-----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, UpwEk0coVWaRv0NSMwvE4Rs9EJEJ6lqVJFFGNj9+3FxX2o6iD2rmKbLCsozatRZK tTnRAm6JuLqXLrCD6jqrUw== 0000077449-99-000005.txt : 19990503 0000077449-99-000005.hdr.sgml : 19990503 ACCESSION NUMBER: 0000077449-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990430 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: SEC FILE NUMBER: 001-03381 FILM NUMBER: 99605149 BUSINESS ADDRESS: STREET 1: 3111 W ALLEGHENY AVE CITY: PHILADELPHIA STATE: PA ZIP: 19132 BUSINESS PHONE: 2152299000 10-K 1 FORM 10-K YEAR ENDED JANUARY 30, 1999 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 January 30, 1999 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) Registrant's telephone number, including area code 215-229-9000 ------------ 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 4% Convertible Subordinated Notes due September 1, 1999 New York Stock Exchange Liquid Yield Option Notes due September 20, 2011 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. ( ) Yes No X ----- ----- As of the close of business on April 9, 1999, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $699,037,997. As of April 9, 1999, there were 52,587,642 shares of the registrant's common stock outstanding. 2 This Annual Report on Form 10-K contains "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward looking statements involve risks and uncertainties which could cause actual results to materially differ from those expressed in any such forward looking statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Forward Looking Statements." 3 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 June 2, 1999. 4 This Annual Report on Form 10-K for the year ended January 30, 1999, 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. 5 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 retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts. The Company's primary operating unit is its SUPERCENTER format. As of January 30, 1999, the Company operated 638 stores consisting of 625 SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of 6,608 service bays, as well as 12 non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates approximately 13,072,000 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 the "do-it-yourself," automotive service, tire and "buy-for-resale" customer sectors with the highest quality merchandise and service. 6 As of January 30, 1999 the Company operated its stores in 37 states and Puerto Rico. The following table indicates by state the number of stores of the Company in operation at the end of fiscal 1995, 1996, 1997 and 1998 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 1995 THROUGH 1998 1995 1996 1997 1998 Year Year Year Year State End Opened Closed End Opened Closed End Opened Closed End - ------ --- ------ ------ --- ------ ------ --- ------ ------ --- Alabama 1 - - 1 - - 1 - - 1 Arizona 24 - 1 23 1 - 24 - 1 23 Arkansas 1 - - 1 - - 1 - - 1 California 118 29 1 146 10 - 156 6 30 132 Colorado 6 2 - 8 - - 8 - - 8 Connecticut 2 5 - 7 2 - 9 1 1 9 Delaware 5 - - 5 1 - 6 - - 6 District of Columbia 2 1 - 3 2 - 5 - 5 - Florida 38 4 - 42 9 - 51 2 5 48 Georgia 22 3 - 25 1 - 26 - - 26 Illinois 17 4 - 21 11 - 32 1 8 25 Indiana 3 3 - 6 6 - 12 4 4 12 Kansas 2 - - 2 - - 2 - - 2 Kentucky 4 - - 4 - - 4 - - 4 Louisiana 12 - - 12 - - 12 - - 12 Maine - - - - - - - 1 - 1 Maryland 18 2 - 20 5 2 23 - 4 19 Massachusetts 5 4 - 9 2 - 11 3 6 8 Michigan 6 5 - 11 6 - 17 4 6 15 Minnesota - - - - - - - 2 - 2 Missouri 1 - - 1 - - 1 - - 1 Nevada 8 - - 8 2 - 10 2 - 12 New Hampshire 1 1 - 2 2 - 4 - - 4 New Jersey 18 8 - 26 8 - 34 - 9 25 New Mexico 8 - - 8 - - 8 - - 8 New York 14 13 - 27 19 - 46 2 18 30 North Carolina 11 - - 11 - - 11 - - 11 Ohio 10 3 - 13 1 - 14 1 - 15 Oklahoma 6 - - 6 - - 6 - - 6 Oregon - - - - - - - 1 - 1 Pennsylvania 40 3 - 43 8 1 50 4 8 46 Puerto Rico 7 4 - 11 10 - 21 2 - 23 Rhode Island 1 2 - 3 1 - 4 - 1 3 South Carolina 6 - - 6 - - 6 - - 6 Tennessee 7 - - 7 - - 7 - - 7 Texas 63 2 - 65 - - 65 - 4 61 Utah 6 - - 6 - - 6 - - 6 Virginia 13 2 - 15 3 - 18 - 2 16 Washington - - - - - - - 3 - 3 ---- --- -- --- ---- -- ---- ---- -- ---- Total 506 100 2 604 110 3 711 39 112 638 === == == === === == === == === ===
7 NEW STORES AND EXPANSION STRATEGY During fiscal 1998, the Company opened 35 SUPERCENTERS, all of which include service bays, and 4 PEP BOYS EXPRESS stores. Further, the Company sold and/or closed 115 of its non-service/non-tire PEP BOYS EXPRESS stores. In October 1998, the Company consummated the sale of real estate assets relating to 100 of these stores for net proceeds of $97,473,000. The Company also closed one SUPERCENTER during fiscal 1998. The Company's typical SUPERCENTER is a free standing, "one-stop" shopping automotive warehouse that features state-of-the-art service bays. Each SUPERCENTER carries an average of approximately 25,000 stock-keeping units and serves the automotive aftermarket needs of the "do-it-yourself," the "do-it-for-me" (automotive service), tire and "buy-for-resale" customer sectors. The Company's primary SUPERCENTER prototype is approximately 18,200 square feet and generally features 12 service bays. The Company currently intends to continue to utilize this prototype in fiscal 1999. The Company completed the rollout of its commercial automotive parts delivery program, "APD," during fiscal 1998. The APD program was established to increase the Company's market share with the professional installer. The APD program has strengthened the Company's position with the "buy-for-resale" customer by taking greater advantage of the breadth and quality of its parts inventory as well as its experience supplying its own service bays and mechanics. As of January 30, 1999, 576 of the Company's stores provide commercial parts delivery, which represents approximately 90% of its stores. 8 In fiscal 1999, the Company plans to focus much of its energy on improving the performance of its existing stores. As a result, the Company plans to open approximately 25 new stores, all of which will be SUPERCENTERS. If all 25 stores are opened, the Company anticipates spending approximately $57,647,000 in addition to the $22,233,000 it has already spent as of January 30, 1999 in connection with certain of these locations. Additionally in fiscal 1999, the Company anticipates spending approximately $19,050,000 on certain stores it expects to open in fiscal 2000. The Company expects to fund this expansion from net cash generated by operating activities. The most important factors considered by the Company when deciding to open new stores are vehicle and population demographics, market penetration, competitive positioning and site development costs. The most important factors considered by the Company when deciding whether to close a store are profitability and whether the store is outmoded by virtue of store size or number of service bays, number of other stores within the same market area and the cost/benefit of establishing a replacement store rather than expanding or otherwise upgrading an older store. The Company's ability to meet its expansion goals will depend, in large measure, upon the availability of suitable sites, prevailing economic conditions, its success in completing negotiations to purchase or lease properties, and its ability to obtain governmental approvals and meet construction deadlines. MERCHANDISING Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries the same basic product line, with variations based on the number and type of cars registered in the different markets. A full complement of inventory at a typical SUPERCENTER includes an average of approximately 25,000 items (approximately 24,000 items are in a PEP BOYS EXPRESS store). The Company's automotive product line includes: tires (not stocked at PEP BOYS EXPRESS locations); batteries; new and rebuilt parts for domestic and imported cars, including suspension parts, ignition parts, mufflers, engines and engine parts, oil and air filters, belts, hoses, air conditioning parts, and brake parts; chemicals, including oil, antifreeze, polishes, additives, cleansers and paints; mobile electronics, including sound systems, alarms, and remote vehicle starters; car accessories, including seat covers, floor mats, and battery cables; hand tools, including sockets, wrenches, ratchets, paint and body tools, jacks and lift equipment, automotive specialty tools and test gauges; as well as a selection of truck, van and sport utility vehicle accessories. In addition to offering a wide variety of high quality, branded products, the Company sells an array of high quality products under the Pep Boys and various other private label names. The Company sells cleaners and chemicals under the Pep Boys name. The Company also sells oil, oil treatments, hand cleaner, air filters, oil filters, transmission fluids and lubricants under the name PROLINE (R) and paints and cleaners under the name VARSITY (R). The Company sells starters and alternators under the name PROSTART (R), water pumps under the name PROCOOL (R) and batteries under the names PRO-START (R), MASTER START (tm), RIGHT START (tm) and CADET (tm). Brakes are sold under the names SHUR GRIP (R), PROSTOP (R) and ELITE (tm) and tires under the names CORNELL (R) and FUTURA (R). 9 The Company also sells shock absorbers under the name PRO RYDER (R), and trunk and hatchback lift supports under the name PROLIFT (R). All products sold by the Company under the Pep Boys and various other private label names accounted for approximately 31% of the Company's merchandise sales in fiscal 1998. The remaining merchandise is sold under the brand names of others. Revenues from maintaining or repairing automobiles and installing products, accounted for approximately 17.0%, 16.3% and 15.0% of the Company's total revenues in fiscal years 1998, 1997 and 1996, respectively. Revenues from the sale of tires accounted for approximately 14.2%, 13.2% and 11.8% of the Company's total revenues in fiscal years 1998, 1997 and 1996, respectively. No other class of products or services accounted for as much as 10% of the Company's total revenues. 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 in all of its stores and an electronic commercial invoicing system in all of its stores that offer commercial parts delivery. 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 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. 