1,226,827 Costs of Service Revenue 105,358 206,192 - - 311,550 Costs of Other Revenue - - 29,498 (29,498) - - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 524,364 1,014,013 29,498 (29,498) 1,538,377 - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 184,288 345,560 - - 529,848 Gross Profit from Service Revenue 40,007 64,256 - - 104,263 Gross Loss from Other Revenue - - (3,423) 3,423 - - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 224,295 409,816 (3,423) 3,423 634,111 - ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 173,037 343,669 317 3,423 520,446 - ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 51,258 66,147 (3,740) - 113,665 Equity in Earnings of Subsidiaries 67,153 - 70,805 (137,958) - Non-operating (Expense) Income (16,977) 47,332 21,113 (48,371) 3,097 Interest Expense 69,720 25,509 - (48,371) 46,858 - ----------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 31,714 87,970 88,178 (137,958) 69,904 Income Tax (Benefit) Expense (12,325) 32,124 6,066 - 25,865 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings Before Extraordinary Items 44,039 55,846 82,112 (137,958) 44,039 Extraordinary Items, Net of Tax (239) - - - (239) - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 43,800 $ 55,846 $ 82,112 $ (137,958) $ 43,800 - -----------------------------------------------------------------------------------------------------------------------------
58
CONSOLIDATING STATEMENT OF OPERATIONS Non- Subsidiary guarantor Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 605,375 $ 1,160,268 $ - $ - $ 1,765,643 Service Revenue 148,396 270,521 - - 418,917 Other Revenue - - 22,588 (22,588) - - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 753,771 1,430,789 22,588 (22,588) 2,184,560 - ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 429,108 821,300 - - 1,250,408 Costs of Service Revenue 110,145 205,766 - - 315,911 Costs of Other Revenue - - 26,118 (26,118) - - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 539,253 1,027,066 26,118 (26,118) 1,566,319 - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 176,267 338,968 - - 515,235 Gross Profit from Service Revenue 38,251 64,755 - - 103,006 Gross Loss from Other Revenue - - (3,530) 3,530 - - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 214,518 403,723 (3,530) 3,530 618,241 - ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 172,529 337,583 304 3,530 513,946 - ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 41,989 66,140 (3,834) - 104,295 Equity in Earnings of Subsidiaries 65,109 - 73,910 (139,019) - Non-operating (Expense) Income (16,795) 49,962 22,979 (52,702) 3,444 Interest Expense 72,243 31,794 - (52,702) 51,335 - ----------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 18,060 84,308 93,055 (139,019) 56,404 Income Tax (Benefit) Expense (18,040) 31,643 6,701 - 20,304 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings Before Extraordinary Items 36,100 52,665 86,354 (139,019) 36,100 Extraordinary Items, Net of Tax (765) - - - (765) - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 35,335 $ 52,665 $ 86,354 $ (139,019) $ 35,335 - -----------------------------------------------------------------------------------------------------------------------------
59
CONSOLIDATING STATEMENT OF OPERATIONS Non- Subsidiary guarantor Year ended February 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 670,807 $ 1,286,673 $ - $ - $ 1,957,480 Service Revenue 164,097 296,891 - - 460,988 Other Revenue - - 22,672 (22,672) - - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 834,904 1,583,564 22,672 (22,672) 2,418,468 - ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 507,069 998,373 - - 1,505,442 Costs of Service Revenue 132,944 248,231 - - 381,175 Costs of Other Revenue - - 24,097 (24,097) - - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 640,013 1,246,604 24,097 (24,097) 1,886,617 - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 163,738 288,300 - - 452,038 Gross Profit from Service Revenue 31,153 48,660 - - 79,813 Gross Loss from Other Revenue - - (1,425) 1,425 - - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 194,891 336,960 (1,425) 1,425 531,851 - ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 246,171 311,978 309 1,425 559,883 - ----------------------------------------------------------------------------------------------------------------------------- Operating (Loss) Profit (51,280) 24,982 (1,734) - (28,032) Equity in Earnings of Subsidiaries 52,268 - 85,390 (137,658) - Non-operating (Expense) Income (19,742) 68,461 23,977 (70,451) 2,245 Interest Expense 93,812 34,521 - (70,451) 57,882 - ----------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings Before Income Taxes (112,566) 58,922 107,633 (137,658) (83,669) Income Tax (Benefit) Expense (59,418) 21,112 7,785 - (30,521) - ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings Before Extraordinary Items (53,148) 37,810 99,848 (137,658) (53,148) Extraordinary Items, Net of Tax 2,054 - - - 2,054 - ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings $ (51,094) $ 37,810 $ 99,848 $ (137,658) $ (51,094) - -----------------------------------------------------------------------------------------------------------------------------
60
CONSOLIDATING STATEMENT OF CASH FLOWS Non- Subsidiary guarantor Year ended February 1, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Earnings $ 43,800 $ 55,846 $ 82,112 $ (137,958) $ 43,800 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Extraordinary item, net of tax 239 - - - 239 Depreciation and amortization 33,858 45,693 - - 79,551 Deferred income taxes 2,823 (3,211) (788) - (1,176) Deferred gain on sale leaseback (11) (101) - - (112) Equity in earnings of subsidiaries (67,153) - (70,805) 137,958 - Loss on assets held for disposal 11 815 - - 826 Gain from sale of assets (218) (1,695) - - (1,913) Change in current assets and liabilities Decrease (Increase) in accounts receivable, prepaid expenses and other 14,769 (41,241) 10,938 2,125 (13,409) Decrease in merchandise inventories 10,530 20,061 - - 30,591 Decrease in accounts payable (16,032) - - - (16,032) Increase in accrued expenses 3,459 472 12,953 (2,125) 14,759 (Decrease) Increase in other long-term liabilities (384) 1,660 - - 1,276 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 25,691 78,299 34,410 - 138,400 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (27,168) (16,743) - - (43,911) Proceeds from sales of assets 2,050 9,008 - - 11,058 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (25,118) (7,735) - - (32,853) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net payments under line of credit agreements (23,841) (46,454) - - (70,295) Repayment of life insurance policy loan (17,908) (2,778) - - (20,686) Payments on capital lease obligations (642) - - - (642) Reduction of long-term debt (121,938) - - - (121,938) Net proceeds from issuance of notes 146,250 - - - 146,250 Intercompany loan 56,811 (22,492) (34,319) - - Dividends paid (13,911) - - - (13,911) Proceeds from exercise of stock options 1,139 - - - 1,139 Proceeds from dividend reinvestment plan 1,325 - - - 1,325 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 27,285 (71,724) (34,319) - (78,758) - ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 27,858 (1,160) 91 - 26,789 Cash and Cash Equivalents at Beginning of Year 4,796 10,874 311 - 15,981 - ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 32,654 $ 9,714 $ 402 $ - $ 42,770 - -----------------------------------------------------------------------------------------------------------------------------
61
CONSOLIDATING STATEMENT OF CASH FLOWS Non- Subsidiary guarantor Year ended February 2, 2002 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Earnings $ 35,335 $ 52,665 $ 86,354 $ (139,019) $ 35,335 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Extraordinary item, net of tax 765 - - - 765 Depreciation and amortization 36,676 48,017 - - 84,693 Deferred income taxes 1,110 6,730 (416) - 7,424 Deferred gain on sale leaseback (12) (14) - - (26) Equity in earnings of subsidiaries (65,109) - (73,910) 139,019 - Accretion of bond discount 3,256 - - - 3,256 Loss on assets held for disposal 24 2,325 - - 2,349 Gain from sale of assets (47) (1,043) - - (1,090) Change in current assets and liabilities (Increase) Decrease in accounts receivable, prepaid expenses and other (34,572) 35,258 (18,087) (1,325) (18,726) Decrease in merchandise inventories 9,674 18,588 - - 28,262 Increase in accounts payable 11,330 - - - 11,330 (Decrease) Increase in accrued expenses (16,547) 18,253 9,064 1,325 12,095 Increase in other long-term liabilities 219 2,007 - - 2,226 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Operating Activities (17,898) 182,786 3,005 - 167,893 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (14,392) (10,983) - - (25,375) Proceeds from sales of assets 7,205 19,555 - - 26,760 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Investing Activities (7,187) 8,572 - - 1,385 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net payments under line of credit agreements (19,147) (37,729) - - (56,876) Reduction of long-term debt (18,571) - - - (18,571) Reduction of convertible debt (161,056) - - - (161,056) Net proceeds from issuance of notes 87,522 - - - 87,522 Intercompany loan 152,962 (149,793) (3,169) - - Dividends paid (13,864) - - - (13,864) Proceeds from exercise of stock options 181 - - - 181 Proceeds from dividend reinvestment plan 1,372 - - - 1,372 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 29,399 (187,522) (3,169) - (161,292) - ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 4,314 3,836 (164) - 7,986 Cash and Cash Equivalents at Beginning of Year 482 7,038 475 - 7,995 - ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 4,796 $ 10,874 $ 311 $ - $ 15,981 - -----------------------------------------------------------------------------------------------------------------------------
62
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Non- Subsidiary guarantor Year ended February 3, 2001 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net (Loss) Earnings $ (51,094) $ 37,810 $ 99,848 $ (137,658) $ (51,094) Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Extraordinary item, net of tax (2,054) - - - (2,054) Depreciation and amortization 41,455 57,853 - - 99,308 Deferred income taxes (4,459) (19,657) (459) - (24,575) Equity in earnings of subsidiaries (52,268) - (85,390) 137,658 - Accretion of bond discount 6,425 - - - 6,425 Loss on assets held for disposal 4,527 49,213 - - 53,740 Loss on asset impairment 2,469 3,266 - - 5,735 Loss from sale of assets 745 2,906 - - 3,651 Change in current assets and liabilities Decrease (Increase) in accounts receivable, prepaid expenses and other 13,162 (171) (3,339) 150 9,802 Decrease in merchandise inventories 324 34,839 - - 35,163 Decrease in accounts payable (114,964) - (347) - (115,311) Increase (Decrease) in accrued expenses 3,818 (12,154) 6,231 (150) (2,255) Increase in other long-term liabilities 116 940 - - 1,056 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Operating Activities (151,798) 154,845 16,544 - 19,591 - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (24,296) (33,040) - - (57,336) Proceeds from sales of assets 4,803 9,577 - - 14,380 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (19,493) (23,463) - - (42,956) - ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net borrowings under line of credit agreements 33,446 84,089 - - 117,535 Reduction of long-term debt (75,028) - - - (75,028) Reduction of convertible debt (17,208) - - - (17,208) Intercompany loan 233,972 (217,590) (16,382) - - Dividends paid (13,793) - - - (13,793) Proceeds from dividend reinvestment plan 1,369 - - - 1,369 - ----------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 162,758 (133,501) (16,382) - 12,875 - ----------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash (8,533) (2,119) 162 - (10,490) Cash and Cash Equivalents at Beginning of Year 9,015 9,157 313 - 18,485 - ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 482 $ 7,038 $ 475 $ - $ 7,995 - -----------------------------------------------------------------------------------------------------------------------------
63 NOTE 8 - PENSION AND SAVINGS PLANS The Company has a defined benefit pension plan covering substantially all of its full-time employees hired on or before February 1, 1992. Normal retirement age is 65. Pension benefits are based on salary and years of service. The Company's policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA. The actuarial computations are made using the "projected unit credit method." Variances between actual experience and assumptions for costs and returns on assets are amortized over the remaining service lives of employees under the plan. As of December 31, 1996, the Company froze the accrued benefits under the plan and active participants became fully vested. The plan's trustee will continue to maintain and invest plan assets and will administer benefit payments. The Company also has a Supplemental Executive Retirement Plan (SERP). This unfunded plan provides key employees designated by the Board of Directors with retirement and death benefits. Retirement benefits are based on salary and bonuses; death benefits are based on salary. Benefits paid to a participant under the defined pension plan are deducted from the benefits otherwise payable under the SERP. Effective March 25, 2002, the Company modified the benefit formula of the SERP. These modifications resulted in a $2,101 change in benefit obligation in fiscal 2002. In fiscal 2003, the Company anticipates an approximate settlement of $12,200 related to the SERP obligation for the Chairman and CEO. This obligation will result in an expense for settlement accounting under SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," of approximately $4,900 in fiscal 2003. Pension expense includes the following:
February 1, February 2, February 3, Year ended 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- Service cost $ 587 $ 328 $ 335 Interest cost 2,934 2,526 2,443 Expected return on plan assets (2,300) (2,162) (2,261) Amortization of transition obligation 274 60 60 Amortization of prior service cost 297 10 10 Recognized actuarial loss 1,451 992 890 - ----------------------------------------------------------------------------------------------------------------------------- Total Pension Expense $ 3,243 $ 1,754 $ 1,477 - -----------------------------------------------------------------------------------------------------------------------------
Pension plan assets are stated at fair market value and are composed primarily of money market funds, stock index funds, fixed income investments with maturities of less than five years, and the Company's common stock. 64 The following table sets forth the reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company's plans:
February 1, February 2, Year ended 2003 2002 - -------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of year $ 37,098 $34,517 Service cost 587 328 Interest cost 2,934 2,526 Plan amendments 2,101 - Actuarial loss 5,202 1,014 Benefits paid (1,335) (1,287) - --------------------------------------------------------------------------------------------------------------- Benefit Obligation at End of Year $ 46,587 $37,098 - --------------------------------------------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of year $ 27,314 $25,854 Actual return on plan assets (net of expenses) (1,867) 1,816 Employer contributions 6,975 931 Benefits paid (1,335) (1,287) - --------------------------------------------------------------------------------------------------------------- Fair Value of Plan Assets at End of Year $ 31,087 $27,314 - --------------------------------------------------------------------------------------------------------------- Reconciliation of the Funded Status: Funded status $(15,500) $(9,785) Unrecognized transition obligation 2,194 2,468 Unrecognized prior service cost 1,829 26 Unrecognized actuarial loss 11,857 3,933 Amount contributed after measurement date 5 214 - --------------------------------------------------------------------------------------------------------------- Net Amount Recognized at Year-End $ 385 $(3,144) - --------------------------------------------------------------------------------------------------------------- Amounts Recognized on Consolidated Balance Sheets Consist of: Prepaid benefit cost $ 9,438 $ 3,960 Accrued benefit liability (13,318) (8,144) Intangible asset 4,023 1,040 Accumulated other comprehensive loss 242 - - --------------------------------------------------------------------------------------------------------------- Net Amount Recognized at Year-End $ 385 $(3,144) - --------------------------------------------------------------------------------------------------------------- Weighted-Average Assumptions: Discount rate 6.75% 7.25% Expected return on plan assets 8.50% 8.50% - ---------------------------------------------------------------------------------------------------------------
The following table sets forth additional fiscal year-end information for the Company's SERP for which the accumulated benefit obligation is in excess of plan assets:
February 1, February. 2, Year ended 2003 2002 - --------------------------------------------------------------------------------------------------------------- Projected benefit obligation $15,752 $9,590 Accumulated benefit obligation 13,318 8,144 Fair value of plan assets - - - ---------------------------------------------------------------------------------------------------------------
The Company recorded an other comprehensive loss attributable to the change in the minimum pension liability of $242 ($151, net of tax) in fiscal 2002. The Company had no other comprehensive loss or income attributable to the change in the minimum pension liability in fiscal 2001 and 2000. 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 $4,417, $4,516 and $4,947 in fiscal 2002, 2001 and 2000, respectively. 65 NOTE 9 - EARNINGS PER SHARE For fiscal 2002, 2001 and 2000, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. Diluted earnings per share assumes conversion of convertible senior notes, zero coupon convertible subordinated notes and the dilutive effects of stock options. Adjustments for the zero coupon convertible subordinated notes were antidilutive in fiscal 2001 and 2000, and therefore excluded from the computation of diluted EPS; the zero coupon convertible subordinated notes were retired as of the end of fiscal 2001 and will not effect future calculations. Options to purchase 4,588,670, 3,940,587 and 5,032,772 shares of common stock were outstanding at February 1, 2003, February 2, 2002 and February 3, 2001, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market prices of the common shares on such dates. The following schedule presents the calculation of basic and diluted earnings per share for income before extraordinary items:
February 1, February 2, February 3, Year ended 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------- Earnings (Loss) Before Extraordinary Items: Basic earnings (loss) before extraordinary items available to common stockholders $44,039 $36,100 $(53,148) Adjustment for interest on convertible senior notes, net of tax 2,807 - - - ------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) before extraordinary items available to common stockholders $46,846 $36,100 $(53,148) - ------------------------------------------------------------------------------------------------------------- Shares: Basic average number of common shares outstanding 51,517 51,348 51,088 Common shares assumed issued upon conversion of convertible senior notes 4,729 - - Common shares assumed issued upon exercise of dilutive stock options 953 687 - - ------------------------------------------------------------------------------------------------------------- Diluted average number of common shares outstanding assuming conversion 57,199 52,035 51,088 - ------------------------------------------------------------------------------------------------------------- Per Share: Basic earnings (loss) before extraordinary items per share $ .85 $ .70 $ (1.04) Diluted earnings (loss) before extraordinary items per share $ .82 $ .69 $ (1.04) - -------------------------------------------------------------------------------------------------------------
66 NOTE 10 - STOCK OPTION PLANS Options to purchase the Company's common stock have been granted to key employees and members of the Board of Directors. The option prices are at least 100% of the fair market value of the common stock on the grant date. On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan which authorized the issuance of restricted stock and/or options to purchase up to 1,000,000 shares of the Company's common stock. Additional shares in the amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by stockholders on June 4, 1997, May 31, 1995 and June 1, 1993, respectively. In April 2001, the Board of Directors amended the 1990 Stock Incentive Plan to extend the expiration date for the grant of non-qualified stock options and restricted stock thereunder to directors, officers and employees until March 31, 2005. Under this plan, both incentive and nonqualified stock options may be granted to eligible participants. Incentive stock options are fully exercisable on the second or third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Nonqualified options are fully exercisable on the third anniversary of their grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of February 1, 2003, there are 200,354 shares remaining available for grant. On June 2, 1999, the stockholders approved the 1999 Stock Incentive Plan which authorized the issuance of restricted stock and/or options to purchase up to 2,000,000 shares of the Company's common stock. Additional shares in the amount of 2,500,000 were authorized by stockholders on May 29, 2002. Under this plan, both incentive and nonqualified stock options may be granted to eligible participants. The incentive stock options and nonqualified stock options are fully exercisable on the third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of February 1, 2003, there are 2,189,750 shares remaining available for grant.
Equity Equity compensation compensation plans approved plans not approved by shareholders by shareholders Total - -------------------------------------------------------------------------------------- Number of securities to be issued upon exercise of outstanding options 6,898,170 - 6,898,170 Weighted average exercise price of outstanding options $ 16.57 $ - $ 16.57 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in top row) 2,390,104 - 2,390,104 - --------------------------------------------------------------------------------------
67 Stock option transactions for the Company's stock option plans are summarized as follows:
Fiscal 2002 Fiscal 2001 Fiscal 2000 ------------------------ ----------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 6,316,787 $16.48 5,039,772 $19.63 5,413,622 $22.05 Granted 1,213,300 16.27 1,757,000 6.75 1,160,450 6.34 Exercised (108,880) 8.10 (19,400) 8.77 - - Cancelled (523,037) 16.45 (460,585) 14.26 (1,534,300) 18.10 Outstanding - end of year 6,898,170 16.57 6,316,787 16.48 5,039,772 19.63 Options exercisable at year end 4,148,570 20.54 3,422,187 22.29 2,501,678 24.93 Weighted average estimated fair value of options granted 7.20 2.85 2.54 - ---------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at February 1, 2003:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at Feb. 1, 2003 Life Price at Feb. 1, 2003 Price - --------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $13.00 2,186,100 8 years $ 6.51 595,400 $ 6.62 $13.01 to $21.00 2,428,850 8 years 15.91 1,269,950 15.58 $21.01 to $29.00 1,300,617 4 years 23.36 1,300,617 23.36 $29.01 to $37.38 982,603 3 years 31.63 982,603 31.63 - --------------------------------------------------------------------------------------------------------------------------- $ 5.31 to $37.38 6,898,170 4,148,570 - ---------------------------------------------------------------------------------------------------------------------------
68 NOTE 11 - INCOME TAXES The provision for income taxes includes the following:
February 1, February 2, February 3, Year ended 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Current: Federal $ 25,102 $ 12,640 $ (6,300) State 1,939 240 353 Deferred: Federal (1,211) 6,680 (22,776) State 35 744 (1,798) - ---------------------------------------------------------------------------------------------------------------------------------- $ 25,865 $ 20,304 $ (30,521) - ---------------------------------------------------------------------------------------------------------------------------------- A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows: February 1, February 2, February 3, Year ended 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 1.9 1.2 1.2 Job credits (0.3) (0.3) 0.3 Other, net 0.4 0.1 - - ----------------------------------------------------------------------------------------------------------------------------------- 37.0% 36.0% 36.5% - -----------------------------------------------------------------------------------------------------------------------------------
Items that gave rise to significant portions of the deferred tax accounts are as follows:
February 1, February 2, 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred Tax Assets: Inventories $ 4,456 $ 3,841 Employee compensation 7,209 4,990 Store closing reserves 750 375 Legal 2,270 2,438 Real estate tax (2,188) (2,188) Insurance 6,128 4,621 Benefit accruals (5,860) (5,693) State tax credit 419 - Valuation allowance (419) - Other 958 919 - ----------------------------------------------------------------------------------------------------------------------------------- $ 13,723 $ 9,303 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred Tax Liabilities: Depreciation $ 72,944 $ 69,093 State taxes (3,046) (2,643) Accrued leases (9,435) (8,955) Other 200 15 - ----------------------------------------------------------------------------------------------------------------------------------- $ 60,663 $ 57,510 - ----------------------------------------------------------------------------------------------------------------------------------- Net Deferred Tax Liability $ 46,940 $ 48,207 - -----------------------------------------------------------------------------------------------------------------------------------
69 NOTE 12 - CONTINGENCIES The Company's California subsidiary is a defendant in a consolidated action entitled "Dubrow et al vs. The Pep Boys - Manny Moe & Jack" that is currently pending in the California Superior Court in Orange County. The two consolidated actions were originally filed on March 29, 2000 and July 25, 2000. Plaintiffs are former and current store management employees who claim that they were improperly classified as exempt from the overtime provisions of California law and seek to be compensated for all overtime hours worked. Plaintiffs filed a Motion to certify the case as a class action to represent all persons employed in California as salaried store managers, assistant store managers, service managers and assistant service managers since March 29, 1996. Plaintiffs' Motion to certify the case as a class action was previously granted by the trial court. The Company's appeals of that decision through the California Supreme Court were unsuccessful. The Company is now preparing to move the trial court for reconsideration of its decision to certify the class. No trial date has been set for the underlying case. The Company intends to vigorously defend this action and believes that it is not material to the Company's financial position. An adverse outcome in this action, however, may have a material adverse effect on the Company's results of operations for the year in which a judgment, if any, is rendered. 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 allege 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. The Company became aware of a Federal Trade Commission investigation regarding the accuracy of advertising claims concerning the product's effectiveness. The plaintiffs further allege that they were negotiating with the manufacturer of the product to obtain the exclusive distribution rights throughout the United States and that those negotiations failed. Plaintiffs are seeking damages including payment for the product that they allege Pep Boys ordered and expenses and loss of sales in Puerto Rico and the United States resulting from the alleged breach. The Company believes that the claims are without merit and continues to vigorously defend this action. The Company is also party to various other lawsuits and claims, including purported class actions, arising in the normal course of business. In the opinion of management, these lawsuits and claims, are not, singularly or in the aggregate, material to the Company's financial position or results of operations. NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
February 1, 2003 February 2, 2002 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 42,770 $ 42,770 $ 15,981 $ 15,981 Accounts receivable 17,916 17,916 18,052 18,052 Liabilities: Accounts payable 200,053 200,053 216,085 216,085 Long-term debt including current maturities 477,459 462,609 669,033 635,080 Senior convertible notes 150,000 133,125 - - - --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts approximate fair value because of the short maturity of these items. LONG-TERM DEBT INCLUDING CURRENT MATURITIES AND SENIOR CONVERTIBLE SUBORDINATED NOTES Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The fair value estimates presented herein are based on pertinent information available to management as of February 1, 2003 and February 2, 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from amounts presented herein. 70 NOTE 14 - SUBSEQUENT EVENT On March 26, 2003, the Company announced that its Board of Directors authorized a share repurchase program for the purchase of up to $25,000 of its outstanding common stock. Share repurchases may be made from time to time in the open market or in privately negotiated transactions.