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, multi-page catalogs, television and radio commercials, newspaper 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 1998, approximately 63% 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. STORE OPERATIONS AND MANAGEMENT All Pep Boys stores are open seven days a week. Each SUPERCENTER has a manager, a service manager, a parts manager and two or more assistant managers. Each PEP BOYS EXPRESS store has a manager, a parts manager and two or more assistant managers. A store manager's average length of service with the Company is approximately six years. The Company has service bays in 626 of its 638 locations. Each service department can perform a variety of services which generally include: engine diagnosis and tune-ups, wheel and front end alignments, state inspection and emission services, air conditioning service, heating and cooling system service, fuel injection and throttle body service, and battery and electrical 10 service; the repair and installation of parts and accessories including brake parts, suspension parts, exhaust systems, front end parts, ignition parts, belts, hoses, clutches, filters, stereos and speakers, alarms, sunroofs, cruise controls, remote starters and various other merchandise sold in the Company's stores; installation and balancing of tires; and oil and lubrication services. The Company coordinates the operation and merchandising of each store through a network of district and regional managers. The regional managers report to one of three divisional Vice Presidents - Store Operations, who report to the Vice President - Sales, who report to the Company's Senior Vice President - Store Operations, who reports to the Company's Chairman of the Board, President & 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 of the Company's management information system functions are conducted at a regional office located near its corporate headquarters. 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 and also by Company-owned or leased trucks. 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 greatly enhanced the Company's ability to control its inventory. SUPPLIERS During fiscal 1998, the Company's ten largest suppliers accounted for approximately 44% of the merchandise purchased by the Company. No single supplier accounted for more than 12% 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. 11 COMPETITION The business of the Company is generally highly competitive. The Company encounters competition from nationwide and regional chains and from local independent merchants. Some of the Company's competitors are general, full range, discount or traditional department stores which carry automotive parts and accessories and/or have automotive service centers, and others, similar to the Company, are specialized automotive service retailers. 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. In addition, the Company believes that its operation of service bays in its SUPERCENTERS positively differentiates it from most of its competitors by providing its customers with the ability to purchase parts and have them installed at the same location. The Company believes that the 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. EMPLOYEES At January 30, 1999, the Company employed 27,460 persons as follows:
Full-time Part-time Total Description Numbers % Numbers % Numbers % ------- ---- ------- ---- ------- ---- Store Sales 8,717 44.1 5,677 73.7 14,394 52.4 Store Service 8,458 42.8 1,839 23.8 10,297 37.5 ------- ----- ----- ----- ------- ----- STORE TOTAL 17,175 86.9 7,516 97.5 24,691 89.9 Warehouses 1,079 5.5 160 2.1 1,239 4.5 Offices 1,500 7.6 30 .4 1,530 5.6 ------- ------ ------- ------- ------- ------ TOTAL EMPLOYEES 19,754 100.0 7,706 100.0 27,460 100.0 ====== ===== ===== ===== ====== =====
Of the 1,239 full-time and part-time warehouse employees referred to above, 239 employees at the Company's New Jersey warehouse facilities are members of a union. The Company believes employee relations are generally good. At the end of fiscal 1997, the Company employed approximately 18,160 full-time and 6,043 part-time employees and at the end of fiscal 1996, the Company employed approximately 15,502 full-time and 4,987 part-time employees. 12 ITEM A 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 53 20 Chairman of the Board since 1994; Chief Executive Officer since 1990; President since 1986 Michael J. Holden 47 19 Executive Vice President since 1996; Senior Vice President & Chief Financial Officer since 1987 Mark L. Page 42 23 Senior Vice President - Store Operations since 1993 Frederick A. Stampone 43 16 Senior Vice President since 1987; Chief Administrative Officer since 1993; Secretary since 1988 Robert E. Brann 47 1/2 Senior Vice President - . Merchandising since March 1999; Vice President - Merchandising since August 1998
Messrs. Leibovitz, Holden, Page and Stampone have been executive officers of the Company for more than the past five years. Mr. Brann served as Executive Vice President - Merchandising for Trak Auto Corp. from 1989 until August 1998 when he joined Pep Boys as Vice President - Merchandising until March 1999 when he became Senior Vice President - Merchandising. Each of the officers serves at the pleasure of the Board of Directors of the Company. 13 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 -- a three-story, approximately 60,000 square foot structure in Los Angeles, California of which it occupies approximately 35,000 square feet and 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. Of the 638 store locations operated by the Company at January 30, 1999, 346 are owned and 292 are leased. Of the 292 leased store locations, 178 are ground leases. 14 The following table sets forth certain information regarding the owned and leased warehouse space utilized by the Company for its 638 store locations at January 30, 1999.
Warehouse Products Square Owned or Stores States Location Warehoused Footage Leased Serviced Serviced - --------- ---------- ------- ------ -------- ------- Los Angeles, CA All except 212,000 Owned 133 AZ, CA, NV tires Los Angeles, CA Tires 73,000 Leased 133 AZ, CA, NV Los Angeles, CA All except 137,000 Leased 133 AZ, CA, NV tires Bridgeport, NJ All except 193,000 Owned 141 CT, DE, MA, tires MD, ME, NH, NJ, NY, PA, PR, RI, VA Bridgeport, NJ Tires and 273,000 Leased 141 CT, DE, MA, chemicals MD, ME, NH, NJ, NY, PA, PR, RI, VA Atlanta, GA All 392,000 Owned 127 AL, FL, GA, NC, PR, SC, TN, VA Mesquite, TX All 244,000 Owned 98 AR, CO, KS, LA, MO, NM OK, TX Plainfield, IN All 403,000 Leased 94 IL, IN, KY, MI, MN, NY, OH, PA Tracy, CA All 246,250 Leased 45 CA, OR, UT, NV, WA ---------- Total 2,173,250 ==========
To meet its current expansion requirements the Company plans to open a 402,500 square foot leased warehouse facility in Chester, New York in mid or late 1999. 15 The Company anticipates that its existing and planned warehouse space will accommodate inventory necessary to support store expansion and any increase in stock-keeping units through the end of fiscal 1999. 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. ITEM 3 LEGAL PROCEEDINGS The Company is a defendant in a purported class action entitled "Brian Lee, Anthony Baxton, and Harry Schlein v. The Pep Boys - Manny, Moe & Jack," in the Circuit Court of Mobile County, Alabama. The Company has moved to dismiss the case for failure to state a claim. The Company's motion to dismiss is pending before the Circuit Court of Mobile County, Alabama. In their complaint, the plaintiffs allege that the Company sold old or used automotive batteries to consumers as if those batteries were new. The complaint purports to state causes of action for fraud and deceit, negligent misrepresentation, breach of contract and violation of state consumer protection statutes. The plaintiffs are seeking compensatory and punitive damages, as well as injunctive and equitable relief. The Company believes the claims are without merit and intends 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, including the case above, 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 January 30, 1999. 16 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 4,022 registered shareholders as of January 30, 1999. 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 January 30, 1999 High Low Per Share - ----------------------------------- ---- --- --------- First Quarter 26 11/16 21 5/16 $.0650 Second Quarter 23 3/4 16 13/16 .0650 Third Quarter 17 7/8 12 3/8 .0650 Fourth Quarter 17 1/16 12 1/2 .0650 Fiscal year ended January 31, 1998 - ---------------------------------- First Quarter 35 29 3/8 $.0600 Second Quarter 35 5/8 30 .0600 Third Quarter 34 7/8 23 5/8 .0600 Fourth Quarter 26 3/16 21 9/16 .0600
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. 17 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 Jan. 30, 1999 Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996 Jan. 28, 1995 - ----------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF EARNINGS DATA Merchandise sales $ 1,991,340 $ 1,720,670 $ 1,554,757 $ 1,355,008 $ 1,211,536 Service revenue 407,368 335,850 273,782 239,332 195,449 Total revenues 2,398,708 2,056,520 1,828,539 1,594,340 1,406,985 Gross profit from merchandise sales 492,443(3) 474,239(4) 484,494 411,133 364,378 Gross profit from service revenue 79,453 66,081 53,025 44,390 32,417 Total gross profit 571,896(3) 540,320(4) 537,519 455,523 396,795 Selling, general and administrative expenses(1) 517,827(3) 429,523(4) 349,353 295,098 247,069 Operating profit(1) 54,069(3) 110,797(4) 188,166 160,425 149,726 Nonoperating income(1) 2,145 4,315 1,369 1,099 2,687 Interest expense 48,930 39,656 30,306 32,072 25,931 Earnings before income taxes and accounting change 7,284(3) 75,456(4) 159,229 129,452 126,482 Earnings before accounting change 4,974(3) 49,611(4) 100,824 81,494 80,008 Accounting change - - - - (4,300) Net earnings 4,974(3) 49,611(4) 100,824 81,494 75,708 BALANCE SHEET DATA Working capital $ 241,738 $ 151,340 $ 70,691 $ 39,868 $ 121,858 Current ratio 1.47 to 1 1.24 to 1 1.13 to 1 1.09 to 1 1.42 to 1 Merchandise inventories $ 527,397 $ 655,363 $ 520,082 $ 417,852 $ 366,843 Property and equipment-net 1,330,256 1,377,749 1,189,734 1,014,052 861,910 Total assets 2,096,112 2,161,360 1,818,365 1,500,008 1,291,019 Long-term debt (includes all convertible debt) 691,714 646,641 455,665 367,043 380,787 Stockholders' equity 811,784 822,635 778,091 665,460 586,253 DATA PER COMMON SHARE Basic earnings before accounting change(2) $ .08(3) $ .81(4) $ 1.67 $ 1.37 $ 1.35 Basic earnings(2) .08(3) .81(4) 1.67 1.37 1.28 Diluted earnings before accounting change(2) .08(3) .80(4) 1.62 1.34 1.32 Diluted earnings(2) .08(3) .80(4) 1.62 1.34 1.25 Cash dividends .26 .24 .21 .19 .17 Stockholders' equity 12.71 12.92 12.33 10.72 9.53 Common share price range: high-low 26 11/16 - 12 3/8 35 5/8 - 21 9/16 38 1/4 - 27 7/8 34 3/4 - 21 7/8 36 7/8 - 26 OTHER STATISTICS Return on average stockholders' equity 0.6% 6.2% 14.0% 13.0% 13.4% Common shares outstanding 63,847,640 63,657,728 63,119,491 62,084,021 61,501,679 Capital expenditures $ 167,876 $ 284,084 $ 245,246 $ 205,913 $ 185,072 Number of retail outlets 638 711 604 506 435 Number of service bays 6,608 6,208 5,398 4,727 4,166 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the current year's presentation. (2) All data per common share for the years ended February 1, 1997 and prior have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128 "Earnings per Share." (3) 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 Pep Boys Express stores. (4) Includes pretax charges of $28,012 ($18,418 net of tax or $.30 per share-basic and diluted), $16,330 of which reduced gross profit from merchandise sales with the remaining $11,682 included in selling, general and administrative expenses. These charges were associated with closing nine stores, reducing the store expansion program, converting all Parts USA stores to the Pep Boys Express format, certain equipment write-offs, and severance and other non-recurring expenses. 