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings(Loss) Net Net Earnings Per Share Before Earnings (Loss) Before Net Extraordinary (Loss) Cash Market Price Year Ended Total Gross Operating Extraordinary Earnings Items Per Share Dividends Per Share Feb. 1, 2003 Revenues Profit Profit Items (Loss) Basic Diluted Basic Diluted Per Share High Low - ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $558,973 $161,935 $32,153 $ 13,565 $13,565 $ .26 $ .26 $ .26 $ .26 $.0675 $19.38 $13.55 2nd Quarter 585,785 171,576 38,240 16,683 16,554 .32 .30 .32 .30 .0675 19.04 10.75 3rd Quarter 544,944 163,042 35,220 15,625 15,515 .30 .28 .30 .28 .0675 15.23 8.75 4th Quarter 482,786 137,558 8,052 (1,834) (1,834) (.04) (.04) (.04) (.04) .0675 12.64 10.06 - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended Feb. 2, 2002 - ----------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $551,577 $155,731 $27,233 $ 9,108 $ 9,108 $ .18 $ .18 $ .18 $ .18 $.0675 $ 7.00 $ 4.40 2nd Quarter 573,074 164,304 32,164 12,285 12,519 .24 .24 .24 .24 .0675 13.97 5.35 3rd Quarter 551,501 155,952 27,608 11,016 10,022 .21 .21 .19 .19 .0675 13.70 8.80 4th Quarter 508,408 142,254 17,290 3,691 3,686 .07 .07 .07 .07 .0675 18.48 11.88 - -----------------------------------------------------------------------------------------------------------------------------------
Under the Company's present accounting system, actual gross profit from merchandise sales can be determined only at the time of physical inventory, which is taken at the end of the fiscal year. Gross profit from merchandise sales for the first, second and third quarters is estimated by the Company based upon recent historical gross profit experience and other appropriate factors. Any variation between estimated and actual gross profit from merchandise sales for the first three quarters is reflected in the fourth quarter's results. 71 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The material contained in the registrant's definitive proxy statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year (the "Proxy Statement"), under the captions "(ITEM 1) ELECTION OF DIRECTORS," other than "-Report of the Audit Committee of the Board of Directors," and "-Independent Auditors' Fees" is hereby incorporated herein by reference. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G(3) to Form 10-K. ITEM 11 EXECUTIVE COMPENSATION The material in the Proxy Statement under the caption "EXECUTIVE COMPENSATION," other than the material under "-Performance Graph" and "-Report of the Compensation Committee of the Board of Directors on Executive Compensation" is hereby incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The material in the Proxy Statement under the caption "SHARE OWNERSHIP" is hereby incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The material in the Proxy Statement under the caption "EXECUTIVE COMPENSATION-Certain Relationships and Related Transactions" is hereby incorporated herein by reference. ITEM 14 CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Under Securities and Exchange Commission (SEC) rules, the Company is required to maintain disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits 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. Within the 90-day period prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures. The Company's management, including the chief executive officer and chief financial officer, supervised and participated in the evaluation. Based on this evaluation, the chief executive officer and the chief financial officer concluded that the Company's disclosure controls and procedures were effective as of the evaluation date. Changes In Internal Controls There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 72 PART IV ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a). Page ---- 1. The following consolidated financial statements of The Pep Boys - Manny, Moe & Jack are included in Item 8. Independent Auditors' Report 35 Consolidated Balance Sheets - February 1, 2003 and February 2, 2002 36 Consolidated Statements of Operations - Years ended February 1, 2003, February 2, 2002 and February 3, 2001 37 Consolidated Statements of Stockholders' Equity - Years ended February 1, 2003, February 2, 2002 and February 3, 2001 38 Consolidated Statements of Cash Flows - Years ended February 1, 2003, February 2, 2002, and February 3, 2001 39 Notes to Consolidated Financial Statements 40 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves 82 All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits
(3.1) Articles of Incorporation, Incorporated by reference from as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (3.2) By-Laws, as amended Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-39225). (3.3) Amendment to By-Laws Incorporated by reference from (Declassification of Board of Directors) the Company's Form 10-K for the fiscal year ended January 29, 2000. (4.1) Indenture, dated as of March 22, Incorporated by reference from 1991 between the Company and the Registration Statement on Bank America Trust Company of Form S-3 (File No. 33-39225). New York as Trustee, including Form of Debt Security (4.2) Indenture, dated as of June Incorporated by reference from 12, 1995, between the Company the Registration Statement on and First Fidelity Bank, Form S-3 (File No. 33-59859). National Association as Trustee, including Form of Debenture 73 (4.3) Indenture, dated as of July 15, 1997, Incorporated by reference from between the Company and PNC the Registration Statement on Bank, National Association, as Form S-3 (File No. 333-30295). Trustee, providing for the issuance of Senior Debt Securities, and form of security (4.4) Indenture, dated as of February 18, 1998 Incorporated by reference from between the Company and PNC the Registration Statement on Bank, National Association, as Form S-3/A (File No. 333-45793). Trustee, providing for the issuance of Senior Debt Securities, and form of security (4.5) Indenture, dated May 21, 2002, by and among The Incorporated by reference from Pep Boys - Manny, Moe & Jack, as Issuer, The Pep the Registration Statement on Boys Manny Moe & Jack of California, Pep Boys - Form S-3 (File No. 333-98255). Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. as Guarantors, and Wachovia Bank, National Association, as Trustee. . (10.1)* Medical Reimbursement Plan of Incorporated by reference from the Company the Company's Form 10-K for the fiscal year ended January 31, 1982. (10.2) Rights Agreement dated as of Incorporated by reference from December 5, 1997 between the the Company's Form 8-K dated Company and First Union December 8, 1997. National Bank (10.3)* Directors' Deferred Compensation Incorporated by reference from Plan, as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (10.4) Dividend Reinvestment and Stock Purchase Incorporated by reference from Plan dated January 4, 1990 the Registration Statement on Form S-3 (File No. 33-32857). (10.5)* The Pep Boys - Manny, Moe & Incorporated by reference from Jack Trust Agreement for the the Company's Form 10-K for the Executive Supplemental Pension fiscal year ended February 1, Plan and Certain Contingent 1992. Compensation Arrangements, dated as of February 13, 1992 (10.6)* Consulting and Retirement Incorporated by reference from Agreement by and between the the Company's Form 10-K for the Company and Benjamin Strauss, fiscal year ended February 1, dated as of February 2, 1992 1992. (10.7)* Flexible Employee Benefits Trust Incorporated by reference from the Company's Form 8-K dated May 6, 1994. 74 (10.8)* Form of Employment Agreement dated as of Incorporated by reference from June 1998 between the Company and certain the Company's Form 10-Q for the officers of the Company. quarter ended October 31, 1998. (10.9)* Employment Agreement between Mitchell G. Leibovitz Incorporated by reference from and the Company dated as of June 3, 1998. the Company's Form 10-Q for the quarter ended October 31, 1998. (10.10)* The Pep Boys - Manny, Moe & Jack Incorporated by reference from Annual Incentive Bonus Plan, as amended and restated. the Company's Form 10-K for the year ended January 30, 1999. (10.11)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from 1999 Stock Incentive Plan - Amended the Company's Form 10-Q for the and Restated as of August 31, 1999. quarter ended October 30, 1999. (10.12) Loan and Security Agreement between the Company and Incorporated by reference from Congress Financial Corporation dated September 22, 2000. the Company's Form 8-K filed October 18, 2000. (10.13) Participation Agreement between the Company and Incorporated by reference from The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed September 22, 2000. October 18, 2000. (10.14) Master Lease Agreement between the Company and Incorporated by reference from The State Street Bank and Trust (Trustee) dated the Company's Form 8-K filed September 22, 2000. October 18, 2000. (10.15) Sale-leaseback agreement between the Company Incorporated by reference from and ARI Fleet LT dated January 31, 2001. the Company's Form 10-K for the year ended February 3, 2001. (10.16)* The Pep Boys - Manny, Moe and Jack Incorporated by reference from 1990 Stock Incentive Plan - Amended the Company's Form 10-K for the and Restated as of March 26, 2001. year ended February 3, 2001. (10.17) Credit Agreement between the Company Incorporated by reference from and GMAC Business Credit, LLC dated the Company's Form 8-K filed June 29, 2001. July 13, 2001. (10.18) Amendment No. 1 dated as of June 29, 2001 Incorporated by reference from to the Loan and Security Agreement dated the Company's Form 10-K for the September 22, 2000 between the Company and year ended February 2, 2002. Congress Financial Corporation. (10.19)* The Pep Boys - Manny, Moe & Jack Incorporated by reference from Pension Plan - Amended and Restated the Company's Form 10-K for the as of September 10, 2001. year ended February 2, 2002. (10.20) Advertising Purchase Agreement between Incorporated by reference from the Company and ICON International, Inc. the Company's Form 10-K for the dated October 3, 2001. year ended February 2, 2002. (10.21) Amendment No. 2 dated as of December 13, 2001 Incorporated by reference from to the Loan and Security Agreement dated the Company's Form 10-K for the September 22, 2000 between the Company and year ended February 2, 2002. Congress Financial Corporation. (10.22)* Amendment and restatement as of September 3, 2002 of Incorporated by reference from The Pep Boys Savings Plan. the Company's Form 10-Q for the quarter ended November 2, 2002. (10.23)* Amendment and restatement as of September 3, 2002 of Incorporated by reference from The Pep Boys Savings Plan - Puerto Rico. the Company's Form 10-Q for the quarter ended November 2, 2002. (10.24)* Amendment Number One to The Pep Boys - Manny, Moe & Incorporated by reference from Jack 1999 Stock Incentive Plan. the Company's Form 10-Q for the quarter ended November 2, 2002. 75 (10.25) Amendment No. 3 to Loan and Security Agreement dated Incorporated by reference from September 22, 2002 between the Company and Congress the Company's Form 10-Q for the Financial Corporation. quarter ended November 2, 2002. (10.26)* Long-Term Disability Salary Continuation Plan, amended and restated as of March 26, 2002. (10.27)* Amendment to and restatement of the Executive Supplemental Pension Plan, effective as of March 26, 2002. (10.28)* Employment agreement between George Babich, Jr. and the Company dated as of February 28, 2003. (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent (99.1) 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 (99.2) 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
* Management contract or compensatory plan or arrangement. (b). The Company filed an 8-K on November 8, 2002 disclosing the effectiveness of the Company's Form S-3 registering the resale of its 4.25% convertible senior notes due June 1, 2007 and the underlying common stock and an update of the Company's legal proceedings. No exhibits were attached. The Company filed an 8-K on January 7, 2003 announcing the pending retirement of its Chairman and Chief Executive Officer, Mitchell G. Leibovitz. An exhibit containing a press release announcing Mr. Leibovitz' retirement was attached. 76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) Dated: April 28, 2003 by: /s/ George Babich, Jr. -------------- ---------------------- George Babich, Jr., President and Chief Financial Officer 77 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - ---------- -------- ---- /s/ Mitchell G. Leibovitz Chairman of the Board April 28, 2003 Mitchell G. Leibovitz and Chief Executive Officer (Principal Executive Officer) /s/ George Babich, Jr. President and April 28, 2003 George Babich, Jr. Chief Financial Officer (Principal Financial Officer) /s/ Bernard K. McElroy Chief Accounting Officer April 28, 2003 Bernard K. McElroy and Treasurer (Principal Accounting Officer) /s/ Peter A. Bassi Director April 28, 2003 Peter A. Bassi /s/ Bernard J. Korman Director April 28, 2003 Bernard J. Korman /s/ J. Richard Leaman, Jr. Director April 28, 2003 J. Richard Leaman, Jr. /s/ William Leonard Director April 28, 2003 William Leonard /s/ Malcolmn D. Pryor Director April 28, 2003 Malcolmn D. Pryor /s/ Lester Rosenfeld Director April 28, 2003 Lester Rosenfeld /s/ Jane Scaccetti Director April 28, 2003 Jane Scaccetti /s/ Benjamin Strauss Director April 28, 2003 Benjamin Strauss /s/ John T. Sweetwood Director April 28, 2003 John T. Sweetwood
78 CHIEF EXECUTIVE OFFICER CERTIFICATION - ------------------------------------- Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mitchell G. Leibovitz, certify that: 1. I have reviewed this annual report on Form 10-K of The Pep Boys - Manny, Moe & Jack; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 28, 2003 /s/ Mitchell G. Leibovitz -------------------- ------------------------- Mitchell G. Leibovitz Chairman of the Board and Chief Executive Officer 79 CHIEF FINANCIAL OFFICER CERTIFICATION - ------------------------------------- Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, George Babich, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of The Pep Boys - Manny, Moe & Jack; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 28, 2003 /s/ George Babich, Jr. -------------------- ----------------------- George Babich, Jr. President and Chief Financial Officer 80 FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K 81
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) - ---------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - ---------------------------------------------------------------------------------------------------------------------------- Additions Additions Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Descriptions Period Expenses Accounts Deductions* Period - ---------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year Ended February 1, 2003 $725 $1,643 $ - $1,946 $422 - ---------------------------------------------------------------------------------------------------------------------------- Year Ended February 2, 2002 $639 $1,674 $ - $1,588 $725 - ---------------------------------------------------------------------------------------------------------------------------- Year Ended February 3, 2001 $826 $1,859 $ - $2,046 $639 - ----------------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off. 82 INDEX TO EXHIBITS Index of Financial Statements, Financial Statement Schedule and Exhibits Page ---- 1. The following consolidated financial statements of The Pep Boys - Manny, Moe & Jack are included in Item 8. Independent Auditors' Report 35 Consolidated Balance Sheets - February 1, 2003 and February 2, 2002 36 Consolidated Statements of Operations - Years ended February 1, 2003, February 2, 2002 and February 3, 2001 37 Consolidated Statements of Stockholders' Equity - Years ended February 1, 2003, February 2, 2002 and February 3, 2001 38 Consolidated Statements of Cash Flows - Years ended February 1, 2003, February 2, 2002 and February 3, 2001 39 Notes to Consolidated Financial Statements 40 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits (10.26) Long-Term Disability Salary Continuation Plan, amended and restated as of March 26, 2002. (10.27) Amendment to the Executive Supplemental pension Plan, (amended effective March 31, 1995), dated as of March 26, 2002. (10.28) Employment agreement between George Babich, Jr. and the Company dated as of February 28, 2003. (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent (99.1) 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 (99.2) 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 83 EX-10 4 fexh1026.txt Exhibit 10.26 THE PEP BOYS - MANNY, MOE & JACK LONG TERM DISABILITY SALARY CONTINUATION PLAN The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation, hereby establishes effective as of October 1, 1979, as amended and restated on March 26, 2002, a long term disability salary continuation plan (hereinafter referred to as the "Plan") for the benefit of those employees who are eligible to participate as herein provided. ARTICLE I. Definitions 1.1. "Administrator" or "Plan Administrator" shall mean the committee designated by the Employer's Board of Directors to administer the Plan in accordance with the terms hereof. 1.2. "Commencement Date" for any Eligible Employee shall mean the date that coverage begins under this Plan for such Eligible Employee as set forth in Section 2.1. 1.3. "Compensation" shall mean 100% of an Eligible Employee's base annual salary determined as of the date he suffers a Disability. 1.4. "Coverage Year" means each twelve-month period during which an Eligible Employee is covered under this Plan beginning on the Commencement Date or an anniversary thereof and ending on each subsequent anniversary thereof during which such coverage is provided. 1.5. "Disability" with respect to the Chief Executive Officer of the Employer shall have the meaning set forth in his Employment Agreement with the Employer and for all other Eligible Employees shall mean that due to Injuries or Sickness the Eligible Employee (a) is unable to perform the substantial and material duties of his occupation, as determined in the sole discretion of a physician appointed by the Administrator to make such determination and (b) is receiving care by a physician which is appropriate for the condition causing the Disability. If continued care would be of no benefit to the Eligible Employee, the condition set forth in Section 1.5(b) shall be waived. For purposes hereof, the term "Injuries" shall mean accidental bodily injuries occurring while the individual is an Eligible Employee, and the term "Sickness" shall mean sickness or disease. 1.6. "Eligible Employee" or "Participant" shall mean key employees of the Employer, including officers and directors who are key employees who are designated by the Employer's Board of Directors to participate in this Plan. 1.7. "Employer" shall mean The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation. 1.8. "Insurer" shall mean a licensed insurance company from which long term disability salary continuation policies are purchased to provide a portion of the benefits under the Plan. 1.9. "Plan Year" shall mean and be the period corresponding to the Employer's fiscal year for Federal income tax reporting purposes. 1.10. "Uniform Percentage" shall mean the percentage of Compensation benefits hereunder that the Administrator determines, in its sole discretion, to fund for an Eligible Employee through the purchase of one or more insurance policies pursuant to Section 3.4. ARTICLE II. Participation 2.1. Commencement. An Eligible Employee's coverage hereunder shall commence on the earlier of: (a) the date an insurance policy is purchased to provide a portion of his benefit hereunder as provided at Section 3.4; and (b) ninety (90) days after the individual is designated as an Eligible Employee; provided, however, that if there is a delay in the issuance of an insurance policy intended to provide a portion of such Eligible Employee's benefit hereunder that is attributable to the actions or inactions of the Eligible Employee, the 90-day period set forth above shall be increased by the period of delay caused by the actions or inactions of the Eligible Employee. 2.2. Termination. An Eligible Employee's coverage hereunder shall terminate on the earliest of the date (a) his designation as an Eligible Employee is terminated by the Employer's Board of Directors, (b) his employment with the Employer terminates for any reason other than an event giving rise to benefits hereunder, (c) he attains age 65 and (d) the Plan is terminated. ARTICLE III. Benefits and Funding 3.1. Amount of Benefit. An Eligible Employee's annual benefit hereunder, payable in monthly installments, shall be his Compensation; provided, however, that if the Employer is unable to obtain an insurance policy for the Eligible Employee to fund the benefit obligation hereunder at a commercially reasonable price when compared with the insurance policies obtained for other Eligible Employees, as determined by the Administrator in its sole discretion, or the policy as obtained excludes the Disability from coverage for the Eligible Employee that suffers a Disability, then the Eligible Employee's annual benefit hereunder, payable in monthly installments, shall equal: (a) sixty percent (60%) of Compensation, if the Eligible Employee's Disability occurs during the first Coverage Year; (b) seventy percent (70%) of Compensation, if the Eligible Employee's Disability occurs during the second Coverage Year; (c) eighty percent (80%) of Compensation, if the Eligible Employee's Disability occurs during the third Coverage Year; (d) ninety percent (90%) of Compensation, if the Eligible Employee's Disability occurs during the fourth Coverage Year; or (e) one hundred percent (100%) of Compensation, if the Eligible Employee's Disability occurs during the fifth Coverage Year or thereafter. 3.2. Commencement of Benefits. Benefits shall commence upon the date an Eligible Employee suffers a Disability. 3.3. Termination of Benefits. Benefits shall terminate on the earliest of the date (a) the condition giving rise to benefits no longer qualifies as a Disability, (b) the Eligible Employee attains age 65 or (c) the Eligible Employee dies. 3.4. Funding Policy. The Employer shall pay the benefits provided hereunder out of its general assets. The Employer shall purchase from such Insurer or Insurers selected by it an insurance policy on each Eligible Employee providing payment for disability in a Uniform Percentage, as determined by the Administrator, of each Eligible Employee's Compensation. 3.5. Insurance Policies. To the extent administratively feasible, the Employer shall attempt to purchase insurance policies with uniform definitions of Disability with respect to all Eligible Employees. The Employer shall be the owner and beneficiary of any insurance policies purchased in connection with the Plan. ARTICLE IV. Termination and Amendments 4.1. Amendments. The Employer may, by appropriate resolution of its Board of Directors, amend this Plan in whole or in part. 4.2. Termination. The Employer reserves the right to terminate this Plan in its entirety at any time by an appropriate resolution of its Board of Directors. ARTICLE V. Plan Administration 5.1. Named Fiduciary and Plan Administrator. The Employer, by resolution of its Board of Directors, shall designate a committee consisting of three or more persons which shall be the Administrator and Named Fiduciary (within the meaning of the Employee Retirement Income Security Act of 1974 (hereinafter referred to as "ERISA")) of this Plan. The committee shall have the authority to control and manage the operation and administration of the Plan. The committee shall act by majority vote. 5.2. Delegation of Duties. The committee may (a) delegate all or a portion of the responsibilities of controlling and managing the operation and administration of the Plan to one or more persons; and (b) appoint such agents, advisors, counsel, or other representatives to render advise with regard to any of its responsibilities under the Plan. Wherever the term "committee" is used herein in connection with the operation or administration of the Plan, such term shall include all delegates appointed by the committee. 5.3. Powers and Duties. The responsibility to control and manage the operation and administration of the Plan shall include, but shall not be limited to, the performance of the following acts: (a) The filing of all reports required of the Plan. (b) The distribution to Eligible Employees and beneficiaries of all reports and other information required of the Plan. (c) The keeping of complete records of the administration of the Plan. (d) The promulgation of rules and regulations for administration of the Plan consistent with the terms and provisions of the Plan. (e) The interpretation of the Plan including the determination of any questions of fact arising under the Plan and the making of all decisions required by the Plan, except those expressly reserved to the Employer or Insurer. The construction of the Plan and any actions and decisions taken thereon in good faith by the committee shall be final and conclusive. The committee may correct any defect, or supply any omission, or reconcile any inconsistency in the Plan in such manner and to such extent as shall be expedient to carry the Plan into effect and shall be the sole judge of such expediency. The committee's determinations (including those made by any person or persons to whom the committee's power has been delegated hereunder) on all matters relating to the Plan shall be final, binding and conclusive for all purposes, upon all persons, including without limitation, the Employer, all Eligible Employees and their respective beneficiaries and successors hereunder. 5.4. Payment of Expenses. All expenses of the Plan Administrator shall be paid by the Employer. 5.5. Indemnity of Plan Administrator. The Employer shall indemnify any individual who is a committee member or delegate against any and all claims, loss, damage, expense or liability arising from any action or failure to act, except when due to gross negligence or willful misconduct. 5.6. Agent for Service of Process. The Plan Administrator shall be the agent for the Plan for service of legal process. ARTICLE VI. Claims Procedures 6.1. Claim. (a) An Eligible Employee or his beneficiary who expects a benefit under the Plan which he has not received, or the authorized representative of such Eligible Employee or beneficiary (each one being hereinafter referred to as a "Claimant") may file a formal claim for benefits with the Plan Administrator. The Plan Administrator shall appoint a named fiduciary to review the claim, taking into account that an independent named fiduciary is required to review any appeal of an adverse benefit determination (any reference in this Claims Procedures section of the Plan to the Plan Administrator shall, where applicable, refer to the named fiduciary appointed by the Plan Administrator to review the initial claim). (b) The Plan Administrator shall review the claim and render a determination relating to the claim based on this Plan document (including the Plan Administrator's power and authority to interpret and construe the Plan and to make rules relating to the administration of the Plan) and consistent with prior determinations rendered with respect to similarly situated claims. (c) The Plan Administrator shall notify the Claimant, within 45 days of receipt of the claim, of the Plan Administrator's determination relating to the claim, unless the Plan Administrator determines that matters beyond the control of the Plan Administrator require an extension of time, in which case the Plan Administrator may notify the Claimant, within 45 days of receipt of the claim, of the extension of time, of the circumstances requiring the extension of time, and of the date by which the Plan Administrator expects to render a determination on the claim, which determination must be made within 75 days following the receipt of the claim. If, prior to the end of the extension period, the Plan Administrator again determines that, due to matters beyond the control of the Plan Administrator, a decision cannot be rendered during the extension period, the period may be extended for an additional 30 days (105 days after receipt of the claim). If the extension period is necessary due to the Claimant's failure to submit information necessary to decide a claim, the period that the Plan Administrator has to make the benefit determination will be tolled from the date on which the extension notice is sent to the Claimant until the date on which the Claimant responds to the request for additional information. (d) Any notice of extension will specifically explain the standards on which entitlement to a benefit is based, the unresolved issues that prevent a decision on the claim, and the additional information needed to resolve those issues, and, if applicable, the Claimant shall have at least 45 days from receipt of the extension notice to provide the specified information. (e) The extension notice and a benefit determination notice shall be in writing, sent by regular mail to the Claimant's last known address. Any adverse benefit determination notice must contain the following information: (i) The specific reasons for the determination that is adverse to the Claimant; (ii) Specific reference to the pertinent Plan provisions, insurance policy provisions, and, if applicable, any internal rule, guideline, protocol, or other similar criterion on which the determination is based. With respect to any reference to an internal rule, guideline, protocol, or similar criterion, the determination notice shall set forth the particular rule, guideline, protocol, or criterion or shall state that such rule, guideline, protocol or criterion will be provided to the Claimant upon request, free of charge; (iii) If the adverse benefit determination is based on medical necessity, experimental treatment, or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of the Plan to the Claimant's medical circumstances, or a statement that such explanation will be provided free of charge upon request; (iv) If applicable, a description of any additional information or material necessary to perfect the claim, and an explanation of why such information or material is necessary; and (v) An explanation of the claims review procedures and the time limitations of the review procedures applicable thereto, including a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA. 6.2. Appeal Procedure. (a) A Claimant is entitled to request an appeal of an adverse benefit determination. The appeal request must be submitted in writing within 180 days following receipt of an adverse benefit determination notice. The Claimant shall be provided, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the Claimant's claim, including the identity of the medical and vocational experts, if any, whose advice was obtained on behalf of the Plan in connection with an adverse benefit determination, whether or not the advice was relied on in making the determination. The Claimant shall be entitled to submit written comments, documents, records, and other information relating to the claim for benefits. (b) The review of the adverse benefit determination shall be conducted by an appropriate named fiduciary of the Plan (the "Reviewing Member") who is neither the individual who made the initial adverse benefit determination nor the subordinate of such individual. If, at the time that such review is to be conducted, there is no Named Fiduciary of the Plan who did not also render the initial adverse benefit determination, the Board of Directors of the Employer may appoint an appropriate named fiduciary to conduct this review. This review of the adverse benefit determination shall afford no deference to that initial determination and shall be a new, full, and fair review. (c) To the extent the initial adverse benefit determination was based on a medical judgment, the Reviewing Member shall consult with a health care professional who has appropriate training and experience in the field of medicine involved in the medical judgment and who (1) was not consulted in connection with the initial adverse benefit determination and (2) is not the subordinate of any health care professional who was consulted in connection with the initial adverse benefit determination. (d) The Reviewing Member shall review the appeal of the initial adverse benefit determination (including all comments, documents, records, and other information submitted by the Claimant, regardless of whether such information was submitted with the original claim) and render a final determination relating to the claim based on this Plan document and consistent with prior determinations rendered with respect to similarly situated claims. 6.3. Plan's Final Benefit Determination. (a) Within 45 days following the Plan Administrator's receipt of the Claimant's request for an appeal, the Plan Administrator shall notify the Claimant of its final benefit determination relating to the claim, unless the Plan Administrator determines that special circumstances require an extension of time for processing the claim, in which case the Plan Administrator shall notify the Claimant of such extension within 45 days following the Plan Administrator's receipt of the request for an appeal, specifying the special circumstances requiring an extension and the date by which the Plan expects to render its final benefit determination on the appeal, which determination must be rendered and notice given to the Claimant no later than 90 days following the Plan Administrator's receipt of the request for an appeal. If such an extension is required because the Claimant failed to submit information necessary to decide a claim, the time period for making the final benefit determination set forth in the prior sentence shall be tolled from the date on which the extension notification is sent to the Claimant until the date on which the Claimant responds to the request for additional information. (b) The Plan's final benefit determination shall be made in writing to the Claimant. This final benefit determination shall, to the extent applicable, recite the specific reasons for a determination adverse to the Claimant, with specific reference to the pertinent Plan provisions on which the determination is based and state that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the claim, including the identity of any medical and vocational experts whose advice was obtained on behalf of the Plan in connection with the adverse benefit determination (whether or not the advice was relied upon in making the determination), and including any internal rule, guideline, protocol, or criterion relied upon in making its final benefit determination. If this final adverse benefit determination is based on medical necessity, experimental treatment, or similar exclusion or limit, the final determination shall contain either an explanation of the scientific or clinical judgment which formed the basis of the determination, applying the terms of the Plan to the Claimant's medical circumstances, or a statement that such explanation will be provided free of charge upon request. The final benefit determination shall contain a statement of the Claimant's right to bring an action under Section 502(a) of ERISA. 6.4. Alternative Dispute Resolution Options. You or your Plan may have other voluntary dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office and your State insurance regulatory agency. ARTICLE VII. Miscellaneous 7.1. Employment Obligations. The establishment of this Plan shall not be construed as creating any contract of employment between the Employer and any Eligible Employee. Nothing herein contained shall give any Eligible Employee the right to inspect the books of the Employer or to interfere with the right of the Employer to discharge any Eligible Employee from employment or the right of an Eligible Employee to terminate his employment at any time. 7.2. Insurer. No Insurer shall be considered a party to this Plan, or any supplement or amendment thereto. The Plan or any supplement or amendment thereto shall in no way enlarge, change or vary the Insurer's obligations as specifically set forth in any policy issued by it. 7.3. Conflicts of Law. All matters respecting the validity, effect, interpretation and administration of this Plan shall be determined in accordance with the laws of the Commonwealth of Pennsylvania, except to the extent superceded by ERISA. All matters respecting the validity, effect, i nterpretation and administration of any insurance policy shall be determined in accordance with the laws of the state in which the policy is delivered. 7.4. References. The masculine pronoun shall include the feminine and the singular form shall include the plural, as necessary for proper interpretation of this Plan. THE PEP BOYS - MANNY, MOE & JACK By: /s/ Mitchell G. Leibovitz ------------------------- Mitchell G. Leibovitz, Chief Executive Officer EX-10 5 fexh1027.txt Exhibit 10.27 THE PEP BOYS - MANNY, MOE & JACK AMENDMENT TO AND RESTATEMENT OF EXECUTIVE SUPPLEMENTAL PENSION PLAN WHEREAS, The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation (the "Company"), established an Executive Supplemental Pension Plan (hereinafter referred to as the "Plan") effective January 1, 1982. The Company previously amended and completely restated the Plan effective January 1, 1988, and further amended the Plan effective on February 13, 1992 and March 31, 1995; and WHEREAS, Section 6.1 of the Plan authorizes the Board of Directors of the Company to amend the Plan; and WHEREAS, pursuant to resolutions adopted March 26, 2002, the Board has taken such actions as are necessary to further amend the Plan with respect to those individuals who are Eligible Employees of the Company on such date and to clarify certain interpretations of the Plan with respect to individuals who are Vested Participants on such date. NOW, THEREFORE, the Plan is hereby amended and restated, effective as of March 26, 2002, as follows: ARTICLE I Definitions 1.1. "Actuarial Equivalent Benefit" shall mean a benefit payable in an Optional Form of Benefit which is of equal value to an Eligible Employee's benefit payable in the Normal Benefit Form determined under actuarial factors specified in the Pension Plan. With respect to any lump sum distribution under Section 4.2(d), the Actuarial Equivalent Benefit shall mean a benefit of equivalent current value to the benefit that would otherwise have been provided commencing on the Designated Benefit Commencement Date using the GATT 2003 mortality table set forth in IRS Revenue Ruling 2001-62 (or such other table as hereafter may be proscribed by the Internal Revenue Service to replace the same), and the Present Value Interest Rate. 1.2. "Administrator" or "Plan Administrator" shall mean a committee composed of three or more persons designated from time to time by the Company's Board of Directors. 