18 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain items in the consolidated statements of earnings 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 - ----------------------------------------------------------------------------------------------------------------------------------- Jan. 30, 1999 Jan. 31, 1998 Feb. 1, 1997 Fiscal 1998 vs. Fiscal 1997 vs. Year ended (Fiscal 1998) (Fiscal 1997) (Fiscal 1996) Fiscal 1997 Fiscal 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales 83.0% 83.7% 85.0% 15.7% 10.7% Service Revenue(1) 17.0 16.3 15.0 21.3 22.7 - ----------------------------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 100.0 16.6 12.5 - ----------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales(2) 75.3(3) 72.4(3) 68.8(3) 20.3 16.5 Costs of Service Revenue(2) 80.5(3) 80.3(3) 80.6(3) 21.6 22.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 76.2 73.7 70.6 20.5 17.4 - ----------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 24.7(3) 27.6(3) 31.2(3) 3.8 (2.1) Gross Profit from Service Revenue 19.5(3) 19.7(3) 19.4(3) 20.2 24.6 - ----------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 23.8 26.3 29.4 5.8 .5 - ----------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 21.6 20.9 19.2 20.6 22.9 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Profit 2.2 5.4 10.2 (51.2) (41.1) Nonoperating Income .1 .2 .1 (50.3) 215.2 Interest Expense 2.0 1.9 1.6 23.4 30.9 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes .3 3.7 8.7 (90.3) (52.6) - ----------------------------------------------------------------------------------------------------------------------------------- Income Taxes 31.7(4) 34.3(4) 36.7(4) (91.1) (55.7) - ----------------------------------------------------------------------------------------------------------------------------------- Net Earnings .2 2.4 5.5 (90.0) (50.8) - -----------------------------------------------------------------------------------------------------------------------------------
(1) Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. (2) Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. (3) As a percentage of related sales or revenue, as applicable. (4) As a percentage of earnings before income taxes. 19 FISCAL 1998 VS. FISCAL 1997 Total revenues for fiscal 1998 increased 16.6% over fiscal 1997 due primarily to a 9.0% increase in comparable store sales (revenues generated by stores in operation during the same months of each period) as well as more stores in operation during fiscal 1998 versus fiscal 1997. Comparative store merchandise sales, which were positively impacted by the Company's commercial delivery program, increased 8.6% while comparable service revenue increased 11.5%. Sales for fiscal 1998 were negatively impacted by the sale and closure of 115 stores, 109 of which were closed on or about October 10, 1998. On October 21, 1998, the Company consummated the sale of real estate assets relating to 100 of these stores. As a result of these events, the Company recorded pretax charges of $29,451,000 ($20,109,000 net of tax), $27,733,000 of which was included in costs of merchandise sales. These costs include various building, leasehold improvement, fixture and equipment write-offs, as well as lease commitment charges and the costs associated with handling the related merchandise inventories. The remaining $1,718,000 of related costs, which consist primarily of store and general office payroll and travel expenses, have been included in selling, general and administrative expenses. The substantial decrease in gross profit from merchandise sales, as a percentage of merchandise sales, was due primarily to significantly lower merchandise margins as well as the pretax charges of $27,733,000 recorded in fiscal 1998 versus the pretax charges of $16,330,000 recorded in fiscal 1997 offset, in part, by decreases in warehousing and store occupancy costs. The fiscal 1997 pretax charges included the costs associated with closing nine stores, converting all Parts USA stores to the Pep Boys Express format, certain equipment write-offs and other non-recurring charges. The increase in selling, general and administrative expenses, as a percentage of total revenues, was due primarily to a substantial increase in store expenses and an increase in media costs offset, in part, by a decrease in general office costs and the pretax charges of $1,718,000 recorded in fiscal 1998 versus $11,682,000 recorded in fiscal 1997. The fiscal 1997 pretax charges included costs associated with reducing the store expansion program, certain equipment write-offs and other non-recurring charges. The significant decrease in net earnings in fiscal 1998, as compared with fiscal 1997, was due primarily to a substantial decrease in gross profit from merchandise sales, as a percentage of merchandise sales and an increase in selling, general and administrative expenses, as a percentage of total revenues. Comparably, the after tax charges of $20,109,000 recorded in fiscal 1998, as a percentage of total revenues, were primarily offset by the after tax charges of $18,418,000 recorded in fiscal 1997. FISCAL 1997 vs. FISCAL 1996 Total revenues for fiscal 1997 increased 12.5% over fiscal 1996 due to a higher store count (711 at January 31, 1998 compared with 604 at February 1, 1997) offset, in part, by a 0.4% decrease in comparable store revenues (revenues generated by stores in operation during the same months of each period). Comparable store merchandise sales decreased 2.3% while comparable service revenue increased 10.3%. During fiscal 1997 the Company recorded pretax charges of $28,012,000 ($18,418,000 net of tax), $16,330,000 of which was recorded as costs of merchandise sales and includes the costs associated with closing nine stores, converting all Parts USA stores to the Pep Boys Express format, certain equipment write-offs and other non-recurring expenses. The remaining $11,682,000 of these expenses, which include costs associated with reducing the store expansion program, certain equipment write-offs and other non-recurring expenses, have been included in selling, general and administrative expenses. 20 The substantial decrease in gross profit from merchandise sales, as a percentage of merchandise sales, was due primarily to significantly lower merchandise margins, significantly higher store occupancy costs and the $16,330,000 pretax charge. The dramatic increase in selling, general and administrative expenses, as a percentage of total revenues, was due primarily to a substantial increase in store expenses, an increase in general office costs and the $11,682,000 pretax charge. Interest expense increased, as a percentage of total revenues, due primarily to higher debt levels necessary to fund the Company's store expansion program and related working capital requirements offset, in part, by slightly lower interest rates. Net earnings in fiscal 1997, which were negatively impacted by the after tax charges of $18,418,000, decreased substantially as compared with fiscal 1996, as a percentage of total revenues, due primarily to a substantial decrease in gross profit from merchandise sales, as a percentage of merchandise sales, a dramatic increase in selling, general and administrative expenses, as a percentage of total revenues, and an increase in interest expense, as a percentage of total revenues. 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 1998, fiscal 1997 or fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements arise principally from the need to finance the acquisition, construction and equipping of new stores and to purchase inventory. The Company opened 39 stores in fiscal 1998, 110 stores in fiscal 1997 and 100 stores in fiscal 1996. During fiscal 1998, the Company consummated the sale of the real estate assets relating to 100 of its non- service/non-tire format Pep Boys Express stores for net proceeds of $97,473,000. A portion of the net proceeds were used to repay debt and the remaining amount was invested in short-term money market accounts and subsequently used to finance a portion of the Company's share repurchase on February 1, 1999. In fiscal 1998, with significantly decreased levels of capital expenditures, the cash generated from its sale of real estate assets, partially offset by increased net inventory levels, the Company increased its debt by $70,380,000 and increased its cash and cash equivalents by $103,737,000. In fiscal 1997, with increased levels of capital expenditures and net inventory, the Company increased its debt by $174,999,000. In fiscal 1996, with increased levels of capital expenditures, the Company increased its debt by $43,550,000. 21
The following table indicates the Company's principal cash requirements for the past three years. (dollar amounts Fiscal Fiscal Fiscal in thousands) 1998 1997 1996 Total - --------------------------------------------------------------------------------------------------------------- Cash Requirements: Capital expenditures $167,876 $284,084 $245,246 $697,206 Net inventory increase (decrease)(1) 40,696 63,764 (12,782) 91,678 - --------------------------------------------------------------------------------------------------------------- Total $208,572 $347,848 $232,464 $788,884 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities (excluding the change in net inventory) $160,713 $180,721 $169,811 $511,245 - ---------------------------------------------------------------------------------------------------------------
(1) Net inventory increase (decrease) is the change in inventory less the change in accounts payable. In fiscal 1998, merchandise inventories decreased, as the Company reduced its warehouse inventories, better tailored its store inventories and decreased its net store count by 73 stores. At the same time the approximate average number of stock-keeping units per store decreased to 25,000 from 28,000 in fiscal 1997 and 27,000 in fiscal 1996. In fiscal 1997 and fiscal 1996, merchandise inventories increased, as the Company added a net of 205 stores during those two years. The Company's working capital was $241,738,000 at January 30, 1999, $151,340,000 at January 31, 1998 and $70,691,000 at February 1, 1997. The Company's long-term debt, as a percentage of its total capitalization, was 46% at January 30, 1999, 44% at January 31, 1998 and 37% at February 1, 1997. As of April 1999, the Company has available lines of credit totaling $280,000,000. The Company currently plans to open approximately 25 new stores in fiscal 1999. Management estimates that the cost to open all 25 stores, coupled with capital expenditures relating to existing stores, warehouses and offices during fiscal 1999, will be approximately $138,000,000. In fiscal 1999, the Company has additional cash requirements to finance a share repurchase totaling $180,427,000 and to repay its debt maturities totaling $72,464,000. The Company's cash and cash equivalents on hand and existing credit facilities as well as its new debt obtained in connection with the share repurchase are sufficient to finance the share repurchase and debt maturities due in 1999. The Company anticipates that its net cash provided by operating activities will exceed its remaining principal cash requirements (capital expenditures and net inventory) in fiscal 1999. On February 1, 1999, the Company repurchased 11,276,698 of its common shares outstanding. The Company financed the share repurchase with $110,427,000 in cash and with the $70,000,000 proceeds received in connection with the private placement of Senior Notes issued on February 