1.3. "Average Monthly Compensation" shall mean one-twelfth (1/12) of the average of an Eligible Employee's Compensation for the five Plan Years which yields the highest average; provided, however, that for the Chief Executive Officer of the Company "Average Monthly Compensation" shall mean one-twelfth (1/12) of the average of his Compensation for the three Plan Years which yields the highest average. 1.4. "Benefit Election Form" shall mean a written election, on a form prescribed by the Administrator, filed by an Eligible Employee with the Administrator to receive an Early Retirement Benefit and/or an Optional Form of Benefit. 1.5. "Change of Control" shall mean the occurrence of any of the following events: (a) individuals who, as of March 26, 2002, constitute the Board of Directors (the "Board") of the Company (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (b) any "Person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Voting Securities"); provided, however, that the event described in this Section 1.5(b) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (i) by the Company or any subsidiary of the Company in which the Company owns more than 50% of the combined voting power of such entity (a "Subsidiary"), (ii) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (iii) by any underwriter temporarily holding the Company's Voting Securities pursuant to an offering of such Voting Securities, (iv) pursuant to a Non-Qualifying Transaction (as defined in Section 1.5(c) hereof), or (v) with respect to a particular Eligible Employee, pursuant to any acquisition by such Eligible Employees or a group of persons including such Eligible Employees (or any entity controlled by such Eligible Employee or any group of persons including such Eligible Employee); (c) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (i) more than 50% of the total voting power of (A) the company resulting from such Business Combination (the "Surviving Company"), or (B) if applicable, the ultimate parent company that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Company (the "Parent Company"), is represented by the Company's Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which the Company's Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of the Company's Voting Securities among the holders thereof immediately prior to the Business Combination, (ii) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Company or the Parent Company), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Company (or, if there is no Parent Company, the Surviving Company) and (iii) at least a majority of the members of the board of directors of the Parent Company (or, if there is no Parent Company, the Surviving Company) following the consummation of the Business Combination were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (i), (ii) and (iii) above shall be deemed to be a "Non-Qualifying Transaction"); (d) a sale of all or substantially all of the Company's assets; (e) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company; or (f) such other events as the Board may designate. Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company's Voting Securities as a result of the acquisition of the Company's Voting Securities by the Company which reduces the number of the Company's Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person by more than one percent (1%) of the Company's outstanding Voting Securities, a Change in Control of the Company shall then occur. 1.6. "Company" shall mean The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation. 1.7. "Compensation" shall mean 100% of an Eligible Employee's cash remuneration for services paid by the Company or a subsidiary in a Plan Year including amounts which an Eligible Employee elects to forego to provide benefits under a plan which satisfies the provisions of Section 401(k) or Section 125 of the Internal Revenue Code; provided, however, that prior to March 31, 1995 Compensation shall exclude amounts paid under any written executive bonus plan, and on and after March 31, 1995 Compensation shall include such amounts; provided, further, that for benefits to be paid hereunder on or after March 26, 2002 any bonus that was earned under the Company's Annual Incentive Bonus Plan, or any other bonus plan that replaces or is in addition to such plan, prior to the date Compensation hereunder is determined but which is unpaid for any reason as of the calculation date shall be included as Compensation for purposes hereof. 1.8. "Designated Benefit Commencement Date" shall mean (a) if an Eligible Employee terminates his employment with the Company for any reason, other than death or on account of a disability in which he is entitled to receive benefits under the Long Term Disability Salary Continuation Plan sponsored by the Company, prior to his Early Retirement Date, such date between the Early Retirement Date and the Normal Retirement Date as is selected by the Eligible Employee or, if no date is selected, the Normal Retirement Date; (b) if an Eligible Employee terminates his employment with the Company for any reason, other than death or on account of a disability in which he is entitled to receive benefits under the Long Term Disability Salary Continuation Plan sponsored by the Company on or after his Early Retirement Date but prior to his Normal Retirement Date, such date between the Eligible Employee's retirement date and his Normal Retirement Date as is selected by the Eligible Employee or, if no date is selected, the Normal Retirement Date; or (c) if an Eligible Employee retires on his Normal Retirement Date, his Normal Retirement Date; or (d) if an Eligible Employee retires after his Normal Retirement Date, his Late Retirement Date; provided, however, that the Administrator, at its sole discretion, may postpone the Designated Benefit Commencement Date for a period of up to ninety (90) days if the Eligible Employee or Vested Participant fails to notify the Administrator in writing of the upcoming Designated Benefit Commencement Date at least ninety (90) days prior to such Designated Benefit Commencement Date. 1.9. "Early Retirement Benefit" shall mean a benefit payable pursuant to Section 3.3. 1.10. "Early Retirement Date" shall mean the first day of the calendar month next following the month in which an Eligible Employee's 55th birthday occurs. 1.11. "Eligible Employee" shall mean an employee of the Company or any of its subsidiaries who is a key employee, including officers and directors who are key employees, and who is designated by the Company's Board of Directors to participate in this Plan. 1.12. "Late Retirement Date" shall mean the first day of the calendar month next following the month in which an Eligible Employee terminates employment with the Company and its subsidiaries after his Normal Retirement Date. 1.13. "Monthly Base Benefit Amount" for any Vested Participant shall mean the amount determined by subtracting (d) (if applicable) from the product of [(a) x (b) x (c)] where: (a) = 2%; (b) = The Vested Participant's completed full Years of Service as of the date of his termination of employment with the Company and its subsidiaries, but not over 25; provided, however, in the case of the Chief Executive Officer of the Company who is in office on the March 26, 2002 effective date of this Amendment (the "CEO"), the Vested Participant's completed full Years of Service as of the date of his termination of employment with the Company and its subsidiaries shall not exceed 30; (c) = The Vested Participant's Average Monthly Compensation as of the date of his termination of employment with the Company and its subsidiaries; and (d) = The Vested Participant's accrued monthly normal retirement pension benefit under the Company's Pension Plan assuming the same were paid in the form of the Normal Benefit Form under this Plan commencing at the Eligible Employee's actual retirement date under the Company's Pension Plan. 1.14. "Normal Benefit Form" shall mean a monthly payment for a Vested Participant's remaining life, with a survivor benefit to the spouse of the Vested Participant to whom he was married on the Designated Benefit Commencement Date equal to 50% of the benefit amount payable during the Vested Participant's remaining life, commencing with the month in which benefits first become payable and terminating with the month in which the later of the Vested Participant's or the Vested Participant's eligible spouse's death occurs. If the Vested Participant is not married on the Designated Benefit Commencement Date, Normal Benefit Form shall mean a monthly payment for the Vested Participant's remaining life, with a minimum of 120 monthly payments guaranteed, commencing with the month in which benefits first become payable and terminating on the later of the month in which the Eligible Employee's death occurs or the month in which the 120th monthly payment occurs. 1.15. "Normal Retirement Date" shall mean the first day of the calendar month next following the month in which an Eligible Employee's 65th birthday occurs. 1.16. "Optional Form of Benefit" shall mean an optional form of benefit settlement described in Section 4.2. 1.17. "Pension Plan" shall mean the funded defined benefit pension plan of the Company titled The Pep Boys - Manny, Moe & Jack Pension Plan, last amended May 17, 2002, as in effect on any date of determination, as applicable. 1.18. "Plan" shall mean The Pep Boys - Manny, Moe & Jack Executive Supplemental Pension Plan (Amended and Restated Effective January 1, 1988 and further amended and restated effective February 13, 1992, March 31, 1995 and March 26, 2002) as set forth herein and the same as may be further amended from time to time. 1.19. "Plan Year" shall mean the calendar year. 1.20. "Present Value Interest Rate" shall mean an interest rate used to determine the value of a lump sum distribution under Section 4.2(d) that is cost neutral to the Company based on the Company's long-term debt rate derived from one or more appropriate national and/or industry long-term bond rate indices that reflect the yields of corporate bonds having a duration equivalent to the average post-retirement life expectancy (based on the GATT 2003 mortality table set forth in IRS Revenue Ruling 2001-62 or such other table as hereafter may be proscribed by the Internal Revenue Service to replace the same) of the retirees expected to elect a lump sum distribution and a risk factor rating equivalent to the Company's risk factor, as determined by the Administrator in its sole discretion; provided, however, that the Present Value Interest Rate for lump sum distributions in 2003 shall be 5.25%, based on the after tax (37% tax rate) value (rounded up to the nearest 5 basis points) of the average of (i) the 20 year + bond yields from Moody's Corporate Seasoned Bond Index (7.11%) and (ii) the Bloomberg Fair Market Sector Curve rates for Composite US BB bonds (9.58%). Except as set forth in the previous sentence, for the calendar year 2003, the Present Value Interest Rate for lump sum distributions in any calendar year shall be determined by the Administrator and communicated to all Eligible Employees and Vested Participants by September 15 of the prior calendar year. 1.21. "Vested Participant" shall mean an Eligible Employee who terminates employment with the Company and its subsidiaries on or after his Early Retirement Date or an Eligible Employee who terminates employment with the Company and its subsidiaries before his Early Retirement Date with five (5) Years of Service following his designation as an Eligible Employee. 1.22. "Year of Service" with respect to an Eligible Employee shall mean a consecutive twelve-month period during which he is an employee of the Company or a subsidiary for the entire period. For purposes of this Plan, any partial Years of Service shall not be included in the calculation of benefits or for any other purpose hereunder. ARTICLE II Participation 2.1. Commencement. An individual's participation in the Plan shall commence on the date he is designated an Eligible Employee by the Company's Board of Directors; however, such individual's Years of Service prior to such date shall be credited under the Plan. 2.2. Termination. An Eligible Employee's participation in the Plan shall terminate on the earliest of the date (a) his designation as an Eligible Employee is terminated by the Company's Board of Directors, (b) his employment with the Company or any of its subsidiaries terminates for any reason other than an event giving rise to benefits hereunder, or (c) the Plan is terminated. 2.3. Early Retirement Elections. (a) Early Retirement Election for Employees. An Eligible Employee may elect to receive an Early Retirement Benefit hereunder by filing a Benefit Election Form with the Administrator no later than December 31 in the year prior to the year in which he terminates employment with the Company and at least ninety (90) days prior to his Designated Benefit Commencement Date. (b) Early Retirement Election for Former Employees. A Vested Participant whose employment with the Company and its subsidiaries terminated prior to his Early Retirement Date may elect to receive an Early Retirement Benefit hereunder by filing a Benefit Election Form with the Administrator no later than December 31 in the year prior to the year in which his Early Retirement Date occurs and at least ninety (90) days prior to his Early Retirement Date. The deadlines for electing an Early Retirement Benefit as set forth in Sections 2.3(a) and (b) are hereafter referred to as the "Latest Early Retirement Election Dates". 2.4. Form of Benefit Elections. Eligible Employees and Vested Participants may elect to receive their retirement benefit hereunder in an Optional Form of Benefit by filing a Benefit Election Form with the Administrator indicating the Optional Form of Benefit chosen no later than December 31 in the year prior to the year in which his Designated Benefit Commencement Date occurs and at least ninety (90) days prior to his Designated Benefit Commencement Date (the "Latest Optional Form of Benefit Election Date"). 2.5. Changes to Benefit Elections - Late Elections. Eligible Employees and Vested Participants may change their Designated Benefit Commencement Date and/or form of retirement benefit at any time prior to the deadlines set forth in Sections 2.3 and 2.4 above. (a) Late or Accelerated Early Retirement Elections. Subject to the ten percent (10%) penalty described below, an Eligible Employee or Vested Participant may elect after his Latest Early Retirement Election Date but before his Normal Retirement Date to receive an Early Retirement Benefit or may elect after his Latest Early Retirement Election Date but prior to his previously elected Designated Benefit Commencement Date to accelerate the receipt of a previously elected Early Retirement Benefit to a date on or after his Early Retirement Date but prior to such previously elected Designated Benefit Commencement Date upon advance written notice to the Administrator (in either case, a "Late Benefit Commencement Election"). (b) Late or Modified Form of Benefit Elections. Subject to the ten percent (10%) penalty described below, an Eligible Employee or Vested Participant may elect an Optional Form of Benefit after his Latest Optional Form of Benefit Election Date but prior to his Designated Benefit Commencement Date or choose an alternative Optional Form of Benefit to a previously chosen Optional Form of Benefit after his Latest Optional Form of Benefit Election Date but prior to his Designated Benefit Commencement Date upon advance written notice to the Administrator (in either case, a "Late Benefit Form Election"). (c) Penalty for Untimely Benefit Elections. To the extent that an Eligible Employee or Vested Participant files a Late Benefit Commencement Election or a Late Benefit Form Election with the Administrator, his retirement benefit hereunder shall be reduced by ten percent (10%) and the Administrator may postpone the commencement of benefits hereunder by up to ninety (90) days to accommodate such late request. The election deadlines and penalties set forth above are intended to prevent an Eligible Employee from constructively receiving his retirement benefit prior to the date of actual receipt for tax purposes and for administrative convenience. The Administrator may impose additional penalties in individual cases in order to prevent constructive receipt by an Eligible Employee and may waive penalties in certain cases which would not impose constructive receipt on an Eligible Employee. In addition, the Administrator may postpone the commencement of a retirement benefit hereunder if, in its sole discretion, it determines that it would be an unreasonable or impracticable administrative burden to commence the retirement benefit as elected by an Eligible Employee, provided that the postponed retirement benefit must commence as soon as reasonably practicable. ARTICLE III Retirement Benefits 3.1. Normal Retirement Benefit. An Eligible Employee who terminates employment with the Company and its subsidiaries on his Normal Retirement Date shall receive a monthly retirement benefit equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.4 and subject to any applicable penalties under Section 2.5, commencing on his Designated Benefit Commencement Date. 3.2. Late Retirement Benefit. An Eligible Employee who terminates employment with the Company and its subsidiaries after his Normal Retirement Date shall receive a monthly retirement benefit equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.4 and subject to any applicable penalties under Section 2.5, commencing on his Designated Benefit Commencement Date, except that for the purpose of calculating the Monthly Base Benefit Amount under Section 1.13 the reduction for the benefit payable under the Company's Pension Plan shall be the late retirement benefit thereunder assuming the same were paid in the Normal Benefit Form under this Plan. 3.3. Early Retirement Benefit. An Eligible Employee who terminates employment with the Company and its subsidiaries on or after his Early Retirement Date but before his Normal Retirement Date shall be entitled to receive a monthly retirement benefit equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.4 and subject to any applicable penalties under Section 2.5, commencing on the Designated Benefit Commencement Date, except that for the purpose of calculating the Monthly Base Benefit Amount under Section 1.13 (a) the product of [(a) x (b) x (c)] in Section 1.13 shall be reduced by multiplying the difference between (i) 1 and (ii) the product of 0.00333 multiplied by the number of full months, not to exceed 84, by which the Designated Benefit Commencement Date precedes the first day of the calendar month next following the month in which the Eligible Employee's 62nd birthday occurs, and (b) the reduction for the benefit payable under the Company's Pension Plan, if any, shall be the early retirement benefit thereunder assuming the same were paid in the Normal Benefit Form under this Plan. There shall be no reduction in the Monthly Base Benefit Amount under Section 1.13 if the Designated Benefit Commencement Date is on or after the first day of the calendar month following the calendar month in which the Eligible Employee's 62nd birthday occurs. 3.4. Disability. An Eligible Employee who terminates employment with the Company and its subsidiaries under circumstances which entitle him to benefits under the Long Term Disability Salary Continuation Plan sponsored by the Company or a subsidiary and who receives such benefits until his Normal Retirement Date shall be deemed to have retired on his Normal Retirement Date under this Plan. For purposes of calculating such an Eligible Employee's Monthly Base Benefit Amount under Section 1.13 (a) "Years of Service" shall include all periods during which the Eligible Employee received disability benefits up to his Normal Retirement Date, as applicable, and (b) "Compensation" for each Plan Year during the disability shall mean the Eligible Employee's Compensation for the last full Plan Year of his active employment. 3.5. Other Terminations. If a Vested Participant's employment with the Company and its subsidiaries terminates for any reason, other than death or a disability for which benefits are payable as provided in Section 3.4, before he has attained his Early Retirement Date, then he shall be entitled to receive a monthly retirement benefit equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable under this Section 3.5. Such benefit will be paid in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.3 and subject to any applicable penalties under Section 2.3, commencing on the Designated Benefit Commencement Date. The Monthly Base Benefit Amount shall be subject to the adjustments set forth in Section 3.3. 3.6. Change in Control Distribution. Notwithstanding any provisions herein to the contrary, in the event an Eligible Employee's employment with the Company terminates for any reason (including, but not limited to, a voluntary termination by the Participant) in connection with, or within one year after any Change in Control of the Company (regardless of whether such change has been approved or opposed by the Company's then Board of Directors), he shall receive a lump sum retirement benefit (the "Distribution Amount") determined under this Section 3.6 and payable no later than ten (10) days following such termination of employment. The Distribution Amount for an Eligible Employee whose employment with the Company terminated on or after his Early Retirement Date shall be equal to the lump sum Actuarial Equivalent Benefit of his Monthly Base Benefit Amount, calculated as a Normal Benefit Form, that would have been payable to the Eligible Employee under this Plan as of his date of termination of employment using his Years of Service (as modified below) and Average Monthly Compensation as of his actual date of termination of employment in computing his Monthly Base Benefit Amount payable under Section 3.3. The Distribution Amount for each such other Eligible Employee shall be equal to the present value of the lump sum Actuarial Equivalent Benefit of his Monthly Base Benefit Amount, calculated as a Normal Benefit Form, that would have been payable to such Eligible Employee under this Plan as of his Early Retirement Date using his Years of Service (as modified below) and Average Monthly Compensation as of his actual date of termination of employment in computing his Monthly Base Benefit Amount payable under Section 3.3. The discount rate used to determine the present value of the lump sum shall be the interest rate provided under Section 1.1. For purposes of calculation of the Monthly Base Benefit Amount under this Section 3.6, Years of Service for an Eligible Employee who is employed by the Company at the time of the Change in Control shall include any period for which severance benefits are guaranteed with respect to the Change in Control under a change in control or other employment agreement between the Eligible Employee and the Company. For purposes of this Section 3.6, severance benefits are deemed to be guaranteed for a period of time if they are measured by reference to increments of salary (e.g. two times annual base salary or three months of salary) or where benefits are provided for a period of time beyond the termination of employment other than on account of the continuation health care coverage requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985 or any similar state or local statute. 3.7. Rehire. If a terminated Eligible Employee is rehired and is again designated as an Eligible Employee, his Years of Service shall include his pre-termination employment (except to the extent that such Eligible Employee lost his right to benefits under Section 3.9) and his employment after rehire. If a terminated employee who was not previously designated an Eligible Employee is rehired and is designated an Eligible Employee, his Years of Service shall not include his pre-termination employment. 3.8. Termination. If the Plan is terminated, each Eligible Employee will receive a benefit under Section 3.5 determined as if he had terminated employment on the date of Plan termination. If the designation of an Eligible Employee as such is terminated by the Company's Board of Directors, such Eligible Employee will receive a benefit under Section 3.5 determined as if he had terminated employment on the date his designation as an Eligible Employee terminated. 3.9. Loss of Benefits. Notwithstanding any provision of Sections 3.1 through 3.5, a person who is a Vested Participant shall cease to have any right to receive any payment hereunder and all obligations of the Company to make payments to or on account of a Vested Participant shall cease and terminate should the Administrator find, after full consideration of the facts presented on behalf of the Company and the Vested Participant that (a) such Vested Participant during his employment with the Company or any of its subsidiaries or within twenty-four (24) months after his termination of employment with the Company, or any of its subsidiaries (other than in connection with or following a Change in Control), directly or indirectly, as an employee, consultant, proprietor, partner, stockholder, principal, agent or in any other capacity, (i) engages in any business activity which is competitive with any business activity conducted by the Company or any of its subsidiaries, or (ii) performs services that are competitive with the services that are provided by the Company or any of its subsidiaries; (b) such Vested Participant, during his employment with the Company or any of its subsidiaries or within twenty-four (24) months after his termination of employment with the Company, or any of its subsidiaries (other than in connection with or following a Change in Control), directly or indirectly solicits any employee(s) of the Company to become an employee, consultant, proprietor, partner, principal or agent of another person or entity; or (c) such Vested Participant's employment by the Company or any of its subsidiaries was terminated (other than in connection with or following a Change in Control) in connection with any act of disloyalty to the Company or any of its subsidiaries including, without limitation, fraud, embezzlement, theft, breach of the Company's Conflict of Interest or Ethics Policies, commission of a felony or proven dishonesty in the course of his employment or service or unauthorized disclosure of trade secrets or confidential information of the Company or any of its subsidiaries. The restrictions set forth in Section 3.9(a) shall not apply if the Vested Participant's employment by the Company and/or any of its subsidiaries was terminated by the Company or a subsidiary of the Company, as applicable (other than as a result of an action described in Section 3.9(c)), provided in all events the restrictions set forth in Section 3.9(b) shall remain in effect. Nothing contained in Section 3.9(a) shall cause the Vested Participant to lose any benefits if his interest in another firm or entity is limited to holding for investment no more than one percent (1%) of any class or equity securities of a firm or entity whose securities are listed on a well-recognized national securities exchange or on an interdealer quotation system of the National Association of Securities Dealers, Inc. 3.10 Termination of CEO. Notwithstanding any provisions herein to the contrary (including Section 3.6), in the event that the employment of the CEO is terminated (i) by the Company without Cause (as defined in his Employment Agreement with the Company (the "Employment Agreement")), (ii) by the CEO for Good Reason (as defined in the Employment Agreement) or (iii) on account of the issuance of a notice of non-renewal of the Employment Agreement by the Company, he shall be deemed for all purposes hereunder to have attained his Normal Retirement Date and shall commence receiving a monthly retirement benefit as soon as practicable following his termination of employment equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.4 and subject to any applicable penalties under Section 2.5; provided, however that in calculating the Monthly Base Benefit Amount he shall be deemed to have completed 30 full Years of Service (notwithstanding any provision to the contrary in the Employment Agreement). ARTICLE IV Benefit Options 4.1. Normal Form. Benefits shall be paid in the Normal Benefit Form unless the Eligible Employee or Vested Participant, as applicable, elects an Optional Form of Benefit permitted under Section 4.2 in accordance with Sections 2.4 or 2.5. 4.2. Optional Forms of Benefit. An Eligible Employee may elect that retirement benefits be paid as an Actuarial Equivalent Benefit in an optional form of settlement from the alternatives below: (a) A straight life annuity for the Eligible Employee's life; (b) A joint and survivor annuity with the survivor benefit payable to the Eligible Employee's spouse equal to 75% or 100% of the benefit amount payable during the Eligible Employee's life; (c) Equal monthly installments over a period of not less than 10 years or more than 25 years; or (d) A lump sum payment. ARTICLE V Death Benefits 5.1. Pre-Retirement Death Benefit - Active Eligible Employees. The beneficiary of an Eligible Employee who dies while in the employ of the Company or a subsidiary but prior to attaining his Normal Retirement Date, shall be entitled to an annual death benefit, payable in equal monthly installments, equal to 50% of the base salary rate of the Eligible Employee in effect on the date of his death; provided, however, in the case of the CEO, the same shall be equal to 60% of his base salary rate in effect on the date of death. The payments shall commence with the month following the month in which the Eligible Employee dies and shall end with the later to occur of the month in which (a) the 180th monthly payment is made or (b) the Eligible Employee would have attained his Normal Retirement Date. 5.2. Death Benefit - Former Eligible Employees. Subject to Section 3.9, the beneficiary of a Vested Participant who dies while not in the employ of the Company or a subsidiary but before he has attained his Normal Retirement Date, shall be entitled to a monthly death benefit with 120 monthly payments guaranteed commencing with the month following the month in which the Vested Participant dies equal to the Monthly Base Benefit Amount under Section 1.13. The beneficiary of a Vested Participant shall have the right to postpone the commencement of benefits under this Section 5.2 until a later month designated by the beneficiary, but not later than the calendar month next following the month in which the Vested Participant's 65th birthday would have occurred. If the beneficiary shall commence receiving benefits under this Section 5.2 prior to the month next following the month in which the Vested Participant's 65th birthday would have occurred, for the purpose of calculating the Monthly Base Benefit Amount payable to such Vested Participant's beneficiary, such amount shall be reduced by the factor(s) that would be applicable to such Vested Participant if he was not deceased and elected to receive benefits after his Early Retirement Date and prior to his Normal Retirement Date under this Plan (and which factor(s) are set forth in the version of Section 3.3 of this Plan that is applicable to such Vested Participant). In addition, if the beneficiary of a Vested Participant shall commence receiving benefits under this Section 5.2 prior to the month next following the month in which the Vested Participant's 55th birthday occurs, for the purpose of calculating the Monthly Base Benefit Amount the amount determined under the preceding sentence of this Section 5.2 shall be further reduced to be the Actuarial Equivalent Benefit of such amount calculated as of the date benefits actually commence. 5.3. Late Retirement Death Benefit. The beneficiary of an Eligible Employee who dies while in the employ of the Company or a subsidiary after attaining his Normal Retirement Date shall be entitled to a monthly death benefit with 120 monthly payments guaranteed commencing with the month following the month in which the Eligible Employee dies equal to the Monthly Base Benefit Amount; provided, however, that for the purpose of calculating the Monthly Base Benefit Amount under Section 1.13 the reduction for the benefit payable under the Company's Pension Plan shall be the benefit thereunder. 5.4. Death Benefit in Lieu of Retirement Benefit. If an Eligible Employee dies after the commencement of his retirement benefits hereunder, no death benefit shall be payable under this Article V. Moreover, to the extent that a death benefit is payable under this Article V, no retirement benefit shall be payable under Article III. 5.5. Disability. The beneficiary of an Eligible Employee who terminates employment with the Company and its subsidiaries under circumstances which entitled him to benefits under the Long Term Disability Salary Continuation Plan sponsored by the Company or a subsidiary and who is receiving such benefits on the date of his death shall be entitled to the benefit provided in Section 5.1 based on his base salary rate in effect when his active employment terminated. 5.6. Other Cases. Except as provided at Sections 5.1-5.5, no death benefits shall be payable under this Plan. 5.7. Beneficiary Designation. Each Eligible Employee and Vested Participant shall have the right to designate one or more beneficiaries and contingent beneficiaries to receive any death benefit payable with respect to such individual by filing a written designation with the Company on the form prescribed by it for such purpose. Eligible Employees and Vested Participants may thereafter designate different beneficiaries at any time by filing a new written designation. The consent of the beneficiary is not required for any revocation or change of election of beneficiary. Any written designation shall become effective only upon its receipt by the Company. If the designated beneficiaries should die on or before the commencement of distribution of death benefits and the Eligible Employee or Vested Participant fails to make a new designation, his beneficiary shall be determined pursuant to Section 5.8. If the beneficiary (or last contingent beneficiary) determined pursuant to this Section 5.7 or the initial beneficiary determined pursuant to Section 5.8 dies before all payments are made, then the balance of the payments shall be made to such beneficiary's estate unless such beneficiary (or last contingent beneficiary) designates a second-level beneficiary by filing a written designation with the Company on the form prescribed by it for such purpose, in which case such second-level beneficiary shall be treated as a beneficiary hereunder. 5.8. Beneficiary List. If an Eligible Employee or Vested Participant omits or fails to designate a beneficiary or if no designated beneficiary survives such individual, the death benefits shall be paid to the beneficiary determined from the following priority list; (a) surviving spouse, or if none, then (b) the Eligible Employee's or Vested Participant's estate. ARTICLE VI Termination and Amendments 6.1. Amendments. The Company may amend this Plan in whole or in part by appropriate resolution of its Board of Directors; provided, however, that no amendment shall (i) decrease or limit any benefits or rights accrued under the Plan prior to the date of the amendment, or (ii) modify any provision of this Article VI without the consent of a majority of the Eligible Employees and Vested Participants affected by such amendment. 6.2. Termination. The Company reserves the right to terminate this Plan in its entirety at any time by an appropriate resolution of its Board of Directors; provided, however, that any termination of the Plan shall not (i) terminate or diminish any benefits then payable under the Plan, (ii) terminate or diminish any benefits payable in the future under the Plan with respect to benefits accrued as of the date of termination of the Plan, or (iii) decrease or limit any benefits or rights accrued under the Plan prior to the date of termination without the consent of a majority of the Eligible Employees and Vested Participants affected by such termination. ARTICLE VII Plan Administration 7.1. Named Fiduciary and Plan Administrator. The committee designated by the Company's Board of Directors shall be the Administrator and Named Fiduciary (within the meaning of the Employee Retirement Income Security Act of 1974, as amended (hereinafter referred to as "ERISA")) of this Plan. The Administrator shall have the authority to control and manage the operation and administration of the Plan. The Administrator shall act by majority vote of the committee members. No Eligible Employee who is a member of the committee shall participate in committee decisions affecting him. 7.2. Delegation of Duties. The Administrator may (a) delegate all or a portion of the responsibilities of controlling and managing the operation and administration of the Plan to one or more persons; and (b) appoint such agents, advisors, counsel, or other representatives to render advice with regard to any of its responsibilities under the Plan. Wherever the term "Administrator" is used herein in connection with the operation or administration of the Plan, such term shall include all delegates appointed by the Administrator. 7.3. Powers and Duties. The authority and responsibility to control and manage the operation and administration of the Plan shall include, but shall not be limited to, the performance of the following acts: (a) The filing of all reports required of the Plan. (b) The distribution to Eligible Employees, Vested Participants and beneficiaries of all reports and other information required of the Plan. (c) The keeping of complete records of the administration of the Plan. (d) Developing rules and regulations for administration and interpretation of the Plan consistent with the terms and provisions of the Plan. (e) The interpretation of the Plan including the determination of any questions of fact arising under the Plan and the making of all decisions required by the Plan. The construction of the Plan and any actions and decision taken thereon in good faith by the Administrator shall be final and conclusive. The Administrator may correct any defect, or supply any omission, or reconcile any inconsistency in the Plan in such manner and to such extent as shall be expedient to carry the Plan into effect and shall be the sole judge of such expediency. The Administrator's determinations (including those made by any person or persons to whom the Administrator's power has been delegated hereunder) on all matters relating to the Plan shall be final, binding and conclusive for all purposes, upon all persons, including without limitation, the Company, all Eligible Employees, all Vested Participants and their respective beneficiaries and successors hereunder. 