1, 1999. The Senior Notes were issued in two series at par and pay interest semiannually on January 31 and July 31, commencing July 31, 1999. Series A Senior Notes, with an aggregate principal balance of $25,000,000, will mature in 2009 and bear interest at 7.80% per annum. Series B Senior Notes, with an aggregate principal balance of $45,000,000, will mature in 2011 and bear interest at 7.95% per annum. In addition, the interest rates on the Senior Notes are subject to a .50% increase for such time as the credit rating of the Company's long-term unsecured debt securities decreases below investment grade as rated by both Moody's and Standard & Poor's. 22 In February 1998, the Company established a Medium-Term Note program which permitted the Company to issue up to $200,000,000 of Medium-Term Notes. Under this program the Company sold $100,000,000 principal amount of senior notes, ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006. The net proceeds of $99,429,000 were used for working capital, the repayment of debt and for general corporate purposes. Additionally, in July 1998, under this note program, the Company sold $100,000,000 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 net proceeds of $101,923,500 from the sale of the securities and the call option were used for working capital, the repayment of debt and for general corporate purposes. In July 1997, the Company established a Medium-Term Note program which permitted the Company to issue up to $150,000,000 of Medium-Term Notes. Under this program the Company has sold $150,000,000 principal amount of senior notes, ranging in annual interest rates from 6.4% to 6.7% and due November 2004 through September 2007. The net proceeds of $149,225,000 were used for working capital, the repayment of debt and for general corporate purposes. In September 1996, the Company received net proceeds of $146,250,000 from the sale of zero coupon subordinated Liquid Yield Option Notes due 2011 which have an aggregate principal amount at maturity of $271,704,000. The notes were issued at a discount representing a yield to maturity of 4%. Proceeds from the notes were used to repay the Company's short-term variable-rate bank debt, portions of the Company's long-term variable rate bank debt and for general corporate purposes. NEW ACCOUNTING STANDARDS In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, although early adoption is encouraged. The Company is still in the process of analyzing the impact of the adoption of this statement on its consolidated financial position and results of operations. In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use." The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company adopted SOP 98-1 effective February 1, 1998. As a result of adoption of this statement, the Company capitalized costs amounting to $2,851,000 in fiscal 1998. 23 INFORMATION SYSTEMS AND THE YEAR 2000 During 1997, the Company initiated a project to assess the impact of Year 2000 issues on a corporate-wide basis. A Year 2000 Project Director, reporting directly to the Chief Information Officer, was assigned to lead the project and, in conjunction with senior management of the Company, has formulated a project plan to address Year 2000 compliance issues. The Project Director monitors and coordinates the project plan through regular meetings with operational managers who execute the specifics of the project plan. The Project Director regularly updates senior management, including the Company's Chief Financial Officer. In addition, the Board of Directors is periodically updated by the Company's senior management. The project plan is comprehensive and focuses on both information technology (IT) systems and non-IT systems. Execution of the project plan has been divided into five key phases: inventory, assessment, remediation, testing, and implementation. The Company is utilizing both internal and external resources to complete its Year 2000 project plan initiatives. IT systems include the Company's application software, both proprietary and third party, as well as the hardware infrastructure. Specifically, this includes all software and related hardware for the Company's systems, namely: mainframe, store, personal computer, local area network, and data communication. The inventory and assessment phases for the IT systems are substantially complete. Although the IT systems are currently in various stages of remediation, testing and implementation, the Company estimates that approximately 60% of its IT systems are currently Year 2000 compliant. The Company currently expects to substantially complete these processes with respect to its IT systems by mid-1999. The non-IT systems include equipment and systems that contain embedded computer chips, such as energy management, HVAC, telephone and the Company's service center equipment, which specifically includes its engine diagnostic, wheel alignment and emission testing equipment. The inventory and assessment phases for the non-IT systems are substantially complete. The Company currently expects to have substantially all of its non-IT systems Year 2000 compliant by October 1999. The Company's critical third party vendor relationships (other than those relating to IT and non-IT systems), such as relationships with critical merchandise, transportation, utility, financial institutions and other general service providers, are currently being reviewed for Year 2000 compliance. The Company will use the information obtained in its review of third party vendor relationships in its contingency plan development. The Company is in the process of developing contingency plans. These plans will identify what actions would need to be taken if a critical system or third party service provider were not Year 2000 compliant. The Company expects such plans to be completed by October 1999. Although the Company is making significant progress to ensure that its systems and facilities are Year 2000 compliant, the ability of third party service providers, merchandise vendors and certain other third parties, including communications and utility companies, to be Year 2000 compliant is beyond the Company's control. Therefore, the Company can offer no assurances that the systems of other entities on which the Company's systems may rely will be modified to be Year 2000 compliant or, if so modified, will be compatible with the Company's systems. The failure of these entities to achieve Year 2000 compliance on a timely basis could have a material adverse effect on the Company. At this time, the Company does not expect any Year 2000 issues to materially affect its operations, merchandise sales, service revenues, competitive position or financial performance. The Company estimates that total costs associated with the Year 2000 effort will range from approximately $9,000,000 to $13,000,000, of which approximately $4,300,000 has been incurred through January 30, 1999. The Company's Year 2000 costs have been and are expected to be funded out of cash flows from operating activities. The foregoing statements as to costs and dates relating to the Year 2000 effort are forward-looking and as a result involve risks and uncertainties. They are based on the Company's best estimates which may be updated as additional information becomes available. The Company's forward-looking statements are also based on assumptions about many important factors, including the technical skills of employees and independent contractors, the representations and preparedness of third parties, the failure of vendors to deliver merchandise or perform services required by the Company and the collateral effects of Year 2000 issues on the Company's business partners and customers. While the Company believes its assumptions are reasonable, it cautions that it is impossible to predict the impact of certain factors that could cause actual costs or timetables to differ materially from the expected results. 24 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 certain revolving credit agreements, changes in the federal funds rate, the lenders' prime rate or LIBOR could affect the rates at which the Company could borrow funds thereunder. At January 30, 1999, the Company had no outstanding borrowings against these credit facilities. The table below summarizes the fair value and contract terms of fixed rate debt instruments held by the Company at January 30, 1999:
(dollar amounts Average in thousands) Amount Interest Rate - ---------------------------------------------------------------- Fair value at January 30, 1999 $573,062 Expected maturities: 1999 72,464 4.0% 2000 183 7.5 2001 197 7.5 2002 111 7.6 2003 75,014 6.6 - -----------------------------------------------------------------
FORWARD-LOOKING STATEMENTS Certain statements made herein are forward-looking which involve risks and uncertainties. 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 consumers' ability to spend, the health of the various sectors of the market that the Company serves, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, location and number of competitors' stores, product costs, and the ability to grow and improve the commercial delivery program. Further factors that might cause such a difference include, but are not limited to, the factors described in the Company's filings with the Securities and Exchange Commission. 25 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 as of January 30, 1999 and January 31, 1998, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended January 30, 1999. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 at January 30, 1999 and January 31, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 1999 in conformity with generally accepted accounting principles. 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 18, 1999 26
CONSOLIDATED BALANCE SHEETS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) January 30, January 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 114,548 $ 10,811 Accounts receivable, less allowance for uncollectible accounts of $996 and $265 17,393 13,070 Merchandise inventories 527,397 655,363 Prepaid expenses 36,634 27,449 Deferred income taxes 17,073 23,215 Other 41,099 40,308 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 754,144 770,216 - ---------------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 281,804 296,721 Building and improvements 907,309 920,522 Furniture, fixtures and equipment 596,840 542,256 Construction in progress 30,951 21,432 - ---------------------------------------------------------------------------------------------------------------------------------- 1,816,904 1,780,931 Less accumulated depreciation and amortization 486,648 403,182 - ---------------------------------------------------------------------------------------------------------------------------------- Total Property and Equipment 1,330,256 1,377,749 - ---------------------------------------------------------------------------------------------------------------------------------- Other 11,712 13,395 - ---------------------------------------------------------------------------------------------------------------------------------- $ 2,096,112 $ 2,161,360 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 240,391 $ 409,053 Accrued expenses 199,551 162,666 Short-term borrowings - 47,000 Current maturities of convertible debt 72,294 - Current maturities of long-term debt 170 157 - ---------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 512,406 618,876 - ---------------------------------------------------------------------------------------------------------------------------------- Long-Term Debt, less current maturities 526,851 402,021 Convertible Debt, less current maturities 164,863 244,620 Deferred Income Taxes 80,208 73,208 Commitments and Contingencies Stockholders' Equity: Common stock, par value $1 per share: Authorized 500,000,000 shares; Issued and outstanding 63,847,640 and 63,657,728 63,848 63,658 Additional paid-in capital 175,940 173,107 Retained earnings 636,475 647,505 Accumulated Other Comprehensive Income (4,210) (1,366) - ---------------------------------------------------------------------------------------------------------------------------------- 872,053 882,904 Less cost of shares in benefits trust - 2,232,500 shares, at cost 60,269 60,269 - ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 811,784 822,635 - ---------------------------------------------------------------------------------------------------------------------------------- $ 2,096,112 $ 2,161,360 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 27