7.4. Payment of Expenses. All expenses of the Administrator shall be paid by the Company. 7.5. Indemnity of Plan Administrator. The Company shall indemnify the Plan Administrator or any individual who is a delegate against any and all claims, loss, damage, expense or liability arising from any action or failure to act, except when due to gross negligence or willful misconduct. 7.6. Agent for Service of Process. The Company shall be the agent for the Plan for service of legal process. ARTICLE VIII Claims Procedure 8.1. Claim. An Eligible Employee or Vested Participant or his beneficiary or authorized representative (each one being hereinafter referred to as a "Claimant") who expects a benefit under the Plan which he has not received may file a formal claim for benefits under the Plan with the Administrator. The Administrator shall review the claim and render a determination relating to the claim based on this Plan document (including the Administrator's power and authority to interpret and construe the Plan and to make rules relating to the administration of the Plan) and consistent with prior determinations rendered with respect to similarly situated claims. The Administrator shall notify the Claimant within 90 days of the receipt of the claim of the Administrator's determination relating to the claim, unless the Administrator determines that special circumstances require an extension of time for processing a claim, in which case the Administrator shall notify the Claimant of the extension within 90 days of receipt of the claim, specifying the special circumstances requiring an extension and the date by which it expects to render a determination on the claim, which determination must be rendered and notice given to the Claimant no later than the 180th day following the receipt of the claim. If an extension is required because the Claimant failed to submit the information necessary to decide a claim, the time period for making a benefit determination set forth in the prior sentence shall be tolled from the date on which the notification of the extension is sent to the claimant until the date on which the Claimant responds to the request for additional information. The determination notice shall be in writing, sent by regular mail to the address specified by the Claimant or if none is specified to the Claimant's last known address, and must contain the following information: (a) The specific reasons for a determination adverse to the Claimant, if applicable; (b) The specific reference to the pertinent Plan provision(s) on which the determination is based; (c) If applicable, a description of any additional information or material necessary to perfect the claim, and an explanation of why such information or material is necessary; and (d) An explanation of the claims review procedure and the time limitations of the review procedure applicable thereto, including a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA following an appeal of any adverse benefit determination. For purposes of this Article VIII claims, notifications and determinations shall be deemed to be received when actually received and parties shall be deemed to be notified and a notification shall be deemed to be sent or submitted on the date that such notification is postmarked or actually delivered by courier if not mailed. 8.2. Appeal Procedure. A Claimant is entitled to request an appeal of any adverse determination of his claim by the Administrator. The request for appeal must be submitted in writing within 60 days of the receipt by the Claimant of the notification of an adverse claim determination. Absent a request for appeal within the 60-day period, the determination of the Administrator regarding the claim will be deemed to be final and conclusive. During the appeal process, the Claimant shall have a reasonable opportunity to submit written comments, documents, records and other information relating to the claim and shall be entitled, free of charge, to reasonable access to and copies of all documents, records and other information relevant to the claim. The Administrator shall review the appeal of the initial claim determination (including all comments, documents, records and other information submitted by the Claimant, regardless of whether such information was submitted with the original claim) and render a final determination. 8.3. Final Determination. Within 60 days following receipt by the Administrator of the Claimant's request for appeal, the Administrator shall render a final determination relating to the claim, unless the Administrator determines that special circumstances (such as the need to hold a hearing) require an extension of time for processing the appeal, in which case the Administrator shall notify the Claimant of such extension within 60 days following receipt by the Administrator of the request for appeal, specifying the special circumstances requiring an extension and the date by which it expects to render a final determination on the appeal, which determination must be rendered and notice given to the Claimant no later than the 120th day following the receipt by the Administrator of the request for appeal. If an extension is required because the Claimant failed to submit the information necessary to decide a claim, the time period for making a benefit determination set forth in the prior sentence shall be tolled from the date on which the extension notification is sent to the Claimant until the date on which the Claimant responds to the request for additional information. The final determination shall be made in writing to the Claimant. The final determination shall (i) recite the specific reasons for a determination adverse to the Claimant, if applicable, with specific reference to the pertinent Plan provision(s) on which the determination is based, (ii) state that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records and other information relevant to the claim and (iii) state that the Claimant has a right to bring an action under Section 502(a) of ERISA. ARTICLE IX Source of Benefits and Payments 9.1. Unfunded Plan. The Company shall pay the benefits provided hereunder out of its general assets in cash when due. The Company shall not be required to establish any segregated account, trust, escrow, reserve or other arrangement to discharge such benefits. 9.2. Non-Alienation. None of the payments, benefits or rights of any Eligible Employee, Vested Participant or beneficiary thereof shall be subject to any claim of any creditor of such person and, in particular, to the fullest extent permitted by law, shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such person. No Eligible Employee, Vested Participant or beneficiary thereof shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive, contingently or otherwise, under this Plan, except the right to designate a beneficiary or beneficiaries as hereinabove provided. 9.3. Incapacity. If the Company determines that a person entitled to receive any benefit payment is under a legal disability or is incapacitated in any way so as to be unable to manage his financial affairs, the Company may make payments to such person's legal representative or to a relative or other person for his benefit, or apply the payment for the benefit of such person in such manner as the Company considers advisable. Any payment of a benefit in accordance with the provisions of this Section 9.3 shall be a complete discharge of any liability to make such payment. ARTICLE X Miscellaneous 10.1. Employment Obligations. The establishment of this Plan shall not be construed as creating any contract of employment between the Company or any subsidiary and any Eligible Employee or Vested Participant. Nothing herein contained shall give any Eligible Employee or Vested Participant the right to inspect the books of the Company or to interfere with the right of the Company to discharge any Eligible Employee from employment at any time for any reason whatsoever, with or without cause. 10.2. Conflicts of Law. All matters respecting the validity, effect, interpretation and administration of this Plan shall be determined in accordance with the laws of the Commonwealth of Pennsylvania, except to the extent superseded by ERISA. 10.3. References. The masculine pronoun shall include the feminine and the singular form shall include the plural, as necessary for proper interpretation of this Plan. 10.4. Effective Date; Applicability to Vested Participants. The amendment and restatement of the Plan is effective as of March 26, 2002 and shall be applicable to all individuals who are Eligible Employees of the Company on March 26, 2002 and to all future individuals who become Eligible Employees after March 26, 2002. Except as specifically set forth below, none of the substantive amendments to the Plan incorporated into the March 26, 2002 amendment and restatement of the Plan shall be applicable to former Eligible Employees or individuals who are Vested Participants as of March 26, 2002. Except as specifically set forth below, the rights and benefits under the Plan, if any, of individuals who were Eligible Employees prior to, but not on March 26, 2002 and of Vested Participants as of March 26, 2002 shall be governed by the terms of the Plan in effect prior to the March 26, 2002 amendment and restatement. The following provisions of the Plan, amended and restated as of March 26, 2002, shall apply to individuals who were Vested Participants as of March 26, 2002: (a) The revision to Section 1.7 shall be effective and is intended to memorialize a prior decision of the Board of Directors with respect to the applicability of earned but unpaid bonuses; (b) The addition of Section 5.2 is effective and is intended to document an existing administrative interpretation of the Plan benefits for Eligible Employees who are described in such Section; (c) The revisions to Articles VII and VIII shall apply; (d) The deadline for electing an Early Retirement Benefit set forth in Section 2.3(b) shall apply; (e) To the extent needed to determine the benefit payable pursuant to Section 5.2, the definition of Monthly Base Benefit Amount set forth in Section 1.13 (and any other defined term used in Section 1.13) shall apply; and (f) To the extent that any provision of the March 26, 2002 amendment and restatement merely clarifies or amplifies a pre-existing right or benefit, as determined in the sole discretion of the Administrator, such provision shall apply. In no event shall any Optional Form of Benefit added by virtue of the March 26, 2002 amendment and restatement of the Plan be available to any individual who is not an Eligible Employee of the Company as of March 26, 2002 or does not become one after March 26, 2002. IN WITNESS WHEREOF, this Amendment and Restatement of the Executive Supplemental Pension Plan is hereby executed effective as of the 26th day of March, 2002. THE PEP BOYS - MANNY, MOE & JACK By: /s/ Mitchell G. Leibovitz ------------------------- Mitchell G. Leibovitz, Chief Executive Officer EX-10 6 fexh1028.txt Exhibit 10.28 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is made by and between THE PEP BOYS-MANNY, MOE & JACK, a Pennsylvania corporation (the "Corporation"), and George Babich, Jr. (the "Executive"), dated as of the 28th day of February, 2003. W I T N E S S E T H : WHEREAS, the Executive is currently employed by the Corporation and the Corporation desires to continue to retain the services of the Executive by entering into this Employment Agreement on the terms and conditions as set forth herein (the "Agreement"). This Agreement shall be in addition to and shall not supercede the Agreement between the Corporation and the Employee, dated as of March 28, 2000 (the "Change of Control Agreement"), which Change of Control Agreement shall continue in effect under the terms and conditions set forth therein. NOW, THEREFORE, in consideration of the representations, warranties and mutual covenants set forth herein, the parties agree as follows: 1. Employment Period; Effectiveness. The Corporation hereby agrees to continue the Executive in its employ, for the period commencing on the Effective Date (as defined herein) and ending on the earlier to occur of (i) the second anniversary of the Effective Date or (ii) the date of a Change of Control under the Change of Control Agreement (the "Employment Period"). This Agreement shall only become effective upon the earlier of the date (the "Effective Date") of retirement of the current Chairman and Chief Executive Officer of the Corporation or appointment of his successor, as contemplated by the letter agreement, dated December 10, 2002. 2. Position and Duties. (a) As of the date hereof, the Executive is employed as President and Chief Financial Officer of the Corporation and shall perform the duties and services incident to such positions and such other reasonably related duties as may be assigned to him from time to time. During the Employment Period, the Executive shall report directly to and take direction from the Chief Executive Officer of the Corporation. The majority of Executive's services shall be performed at the Corporation's main headquarters in Philadelphia Pennsylvania or at an office or location no more than twenty (20) miles from Philadelphia. (b) Excluding periods of vacation, sick leave and disability to which the Executive is entitled, the Executive agrees to devote his full time, attention and energy to the business of the Corporation and to use his reasonable best efforts to perform faithfully and efficiently such responsibilities. Executive shall not, without the prior written consent of the Corporation, actively engage in any other business or business activity during the Employment Period. The Executive may, however, (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions and (iii) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Corporation. 3. Compensation. (a) Base Salary. During the Employment Period, as consideration for services rendered, the Corporation shall pay to the Executive a base salary at an annual rate at least equal to $500,000 ("Base Salary") payable over the calendar year at the regular pay periods of the Corporation. During the Employment Period, Base Salary shall be reviewed by the Board (or the Compensation Committee thereof) at least annually and may be increased, but not decreased, at any time and from time to time as shall be determined by the Board (or the Compensation Committee) in its sole discretion. Any increase in Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Executive's Base Salary shall not be reduced after any such increase. (b) Executive Incentive Bonus Plan. During the Employment Period, the Executive shall be eligible to earn an annual bonus (a "Bonus") under the Corporation's Executive Incentive Bonus Plan (the "Bonus Plan") based on Executive's target percentage of Base Salary established pursuant to the Bonus Plan. (c) Employee Benefit Plans. In addition to the Base Salary and Bonus payable as hereinabove provided, the Executive shall be entitled to participate during the Employment Period in all incentive programs, savings, pension and retirement plans and programs applicable to other similar key executives, and to receive such automobile allowance as is provided to such other key executives. (d) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under each welfare benefit plan of the Corporation, including, without limitation, all medical, prescription, dental, disability, salary continuance, life, accidental death and travel accident insurance plan and programs of the Corporation and its affiliated companies. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement, in accordance with the general expense reimbursement policy of the Corporation for all reasonable expenses incurred by the Executive in the performance of his duties hereunder. (f) Vacation. During the Employment Period, the Executive shall be entitled to four weeks per calendar year of paid vacation. 4. Termination. This Agreement shall terminate under the following circumstances: (a) Death or Disability. This Agreement shall terminate automatically upon the Executive's death. During the Employment Period, if, as a result of physical or mental incapacity or infirmity, Executive shall be unable to perform his duties under this Agreement for (i) a continuous period of at least 90 days, or (ii) periods aggregating at least 120 days during any period of 12 consecutive months (each a "Disability Period"), and at the end of the Disability Period there is no reasonable probability that Executive can promptly resume his duties hereunder, Executive shall be deemed disabled (the "Disability") and Corporation, by notice to Executive, shall have the right to terminate the Employment Period for Disability at, as of or after the end of the Disability Period. The existence of the Disability shall be determined by a reputable, licensed physician selected by Corporation in good faith, whose determination shall be final and binding on the parties. Executive shall cooperate in all reasonable respects to enable an examination to be made by such physician. Notwithstanding the foregoing, the Corporation may conclusively determine Executive to be disabled and terminate the Employment Period on account of Disability at any time after Executive has commenced receiving benefits under the Corporation's Long Term Disability Salary Continuation Plan. (b) With or Without Cause. The Corporation may terminate the Executive's employment with or without "Cause." For purposes of this Agreement, "Cause" means (i) the continued failure of Executive to perform substantially his duties with the Corporation (other than any such failure resulting from Executive's incapacity due to physical or mental illness or any such failure subsequent to Executive being delivered a Notice of Termination without Cause by the Corporation or delivering a Notice of Termination for Good Reason to the Corporation); (ii) any material act by Executive of illegality, dishonesty or fraud in connection with the Executive's employment; (iii) the willful engaging by Executive in gross misconduct which is demonstrably and materially injurious to the Corporation or its affiliates; (iv) Executive's conviction of or pleading guilty or no contest to a felony; or (v) a violation of Section 7. For purpose of this paragraph (b), no act or failure to act by Executive shall be considered "willful" unless done or omitted to be done by Executive in bad faith and without reasonable belief that Executive's action or omission was in the best interests of the Corporation or its affiliates. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, based upon the advice of counsel for the Corporation or upon the instructions of the Corporation's chief executive officer or another officer of the Corporation senior to Executive shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Corporation. Cause shall not exist unless and until the Corporation has delivered to Executive, along with the Notice of Termination for Cause, a copy of a resolution duly adopted by three-quarters (3/4) of the entire Board (excluding Executive if Executive is a Board member) at a meeting of the Board called and held for such purpose, finding that in the good faith opinion of the Board an event set forth in clauses(i) - (v) above has occurred and specifying the particulars thereof in detail. The Board must notify Executive of any event constituting Cause within ninety (90) days following the Board's knowledge of its existence or such event shall not constitute Cause under this Agreement. (c) With or Without Good Reason. The Executive's employment may be terminated by the Executive with or without Good Reason. For purposes of this Agreement, "Good Reason" means: (i) any change in the duties or responsibilities of Executive that is inconsistent in any material and adverse respect with Executive's position, duties, responsibilities or status as President of the Corporation (including any material and adverse diminution of such duties or responsibilities); provided, however, that Good Reason shall not be deemed to occur upon (A) a change in duties or responsibilities (other than reporting responsibilities) that is solely and directly a result of the Corporation no longer being a publicly traded entity and does not involve any other event set forth in this paragraph (c). (ii) a material and adverse change in Executive's title or office as President of the Corporation, other than an insubstantial and inadvertent action which is remedied by the Corporation promptly after receipt of notice thereof given by Executive; (iii) any failure by the Corporation to comply with any of the provisions of Section 3 of this Agreement; or (iv) the Corporation requiring the Executive to be based at any office or location other than that described in Section 2(a) hereof, except for travel required in the performance of the Executive's responsibilities which shall be no more extensive than the customary travel requirements of Executive have been heretofore; provided, however, that a termination by Executive for Good Reason shall be effective only if, within 30 days following the delivery of a Notice of Termination for Good Reason by Executive to the Corporation, the Corporation has failed to cure the circumstances giving rise to Good Reason to the reasonable satisfaction of the Executive. (d) Notice of Termination. Any termination by the Corporation with or without Cause or by the Executive with or without Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(d) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the termination date is other than the date of receipt of such notice specifies the proposed termination date. (e) Expiration of the Employment Period. This Agreement shall terminate upon the expiration of the Employment Period as set forth in Section 1. (f) Certain Modifications. Notwithstanding anything to the contrary contained in this Section 4 or in any other Section of this Agreement, Good Reason shall not be deemed to occur, and the Corporation shall not be deemed in violation of any provision of this Agreement, upon (i) any change in duties or responsibilities that is a result of a modification of the organizational structure of the Corporation, or (ii) the modification or deletion of Executive's title and office of Chief Financial Officer of the Corporation. 5. Obligations of the Corporation Upon Termination. (a) Death. If the Executive's employment is terminated by reason of the Executive's death, this Agreement shall terminate and the Corporation shall pay the Executive's estate his Base Salary through the date of termination at the rate in effect at the time of death and any other benefits (including death benefits) to which Executive is entitled to hereunder at the date of the Executive's death and shall have no further obligations to the Executive under this Agreement. (b) Disability. If the Executive's employment is terminated by reason of the Executive's Disability, this Agreement shall terminate and the Corporation shall pay the Executive his Base Salary through the date of termination at the rate in effect at the time of Disability and any other benefits (including Disability benefits) to which Executive is entitled to hereunder at the date of the termination and shall have no further obligations to the Executive under this Agreement. (c) With Cause, Without Good Reason or Expiration of Employment Period. If the Executive's employment shall be terminated (i) by the Corporation with Cause, (ii) by Executive without Good Reason or (iii) on account of the expiration of the Employment Period, the Corporation shall pay the Executive his Base Salary through the date of termination at the rate in effect at the time Notice of Termination is given and shall have no further obligations to the Executive under this Agreement. (d) Without Cause or With Good Reason. If, during the Employment Period, Executive's employment shall be terminated (i) by the Corporation without Cause, or (ii) by Executive for Good Reason, the Corporation shall pay to the Executive in a lump sum in cash within ten (10) days after the date of termination the aggregate of the following amounts, with respect to which Executive shall have no duty of mitigation: (A) to the extent not theretofore paid, the Executive's Base Salary through the date of termination at the rate in effect on the date of termination plus any Bonus amounts which have become payable and any vacation pay for unused vacation through the date of termination in the Fiscal Year which includes the date of termination; and (B) a pro rata portion of Executive's Bonus for the Fiscal Year in which the date of termination occurs equal to the product of (i) Executive's Target bonus amount under the Bonus Plan for the Fiscal Year which includes the date of termination or, if no target has been set with respect to Executive for such Fiscal Year, the Target bonus amount for the immediately preceding Fiscal Year (in either case, based on Executive's target percentage of Base Salary established pursuant to the Bonus Plan) (the "Target Bonus"), multiplied by (ii) a fraction, the numerator of which is the number of days in the Fiscal Year in which the date of termination, occurs through the date of termination and the denominator of which is three hundred sixty-five (365). In addition, upon a termination of Executive in accordance with this Section 5d, the Corporation shall pay to Executive an amount equal to the aggregate of two times Executive's Base Salary and Target Bonus, payable over the two-year period following such termination in equal installments at the regular pay periods of the Corporation. Upon a termination of Executive in accordance with this Section 5(d), the Corporation shall continue to provide welfare benefits to the Executive and his family during the remainder of the Employment Period at least equal to those which would have been provided to them in accordance with the plans, programs and policies described in Section 3(d) in this Agreement if the Executive's employment had continued through the Employment Period. To the extent that the benefits provided for in this Section 5(d) are not permissible after termination of employment under the terms of the benefit plans of the Corporation then in effect the Corporation shall pay to the Executive in a lump sum in cash within thirty (30) days after the date of termination an amount equal to the cost to the Executive of acquiring on a non-group basis those benefits lost to the Executive and/or the Executive's family as a result of the Executive's termination. In addition, upon a termination of Executive in accordance with this Section 5(d), and not withstanding any other provisions of this Agreement or any other agreement, all non-vested stock options, and any other non-vested stock or stock-based awards held by Executive, shall immediately become fully vested, non-forfeitable and exercisable at any time on the sooner of (i) their expiration or (ii) the last day of the month which is within the period ending twenty-four calendar months after the date of termination of employment. All payments and benefits to be provided to this Section 5(d) shall be subject to the Executive's (x) compliance with the restrictions of Sections 7 and 8(a) herein and (y) execution of a general release and waiver of claims against the Corporation in the form to be determined by the Corporation at the time of termination. 6. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Corporation or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Corporation or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Corporation or any of its affiliated companies at or subsequent to the date on which the Executive's employment is terminated shall be payable in accordance with such plan or program. Anything herein to the contrary notwithstanding, if the Executive becomes entitled to payments pursuant to Section 5(d) hereof, Executive agrees to waive payments under any severance plan or program of the Corporation. 7. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Corporation all secret or confidential information, knowledge or data relating to the Corporation or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Corporation or any of its affiliated companies and which shall not be public knowledge. The Executive shall not, without the prior written consent of the Corporation, communicate or divulge any such information, knowledge or data to anyone other than the Corporation and those designated by it. 8. Covenant Against Competition. (a) After termination of the Executive's employment with the Corporation for any reason, the Executive shall not, for the greater of (i) two years from the Effective Date or (ii) in the event of a termination by the Executive for Good Reason or by the Corporation without Cause, the remainder of the Employment Period, directly or indirectly induce or attempt to influence any employee of the Corporation to terminate his employment with the Corporation and shall not engage in (as a principal, partner, director, officer, agent, employee, consultant or otherwise) or be financially interested in any business operating within the United States of America, which is involved in business activities which are the same as, similar to or in competition with business activities carried on by the Corporation, or being definitely planned by the Corporation, at the time of the termination of the Executive's employment. However, nothing contained in this Section 8(a) shall prevent the Executive from holding for investment no more than two percent (2%) of any class or equity securities of a company whose securities are traded on a national securities exchange. (b) Executive acknowledges that the restrictions contained in Section 7 and 8(a), in view of the nature of the business in which the Corporation is engaged, are reasonable and necessary in order to protect the legitimate interests of the Corporation, and that any violation thereof would result in irreparable injuries to the Corporation, and the Executive therefore acknowledges that, in the event of his violation of any of these restrictions, the Corporation shall be entitled to obtain from any court of competent jurisdiction preliminary and permanent injunctive relief as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such a violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Corporation may be entitled. (c) If the Executive violates any of the restrictions contained in the foregoing Section 8(a), the restrictive period shall be extended from the time of the commencement of any such violation until such time as such violation shall be cured by the Executive to the satisfaction of the Corporation. 9. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Corporation shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Corporation and its successors. (c) Subject to the expiration of this Agreement upon an event that constitutes a Change of Control under the Change of Control Agreement, the Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 10. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without reference to principles of conflict of laws. The parties hereto agree that exclusive jurisdiction of any dispute regarding this Agreement shall be the state courts located in Philadelphia, Pennsylvania. (b) The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (c) This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: George Babich, Jr. Three Woodford Lane Malverne, PA 19355 If to the Corporation: The Pep Boys - Manny, Moe & Jack 3111 West Allegheny Avenue Philadelphia, PA 19132 Attention: Chief Executive Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (e) The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision or provisions of this Agreement, which shall remain in full force and effect. If any provision of this Agreement is held to be invalid, void or unenforceable in any jurisdiction, any court or arbitrator so holding shall substitute a valid, enforceable provision that preserves, to the maximum lawful extent, the terms and intent of this Agreement. If any of the provisions of, or covenants contained in, this Agreement are hereafter construed to be invalid or unenforceable in any jurisdiction, the same shall not affect the remainder of the provisions or the enforceability thereof in any other jurisdiction, which shall be given full effect, without regard to the invalidity or unenforceability in such other jurisdiction. Any such holding shall affect such provision of this Agreement, solely as to that jurisdiction, without rendering that or any other provisions of this Agreement invalid, illegal, or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable because its scope is considered excessive, such covenant will be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable. (f) The Corporation may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) This Agreement contains the entire understanding of the Corporation and the Executive with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Corporation has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. /s/ George Babich, Jr. --------------------- George Babich, Jr. /s/ Bernard J. Korman -------------------------------- THE PEP BOYS - MANNY, MOE & JACK EX-12 7 fexh1202.txt
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES Exhibit 12 - Statement Regarding Computation of Ratios of Earnings to Fixed Charges (in thousands, except ratios) - ---------------------------------------------------------------------------------------------------------------------- February 1, February 2, February 3, Fiscal year 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- Interest $ 46,858 $ 51,335 $ 57,882 Interest factor in rental expense 21,422 21,478 21,069 Capitalized interest 44 1 489 - ---------------------------------------------------------------------------------------------------------------------- (a) Fixed charges, as defined $ 68,324 $ 72,814 $ 79,440 Earnings before income taxes $ 69,904 $ 56,404 $ (83,669) Fixed charges 68,324 72,814 79,440 Capitalized interest (44) (1) (489) - ---------------------------------------------------------------------------------------------------------------------- (b) Earnings, as defined $ 138,184 $ 129,217 $ (4,718) - ---------------------------------------------------------------------------------------------------------------------- (c) Ratio of earnings to fixed charges (b/a) 2.0x 1.8x - - ---------------------------------------------------------------------------------------------------------------------- The ratio of earnings to fixed charges is completed by dividing earnings by fixed charges. "Earnings" consist of earnings before income taxes plus fixed charges (exclusive of capitalized interest costs) plus one-third of rental expense (which amount is considered representative of the interest factor in rental expense). Earnings, as defined, were not sufficient to cover fixed charges by approximately $4.7 million in fiscal year 2000. (Table Restubbed Below) (in thousands, except ratios) - ---------------------------------------------------------------------------------------- January 29, January 30, Fiscal year 2000 1999 - ---------------------------------------------------------------------------------------- Interest $ 51,557 $ 48,930 Interest factor in rental expense 19,963 19,052 Capitalized interest 1,098 1,020 - ---------------------------------------------------------------------------------------- (a) Fixed charges, as defined $ 72,618 $ 69,002 Earnings before income taxes $ 44,967 $ 7,284 Fixed charges 72,618 69,002 Capitalized interest (1,098) (1,020) - ---------------------------------------------------------------------------------------- (b) Earnings, as defined $ 116,487 $ 75,266 - ---------------------------------------------------------------------------------------- (c) Ratio of earnings to fixed charges (b/a) 1.6x 1.1x - ----------------------------------------------------------------------------------------
The ratio of earnings to fixed charges is completed by dividing earnings by fixed charges. "Earnings" consist of earnings before income taxes plus fixed charges (exclusive of capitalized interest costs) plus one-third of rental expense (which amount is considered representative of the interest factor in rental expense). Earnings, as defined, were not sufficient to cover fixed charges by approximately $4.7 million in fiscal year 2000. EX-21 8 fexh2102.txt Exhibit 21
SUBSIDIARIES OF THE COMPANY WHERE % OF SHARES NAME INCORPORATED OWNED - ----- ------------ ----- The Pep Boys Manny Moe & Jack of California 3111 W. Allegheny Avenue Philadelphia, PA 19132 California 100% Pep Boys- Manny, Moe & Jack of Delaware, Inc. 3111 W. Allegheny Avenue Philadelphia, PA 19132 Delaware 100% Pep Boys- Manny, Moe & Jack of Puerto Rico, Inc. 3111 W. Allegheny Avenue Philadelphia, PA 19132 Delaware 100% Colchester Insurance Company 100 Bank Street, Suite 610 Burlington, VT 05401 Vermont 100% PBY Corporation Suite 1006 1105 North Market Street Wilmington, DE 19899 Delaware 100% Carrus Supply Corporation 1013 Centre Road Wilmington, DE 19805 Delaware 100%
EX-23 9 fexh2302.txt Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Numbers 33-31765, 33-64248, 33-35592, 33-61429, 33-32857, 333-40363, 333-51585, 333-81351, 333-89280 and 333-100224 of The Pep Boys - Manny, Moe & Jack and subsidiaries on Form S-8 and Post-Effective Amendment No. 2 to Registration Statement No. 333-98255 of The Pep Boys - Manny, Moe & Jack and Subsidiaries on Form S-3 of our report dated March 13, 2003 (March 26, 2003 as to Note 14), appearing in this Annual Report on Form 10-K of The Pep Boys - Manny, Moe & Jack and subsidiaries for the year ended February 1, 2003. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania May 2, 2003 EX-99 10 fexh9901.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of The Pep Boys - Manny, Moe & Jack (the "Company") on Form 10-K for the fiscal year ending February 1, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mitchell G. Leibovitz, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 28,2003 /s/ Mitchell G. Leibovitz -------------------- -------------------------- Mitchell G. Leibovitz Chairman of the Board and Chief Executive Officer EX-99 11 fexh9902.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of The Pep Boys - Manny, Moe & Jack (the "Company") on Form 10-K for the fiscal year ending February 1, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George Babich, Jr., President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 28, 2003 /s/ George Babich, Jr. -------------------- ----------------------- George Babich, Jr. President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----