CONSOLIDATED STATEMENTS OF EARNINGS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) January 30, January 31, February 1, Year ended 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $1,991,340 $1,720,670 $ 1,554,757 Service Revenue 407,368 335,850 273,782 - ---------------------------------------------------------------------------------------------------------------------------------- Total Revenues 2,398,708 2,056,520 1,828,539 - ---------------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 1,498,897 1,246,431 1,070,263 Costs of Service Revenue 327,915 269,769 220,757 - ---------------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 1,826,812 1,516,200 1,291,020 - ---------------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 492,443 474,239 484,494 Gross Profit from Service Revenue 79,453 66,081 53,025 - ---------------------------------------------------------------------------------------------------------------------------------- Total Gross Profit 571,896 540,320 537,519 - ---------------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 517,827 429,523 349,353 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Profit 54,069 110,797 188,166 Nonoperating Income 2,145 4,315 1,369 Interest Expense 48,930 39,656 30,306 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 7,284 75,456 159,229 Income Taxes 2,310 25,845 58,405 - ---------------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 4,974 $ 49,611 $ 100,824 - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings per Share $ .08 $ .81 $ 1.67 Diluted Earnings per Share $ .08 $ .80 $ 1.62 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 28
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 Comprehensive Benefits Stockholders' Shares Amount Capital Earnings Income Trust Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance, February 3, 1996 62,084,021 $62,084 $139,202 $524,443 $ $(60,269) $665,460 Comprehensive Income Net earnings 100,824 Total Comprehensive Income 100,824 Cash dividends ($.21 per share) (12,686) (12,686) Exercise of stock options and related tax benefits 1,002,333 1,002 22,977 23,979 Dividend reinvestment plan 33,137 33 1,025 1,058 Acquisitions and transfers of 150,500 shares to employees' savings plan (544) (544) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, February 1, 1997 63,119,491 63,119 162,660 612,581 (60,269) 778,091 Comprehensive Income Net earnings 49,611 Minimum pension liability adjustment, net of tax (1,366) Total Comprehensive Income 48,245 Cash dividends ($.24 per share) (14,687) (14,687) Exercise of stock options and related tax benefits 491,039 492 9,582 10,074 Dividend reinvestment plan 47,198 47 1,221 1,268 Acquisitions and transfers of 190,000 shares to employees' savings plan (356) (356) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 31, 1998 63,657,728 63,658 173,107 647,505 (1,366) (60,269) 822,635 Comprehensive Income Net earnings 4,974 Minimum pension liability adjustment, net of tax (2,844) Total Comprehensive Income 2,130 Cash dividends ($.26 per share) (16,004) (16,004) Exercise of stock options and related tax benefits 107,825 108 1,369 1,477 Dividend reinvestment plan 82,087 82 1,369 1,451 Acquisitions and transfers of 75,000 shares to employees' savings plan 95 95 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 30, 1999 63,847,640 $63,848 $175,940 $636,475 $(4,210) $(60,269) $811,784
See notes to consolidated financial statements. 29
CONSOLIDATED STATEMENTS OF CASH FLOWS The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) January 30, January 31, February 1, Year ended 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net earnings $ 4,974 $ 49,611 $ 100,824 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and amortization 96,856 82,862 65,757 Accretion of bond discount 6,493 6,133 2,238 Increase in deferred income taxes 13,142 16,593 8,838 Loss (gain) from sales of assets 19,968 12,278 (34) Changes in operating assets and liabilities: Increase in accounts receivable, prepaid expenses and other (14,857) (16,875) (44,950) Decrease (Increase) in merchandise inventories 127,966 (135,281) (102,230) (Decrease) Increase in accounts payable (168,662) 71,517 115,012 Increase in accrued expenses 34,137 30,119 37,138 - ----------------------------------------------------------------------------------------------------------------------------------- Total Adjustments 115,043 67,346 81,769 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 120,017 116,957 182,593 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (167,876) (284,084) (245,246) Proceeds from sales of assets 98,545 929 3,841 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (69,331) (283,155) (241,405) - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net (payments) borrowings under line of credit agreements (122,000) 19,000 (1,500) Borrowings from life insurance policies - 12,406 - Reduction of long-term debt (14,114) (134) (107,187) Dividends paid (16,004) (14,687) (12,686) Net proceeds from issuance of notes 202,241 149,225 146,250 Proceeds from exercise of stock options 1,477 7,342 23,979 Proceeds from dividend reinvestment plan 1,451 1,268 1,058 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 53,051 174,420 49,914 - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 103,737 8,222 (8,898) Cash and Cash Equivalents at Beginning of Year 10,811 2,589 11,487 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 114,548 $ 10,811 $ 2,589 - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Income taxes paid $ - $ 29,009 $ 56,336 Interest paid, net of amounts capitalized 39,966 32,489 31,843 - -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 30 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended January 30, 1999, January 31, 1998 and February 1, 1997 (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 638 stores at January 30, 1999. The Company currently operates stores in 37 states and Puerto Rico. FISCAL YEAR END The Company's fiscal year ends on the Saturday nearest to January 31. Fiscal years 1998, 1997 and 1996 were comprised of 52 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 generally accepted accounting principles 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 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 method) or market. If the first-in, first-out method of valuing inventories had been used, inventories would have been approximately $0 and $870 higher at January 30, 1999 and January 31, 1998, respectively. CASH AND CASH EQUIVALENTS Cash equivalents include all short-term, highly liquid investments that are readily convertible to known amounts of cash and so near maturity that they present an insignificant risk to changes in value because of changes in interest rates. 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. CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection with the construction of certain long-term assets. Capitalized interest amounted to $1,020, $1,861 and $1,575 in fiscal years 1998, 1997 and 1996, respectively. 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." All periods reported have been stated in accordance with SFAS No. 132. 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. 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 years 1998, 1997 and 1996 was $6,378, $0 and $324, respectively. No advertising costs were recorded as an asset as of January 30, 1999. STORE OPENING COSTS The costs of opening new stores are expensed as incurred. 31 IMPAIRMENT OF LONG-LIVED ASSETS The Company accounts for impaired long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." 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 reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. 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. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company is accounting for employee stock-based compensation plans in accordance with Accounting Principles Board (APB) opinion No. 25, "Accounting for Stock Issued to Employees," and has provided disclosures required by SFAS No. 123. 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 In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, although early adoption is encouraged. The Company is still in the process of analyzing the impact of the adoption of this statement on its consolidated financial position and results of operations. ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use." The SOP requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company adopted SOP 98-1 effective February 1, 1998. As a result of adoption of this statement, the Company capitalized costs amounting to $2,851 in fiscal 1998. 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:
Year ended Jan. 30, 1999 Jan. 31, 1998 Feb. 1, 1997 - ---------------------------------------------------------------------------------------- Parts and Accessories $1,649,599 $1,448,355 $1,338,875 Tires 341,741 272,315 215,882 - ---------------------------------------------------------------------------------------- Total Merchandise Sales 1,991,340 1,720,670 1,554,757 Service 407,368 335,850 273,782 - ---------------------------------------------------------------------------------------- Total Revenues $2,398,708 $2,056,520 $1,828,539 ========================================================================================
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. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the current year's presentation. 32 NOTE 2 - DEBT SHORT-TERM BORROWINGS The Company had short-term borrowings of $0 at January 30, 1999 and $47,000 at January 31, 1998. The Company had short-term lines of credit with several banks totaling $120,000 at January 30, 1999 and $159,000 at January 31, 1998. The interest rates on these lines were negotiated based upon market conditions. The weighted average interest rate on borrowings from these lines was 5.9% at January 31, 1998. The average and maximum month end balances on these borrowings were $43,171 and $137,050, respectively, during fiscal 1998 and $111,014 and $143,150, respectively, during fiscal 1997.
LONG-TERM DEBT - ------------------------------------------------------------------------------------------------------------ January 30, 1999 January 31, 1998 - ------------------------------------------------------------------------------------------------------------ Medium-term notes, 6.4% to 6.7%, due November 2004 through September 2007 $150,000 $150,000 Medium-term notes, 6.7% to 6.9%, due 100,000 - March 2004 through March 2006 7% notes due June 2005 100,000 100,000 6.92% Term Enhanced ReMarketable Securities, 100,000 - Due July 2017 Revolving credit agreement - 75,000 6 5/8% notes due May 2003 75,000 75,000 Mortgage notes payable, 5.8% to 8% 2,021 2,178 - ------------------------------------------------------------------------------------------------------------ 527,021 402,178 Less current maturities 170 157 - ------------------------------------------------------------------------------------------------------------ Total long-term debt $526,851 $402,021 - ------------------------------------------------------------------------------------------------------------
The Company has a revolving credit agreement with seven major banks providing for borrowings of up to $200,000. Funds may be drawn and repaid anytime prior to March 30, 2002. Sixty days prior to each anniversary date, the Company may request, and upon agreement of each bank, extend the maturity of this facility an additional year. If one of the banks fails to agree to this extension, the Company has the right to replace that bank. At the Company's option, the interest rate on any loan may be based on (i) the higher of the federal funds rate plus 1/4% or the prime rate, (ii) LIBOR plus up to 1.1% or (iii) a negotiated rate based upon market conditions. The weighted average interest rate on borrowings under the revolving credit agreement was 5.9% at January 31, 1998. The weighted average interest rate on the mortgage notes payable was 6.4% at January 30, 1999 and 6.9% at January 31, 1998. These notes, which mature at various times through August 2016, are collateralized by land and buildings with an aggregate carrying value of approximately $7,537 at January 30, 1999. 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. The net proceeds of $99,429 were used for working capital, the repayment of debt and for general corporate purposes. 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 net proceeds of $101,924 from the sale of the securities and the call option were used for working capital, the repayment of debt and for general corporate purposes. 33
CONVERTIBLE DEBT - ------------------------------------------------------------------------------------------------------------ January 30, 1999 January 31, 1998 - ------------------------------------------------------------------------------------------------------------ Convertible Subordinated Notes $72,294 $86,250 Zero Coupon Convertible Subordinated Notes 164,863 158,370 - ------------------------------------------------------------------------------------------------------------ 237,157 244,620 Less current maturities 72,294 - - ------------------------------------------------------------------------------------------------------------ Total convertible debt $164,863 $244,620 - ------------------------------------------------------------------------------------------------------------
On August 24, 1994 the Company sold $86,250 of 4% convertible subordinated notes. These notes are convertible by the holders into the common stock of the Company at any time on or before September 1, 1999 (the maturity date) at a conversion price of $41 per share subject to adjustment in certain events. The notes are redeemable, in whole or in part, at the option of the Company at any time on or after September 15, 1997, at a redemption price of 101% of the principal amount and at par on or after September 1, 1998. The notes are subordinated to all existing and future senior indebtedness of the Company. During the fourth quarter of fiscal 1998, the Company redeemed $13,956 of the convertible subordinated notes. On September 20, 1996, the Company issued $271,704 principal amount (at maturity) of Liquid Yield Option Notes (LYONs) with a price to the public of $150,000. The net proceeds to the Company were $146,250. The issue price of each such LYON was $552.07 and there will be no periodic payments of interest. The LYONs will mature on September 20, 2011, at $1,000 per LYON, representing a yield to maturity of 4.0% per annum (computed on a semiannual bond equivalent basis). Each LYON is convertible at the option of the holder at any time on or prior to maturity, unless previously redeemed or otherwise purchased, into common stock of the Company at a conversion rate of 12.929 shares per LYON. The LYONs are redeemable at the option of the holder on September 20, 2001 and September 20, 2006 at the issue price plus accrued original issue discount. The Company, at its option, may elect to pay the purchase price on any such purchase date in cash or common stock, or any combination thereof. No LYONs were converted in 1998 and 1997. In addition, on or prior to September 20, 2001, the Company will purchase for cash any LYON, at the option of the holder, in the event of change in control of the Company. The LYONs are subordinated to all existing and future senior indebtedness of the Company. Several of the Company's debt agreements require the maintenance of certain financial ratios and covenants. Approximately $33,403 of the Company's net worth was not restricted by these covenants at fiscal year end. The Company is in compliance with all debt covenants at January 30, 1999. The annual maturities of all long-term debt and convertible debt for the next five years are $72,464 in 1999, $183 in 2000, $197 in 2001, $111 in 2002 and $75,014 in 2003. Any compensating balance requirements related to all revolving credit agreements and debt were satisfied by balances available from normal business operations. The Company was contingently liable for outstanding letters of credit in the amount of approximately $15,832 at January 30, 1999. 34 NOTE 3 - LEASE COMMITMENTS The Company leases certain property and equipment under operating leases which contain renewal and escalation clauses. Aggregate minimum rental commitments for leases having noncancelable lease terms of more than one year are approximately: 1999 - $44,607; 2000 - $44,564; 2001 - $44,021; 2002 - $43,949; 2003 - $36,812; thereafter - $422,127. Rental expenses incurred for operating leases in 1998, 1997 and 1996 were $57,157, $49,105 and $33,616, respectively. NOTE 4 - STOCKHOLDERS' EQUITY 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 over the next 15 years 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. As of January 30, 1999, the Company has repurchased 2,232,500 shares of its common stock at a cost of $60,269 which is shown as "Cost of shares in benefits trust" on the Company's consolidated balance sheets. NOTE 5 - SIGNIFICANT CHARGES During fiscal 1998, the Company recorded pretax charges of $29,451 ($20,109 net of tax), $27,733 of which was recorded as Costs of Merchandise Sales on the Company's Consolidated Statements of Earnings and includes the costs associated with closure and sale of 109 Pep Boys Express stores. The remaining $1,718 of these expenses have been included in Selling, General and Administrative Expenses on the Company's Consolidated Statements of Earnings. During the fourth quarter of fiscal 1997, the Company recorded pretax charges of $28,012 ($18,418 net of tax), $16,330 of which was recorded as Costs of Merchandise Sales on the Company's Consolidated Statements of Earnings and includes the costs associated with closing nine stores, converting all Parts USA stores to the Pep Boys Express format, certain equipment write-offs and other non-recurring expenses. The remaining $11,682 of these expenses, which include costs associated with reducing the store expansion program, certain equipment write-offs and other non-recurring expenses, have been included in Selling, General and Administrative Expenses on the Company's Consolidated Statements of Earnings. 35 NOTE 6 - PENSION AND SAVINGS PLANS The Company has a 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. In accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," a curtailment gain of $1,554 was recognized in 1996. Pension (income) expense includes the following:
Jan. 30, Jan. 31, Feb. 1, Year ended 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Service cost $ - $ - $1,213 Interest cost 1,711 1,667 1,561 Expected return on plan assets (1,703) (1,729) (1,726) Amortization of transition asset (214) (214) (214) Prior service cost - - 19 - ----------------------------------------------------------------------------------------------------------------------------------- Total pension (income) expense $ (206) $ (276) $ 853 - -----------------------------------------------------------------------------------------------------------------------------------
Pension plan assets are stated at fair market value and are composed primarily of money market funds, fixed income investments with maturities of less than five years and the Company's common stock. The following table sets forth the reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company's defined benefit plan.
Jan. 30, Jan 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation at beginning of year $24,567 $22,076 Interest cost 1,711 1,667 Actuarial loss 3,129 1,759 Benefits paid (792) (935) - --------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $28,615 $24,567 - --------------------------------------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets at beginning of year $20,324 $20,815 Actual return on plan assets (net of expenses) 654 444 Employer contributions 50 - Benefits paid (792) (935) - --------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $20,236 $20,324 - ---------------------------------------------------------------------------------------------------------------
36 - --------------------------------------------------------------------------------------------------------------- Reconciliation of the Funded Status Funded status $(8,378) $(4,243) Unrecognized transition asset (643) (857) Unrecognized actuarial loss 7,221 3,043 Amount contributed after measurement date 2,000 - - --------------------------------------------------------------------------------------------------------------- Net amount recognized at year-end $ 200 $(2,057) - --------------------------------------------------------------------------------------------------------------- Amounts recognized on consolidated balance sheets consist of: Accrued benefit liability $(6,378) $(4,243) Accumulated other comprehensive income 6,578 2,186 - --------------------------------------------------------------------------------------------------------------- Net amount recognized at year-end $ 200 $(2,057) - --------------------------------------------------------------------------------------------------------------- Weighted-Average Assumptions Discount rate: 6.50% 7.25% Expected return on plan assets: 8.50% 8.50% - ---------------------------------------------------------------------------------------------------------------
The Company recorded other comprehensive income attributable to the change in the minimum pension liability of $4,392 ($2,844 net of tax) and $ 2,186 ($1,366 net of tax) in fiscal years 1998 and 1997, respectively. The Company has 401(k) savings plans which covers 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 plan contribution expense was $5,274 in 1998, $4,543 in 1997 and $3,685 in 1996. 37 NOTE 7 - INCOME TAXES The provision for income taxes includes the following:
Jan. 30, Jan. 31, Feb. 1, Year ended 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Current: Federal $(10,295) $ 8,651 $45,831 State (537) 601 3,761 Deferred: Federal 12,266 15,487 8,225 State 876 1,106 588 - ---------------------------------------------------------------------------------------------------------------------------------- $ 2,310 $25,845 $58,405 - ---------------------------------------------------------------------------------------------------------------------------------- A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows: Jan. 30, Jan. 31, Feb. 1, Year ended 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 3.0 1.5 1.8 Job credits (5.8) (.3) - Other, net (0.5) (1.9) (.1) - ----------------------------------------------------------------------------------------------------------------------------------- 31.7% 34.3% 36.7% - ----------------------------------------------------------------------------------------------------------------------------------- Deferred income taxes relate to the following temporary differences: Jan. 30, Jan. 31, Feb. 1, Year ended 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Depreciation $ 11,508 $ 22,173 $ 9,330 Inventories 1,767 575 (1,593) Vacation accrual (387) (725) (593) Pension accrual 3,386 (2,118) 263 Store closing reserves 1,340 (3,866) - Insurance 1,939 (288) 1,096 Loss on real estate disposal (4,727) - - Other, net (1,684) 842 310 - ----------------------------------------------------------------------------------------------------------------------------------- $13,142 $16,593 $ 8,813 - -----------------------------------------------------------------------------------------------------------------------------------
38 The following are components of the net deferred tax accounts as of January 30, 1999:
Federal State Total - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Current $33,709 $2,408 $36,117 Long-term 24,408 1,743 26,151 Deferred tax liabilities: Current 17,774 1,270 19,044 Long-term 99,269 7,090 106,359 - ------------------------------------------------------------------------------------------------------------------------------------ The following are components of the net deferred tax accounts as of January 31, 1998: Federal State Total - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Current $33,817 $2,415 $36,232 Long-term 18,981 1,356 20,337 Deferred tax liabilities: Current 12,149 868 13,017 Long-term 87,308 6,237 93,545 - ------------------------------------------------------------------------------------------------------------------------------------ Items that gave rise to significant portions of the deferred tax accounts are as follows: Jan. 30, Jan. 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Inventories $ 7,734 $ 9,500 Vacation accrual 4,711 4,325 Minimum pension liability adjustment 820 820 Store closing reserves 2,526 3,866 Other, net 1,282 4,704 - ------------------------------------------------------------------------------------------------------------------------------------ $17,073 $23,215 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax liabilities: Depreciation $82,188 $70,681 Other, net (1,980) 2,527 - ------------------------------------------------------------------------------------------------------------------------------------ $80,208 $73,208 - ------------------------------------------------------------------------------------------------------------------------------------
39 NOTE 8 - NET EARNINGS PER SHARE For fiscal years 1998, 1997 and 1996, 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 subordinated notes, zero coupon convertible subordinated notes and the dilutive effects of stock options. Adjustments for convertible securities were antidilutive in 1998 and 1997, and therefore excluded from the computation of diluted EPS, however, these securities could potentially be dilutive in the future. Options to purchase 3,572,946 and 2,281,572 shares of common stock were outstanding at January 30, 1999 and January 31, 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. - ------------------------------------------------------------------------------- (in thousands, except per share amounts)
Fiscal 1998 Fiscal 1997 ---------------------------------- ------------------------------------------ Earnings Shares Per share Earnings Shares Per share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------ ------ ----------- ------------- ------ Basic EPS Earnings available to common stockholders $4,974 61,543 $.08 $49,611 61,133 $.81 ===== ===== Effect of Dilutive Securities Adjustment for interest on 4% convertible subordinated notes, net of tax - - - - Adjustment for interest on 4% zero coupon subordinated notes, net of tax - - - - Common shares assumed issued upon exercise of dilutive stock options - 197 - 524 Diluted EPS ------- ------ ------- ------ Earnings available to common stockholders assuming conversion $4,974 61,740 $.08 $49,611 61,657 $.80 ======= ====== ===== ======== ====== ===== [RESTUBBED TABLE] (in thousands, except per share amounts) Fiscal 1996 ---------------------------------- Earnings Shares Per share (Numerator) (Denominator) Amount ----------- ------------- ------- Basic EPS Earnings available to common stockholders $100,824 60,305 $1.67 ===== Effect of Dilutive Securities Adjustment for interest on 4% convertible subordinated notes, net of tax 2,168 2,104 Adjustment for interest on 4% zero coupon subordinated notes, net of tax 1,409 1,303 Common shares assumed issued upon exercise of dilutive stock options - 893 Diluted EPS -------- ------ Earnings available to common stockholders assuming conversion $104,401 64,605 $1.62 ======== ====== =====
40 NOTE 9 - 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. Under the terms of the Company's Incentive Stock Option Plan adopted in 1982, options to purchase up to 3,600,000 shares of the Company's common stock were authorized. Options granted prior to 1988 are exercisable from the date of grant. Options granted in 1988 and thereafter are exercisable on the second anniversary of the grant date. All options under this plan cannot be exercised more than ten years from the grant date. No additional options will be granted under this plan. Under the terms of the Company's Nonqualified Stock Option Plans, adopted in 1984 and 1985, options to purchase up to 3,300,000 shares of the Company's common stock were authorized. The options became exercisable over a five-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 granted cannot be exercised more than ten and one-half years after the grant date. No additional options will be granted under these plans. 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. Under this plan, both incentive and nonqualified stock options may be granted to eligible participants. Incentive stock options are exercisable on the second or third anniversary of the grant date and nonqualified options become exercisable over a five-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 January 30, 1999, 647,743 shares remain available for grant. Stock option transactions for the Company's stock option plans are summarized as follows:
Fiscal 1998 Fiscal 1997 Fiscal 1996 ------------------------ ----------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 3,465,194 $25.40 3,500,036 $23.34 4,031,329 $20.91 Granted 2,515,150 21.06 837,000 30.15 613,702 33.64 Exercised (107,825) 17.09 (487,914) 15.00 (988,605) 18.43 Canceled (889,758) 27.23 (383,928) 30.24 (156,390) 31.10 - --------------------------------------------------------------------------------------------------------------------------- Outstanding - end of year 4,982,761 23.02 3,465,194 25.40 3,500,036 23.34 - --------------------------------------------------------------------------------------------------------------------------- Options exercisable - at year end 2,359,724 21.94 1,988,209 21.08 2,227,917 18.53 Weighted average estimated fair value of options granted 8.44 11.00 11.28 - ---------------------------------------------------------------------------------------------------------------------------
41 The following table summarizes information about stock options outstanding at January 30, 1999:
Options Outstanding Options Exercisable ---------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 1/30/99 Life Price at 1/30/99 Price - ---------------------------------------------------------------------------------------------------------------------------------- $11.13 to $20.00 1,409,815 5 years $13.14 903,465 $12.39 $20.01 to $25.00 1,884,625 8 years 22.97 525,875 22.78 $25.01 to $30.00 190,056 6 years 28.04 173,924 28.01 $30.01 to $37.38 1,498,265 7 years 31.74 756,460 31.36 - ---------------------------------------------------------------------------------------------------------------------------------- $11.13 to $37.38 4,982,761 2,359,724 - ----------------------------------------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans for options granted in fiscal 1995 and thereafter been determined based on the fair value at the grant dates and recognized as compensation expense on a straight-line basis over the vesting period of the grant consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and net earnings per share would have been reduced to the pro forma amounts indicated below:
- ---------------------------------------------------------------------------------------------------- Fiscal 1998 Fiscal 1997 - ---------------------------------------------------------------------------------------------------- Net earnings: As reported $4,974 $49,611 Pro forma $ (757) $46,120 Net earnings per share: As reported Basic $ .08 $ .81 Diluted $ .08 $ .80 Pro forma Basic $ (.01) $ .75 Diluted $ (.01) $ .75 - ----------------------------------------------------------------------------------------------------
The pro forma effect on net earnings for fiscal 1998 and fiscal 1997 are not representative of the pro forma effect on net earnings in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The fair value of each option granted during fiscal 1998 and fiscal 1997 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: (i) 0.7% dividend yield for all years, (ii) expected volatility of 35% and 33%, respectively, (iii) risk-free interest rate ranges of 4% to 5.7% and 5.5% to 6.9%, respectively, and (iv) ranges of expected lives 4 years to 8 years and 3.5 years to 6.5 years, respectively. NOTE 10 - CONTINGENCIES The Company is a defendant in a purported class action entitled "Brian Lee, Anthony Baxton, and Harry Schlein v. The Pep Boys - Manny, Moe & Jack," in the Circuit Court of Mobile County, Alabama. The Company has moved to dismiss the case for failure to state a claim. The Company's motion to dismiss is pending before the Circuit Court of Mobile County, Alabama. In their complaint, the plaintiffs allege that the Company sold old or used automotive batteries to consumers as if those batteries were new. The complaint purports to state causes of action for fraud and deceit, negligent misrepresentation, breach of contract and violation of state consumer protection statutes. The plaintiffs are seeking compensatory and punitive damages, as well as injunctive and equitable relief. The Company believes the claims are without merit and intends 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, including the case above, are not singularly or in the aggregate, material to the Company's financial position or results of operations. 42 NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
January 30, 1999 January 31, 1998 ------------------------ --------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 114,548 $ 114,548 $ 10,811 $ 10,811 Accounts receivable 17,393 17,393 13,070 13,070 Liabilities: Accounts payable 240,391 240,391 409,053 409,053 Short-term borrowings - - 47,000 47,000 Long-term debt including current maturities 527,021 502,033 402,178 406,086 Convertible subordinated notes including current maturities 72,294 71,029 86,250 84,637 Zero coupon convertible subordinated notes 164,863 139,248 158,370 147,236 - --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND SHORT-TERM BORROWINGS The carrying amounts approximate fair value because of the short maturity of these items. LONG-TERM DEBT INCLUDING CURRENT MATURITIES, CONVERTIBLE SUBORDINATED NOTES INCLUDING CURRENT MATURITIES AND ZERO COUPON 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 January 30, 1999 and January 31, 1998. 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 that date, and current estimates of fair value may differ significantly from amounts presented herein. 43 NOTE 12 - SUBSEQUENT EVENT - DUTCH AUCTION SELF-TENDER STOCK REPURCHASE In December 1998, the Board of Directors authorized the purchase by the Company of up to 10,000,000 shares of the Company's common stock, plus an additional amount of shares not to exceed 2% of the Company's outstanding shares, together with associated common stock purchase rights issued pursuant to the Rights Agreement, dated as of December 5, 1997. The shares were repurchased pursuant to a Dutch Auction self-tender offer which commenced on December 23, 1998 and expired on January 25, 1999. The tender offer price range was from $13.50 to $16.00 net per share in cash. As a result of the self-tender offer, on February 1, 1999, the Company repurchased 11,276,698 common shares 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. Prior to the repurchase of the common shares, the Company had 63,847,640 shares outstanding, with 2,232,500 shares in a benefits trust, at January 30, 1999. As a result of the tender offer share repurchase, the Company had 11,276,698 shares in treasury and 2,195,270 shares in the benefits trust at February 1, 1999. The Company financed the tender offer share repurchase with $110,427 in cash and with the $70,000 proceeds received in connection with the private placement of Senior Notes on February 1, 1999. The Senior Notes were issued in two series at par and pay interest semiannually on January 31, and July 31, commencing July 31, 1999. Series A Senior Notes, with an aggregate principal balance of $25,000, will mature in 2009 and bear interest at 7.80% per annum. Series B Senior Notes with an aggregate principal balance of $45,000 will mature in 2011 and bear interest at 7.95% per annum. In addition, the interest rates on the Senior Notes are subject to a .50% increase for such time as the credit rating of the Company's long-term unsecured debt securities decreases below investment grade as rated by both Moody's and Standard & Poor's. Fees associated with the issuance of the debt are approximately $750 and have been capitalized and amortized over the life of the borrowing. Expenses related to the share repurchase are approximately $3,129 and are included as part of the cost of the shares acquired. The pro forma effects of the tender offer share repurchase and the related financing assuming such events had occurred on January 30, 1999 are summarized in the unaudited pro forma information below:
Pro Forma Pro Forma As Reported Jan. 30, 1999 Balance Sheet Information Jan. 30, 1999 (Unaudited) - --------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 114,548 $ 4,717 Total current assets 754,144 644,313 Total assets 2,096,112 1,987,031 Liabilities and Stockholders' Equity: Current liabilities 512,406 516,285 Long-term debt 526,851 596,851 Total liabilities 1,284,328 1,358,207 Stockholders' equity 811,784 628,824 - ---------------------------------------------------------------------------------
The unaudited pro forma information as of January 30, 1999 includes: a decrease in cash and cash equivalents related to the cash payment portion of the tender offer repurchase; an increase in other assets related to the capitalized costs of the new indebtedness incurred; an increase in current liabilities related to certain costs not paid at the closing of the tender offer repurchase; an increase in long-term debt related to additional borrowings to finance the tender offer repurchase; and a decrease in stockholders' equity primarily related to the shares acquired in the tender offer repurchase. 44
QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys - Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, except per share amounts) - -------------------------------------------------------------------------------------------------------------------------------- Net Earnings Cash Market Price Year Ended Total Gross Operating Net (Loss) Per Share Dividends Per Share Jan. 30, 1999 Revenues Profit Profit (Loss) Earnings (Loss) Basic Diluted Per Share High Low - -------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $584,224 $154,382 $28,143 $10,058 $.16 $.16 $.0650 26 11/16 21 5/16 2nd Quarter 635,301 172,408 40,368 17,704 .29 .29 .0650 23 3/4 16 13/16 3rd Quarter 615,967 140,077 5,635 (3,921) (.06) (.06) .0650 17 7/8 12 3/8 4th Quarter 563,216 105,029 (20,077) (18,867) (.31) (.31) .0650 17 1/16 12 1/2 - -------------------------------------------------------------------------------------------------------------------------------- Year Ended Jan. 31, 1998 - -------------------------------------------------------------------------------------------------------------------------------- 1st Quarter $489,278 $141,942 $44,403 $23,146 $.38 $.37 $.0600 35 29 3/8 2nd Quarter 539,298 160,465 55,717 30,088 .49 .47 .0600 35 5/8 30 3rd Quarter 525,564 152,866 46,525 24,120 .39 .38 .0600 34 7/8 23 5/8 4th Quarter 502,380 85,047 (35,848) (27,743) (.45) (.45) .0600 26 3/16 21 9/16 - --------------------------------------------------------------------------------------------------------------------------------
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. 45 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 caption "Election of Directors" 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 the caption "Executive Compensation - Report of Compensation Committee of the Board of Directors on Executive Compensation" and "Executive Compensation - Performance Graph" 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 "Outstanding Shares, Voting Rights and Shareholdings of Certain Persons - Share Ownership of Certain Beneficial Owners and Management" 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. 46 PART IV ITEM 14 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 26 Consolidated Balance Sheets - January 30, 1999 and January 31, 1998 27 Consolidated Statements of Earnings - Years ended January 30, 1999, January 31, 1998 and February 1, 1997 28 Consolidated Statements of Stockholders' Equity Years ended January 30, 1999, January 31, 1998 and February 1, 1997 29 Consolidated Statements of Cash Flows - Years ended January 30, 1999, January 31, 1998, and February 1, 1997 30 Notes to Consolidated Financial Statements 31 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves 56 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). (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
47
(4.2) Indenture, dated as of August Incorporated by reference from 31, 1994, between the Company the Registration Statement on and First Fidelity Bank, Form S-3 (File No. 33-55115). National Association as Trustee, including Form of Debenture (4.3) 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 (4.4) Indenture, dated as of September Incorporated by reference from 20, 1996, between the Company and the Registration Statement on the Trustee, providing for the Form S-3 (File No. 333-00985). Issuance of the LYONs (4.5) 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 (4.6) 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 Subordinated Debt Securities, and form of security (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)* 1982 Incentive Stock Option Plan Incorporated by reference from the Company's Form 10-K for the fiscal year ended January 31, 1982. (10.3)* 1984 Non-Qualified Stock Option Incorporated by reference from Plan the Company's Form 10-K for the fiscal year ended February 2, 1985. (10.4)* 1985 Non-Qualified Stock Option Incorporated by reference from Plan the Company's Form 10-K for the fiscal year ended February 2, 1985. (10.5) 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
48
(10.6)* Directors' Deferred Compensation Incorporated by reference from Plan, as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (10.7)* Form of Employment Agreement, as Incorporated by reference from amended, dated as of December 12, the Company's Form 10-K for the 1989 fiscal year ended February 3, 1990. (10.8)* Amendment No. 1 to the 1985 Incorporated by reference from Non-Qualified Stock Option Plan the Company's Form 10-K for the fiscal year ended January 28, 1989. (10.9)* Amendment No. 1 to the 1982 Incorporated by reference from Incentive Stock Option Plan the Company's Form 10-K for the fiscal year ended January 28, 1989. (10.10) 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). (10.11)* 1990 Stock Incentive Plan Incorporated by reference from the Company's Form 10-Q for the quarter ended November 3, 1990. (10.12)* Amendment No. 1 to 1990 Stock Incorporated by reference from Incentive Plan the Company's Form 10-K for the fiscal year ended February 1, 1992. (10.13)* 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 (10.14)* Amendment to the Executive Incorporated by reference from Supplemental Pension Plan the Company's Form 10-K for the (amended and restated effective fiscal year ended February 1, January 1, 1988), dated as of 1992. February 13, 1992 (10.15)* 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. (10.16)* Amendment No. 2 to the 1982 Incorporated by reference from Incentive Stock Option Plan the Company's Form 10-Q for the quarter ended October 31, 1992. (10.17)* Amendment No. 3 to the Non- Incorporated by reference from Qualified Stock Option Plan the Company's Form 10-Q for the quarter ended October 31, 1992.
49
(10.18)* Amendment No. 2 to the 1990 Incorporated by reference from Stock Incentive Plan the Company's Form 10-Q for the quarter ended October 31, 1992. (10.19) Not Used (10.20) Flexible Employee Benefits Trust Incorporated by reference from the Company's Form 8-K dated May 6, 1994. (10.21) Not Used (10.22) Credit Agreement dated as of Incorporated by reference from April 21, 1995 between the the Company's Form 10-Q for the Company and The Chase Manhattan quarter ended April 29, 1995. Bank (Agent) (10.23) Transaction Agreement, including Incorporated by reference from amendments, among The Pep Boys - the Company's Form 10-K for the Manny, Moe & Jack, State Street year ended February 1, 1997. Bank and Trust Company (Trustee) and Citicorp Leasing, Inc., dated as of November 13, 1995 (10.24) Master Lease, including amendments, Incorporated by reference from between State Street Bank and Trust the Company's Form 10-K for the Company (Trustee) and The Pep Boys - Manny, year ended February 1, 1997. Moe & Jack, dated as of November 13, 1995 (10.25) Master Lease, including amendments, Incorporated by reference from between State Street Bank and Trust the Company's Form 10-K for the Company (Trustee) and The Pep Boys - Manny, year ended January 31, 1998. Moe & Jack dated as of February 28, 1997 (10.26) Transaction Agreement, including Incorporated by reference from amendments, between State Street the Company's Form 10-K for the Bank and Trust Company (Trustee) and The year ended January 31, 1998. Pep Boys - Manny, Moe & Jack dated as of February 28, 1997 (10.27) Amendment No. 1 to the Credit Incorporated by reference from Agreement dated as of April 21, 1995 the Company's Form 10-K for the between the Company and The Chase year ended January 31, 1998. Manhattan Bank (Agent) (10.28)* The Pep Boys - Manny, Moe & Jack Incorporated by reference from Pension Plan the Company's Form 10-K for the year ended January 31, 1998.
50
(10.29)* The Pep Boys Savings Plan Incorporated by reference from the Company's Form 10-K for the year ended January 31, 1998. (10.30)* The Pep Boys Savings Plan - Puerto Rico Incorporated by reference from the Company's Form 10-K for the year ended January 31, 1998. (10.31) Amendment No. 2 dated as of July 31,1998 Incorporated by reference from to the Credit Agreement dated as of April the Company's Form 10-Q for the 21, 1995 between the Company, the Banks quarter ended August 1, 1998. signatory thereto and The Chase Manhattan Bank (Agent) (10.32) Amendment to Transaction Agreement between Incorporated by reference from the Company and State Street Bank and Trust the Company's Form 10-Q for the Company (Trustee) dated as of February 28, 1997 quarter ended August 1, 1998. (10.33) Amendment dated as of July 31, 1998 to Master Incorporated by reference from Lease between the Company and State Street the Company's Form 10-Q for the Bank and Trust Company (Trustee) dated as of quarter ended August 1, 1998. November 13, 1995 (10.34) Amendment dated as of July 31, 1998 to Master Incorporated by reference from Lease between the Company and State Street the Company's Form 10-Q for the Bank and Trust Company (Trustee) dated as of quarter ended August 1, 1998. February 28, 1997 (10.35) Amendment No. 3 dated as of October 31, 1998 Incorporated by reference from to the Amended and Restated Credit Agreement the Company's Form 10-Q for the dated as of April 21, 1995 among the Company, quarter ended October 31, 1998. the Banks signatory thereto and The Chase Manhattan Bank, as Agent. (10.36) Third Amendment dated as of October 31, 1998 Incorporated by reference from to Transaction Agreement between the Company and the Company's Form 10-Q for the State Street Bank and Trust Company (Trustee) dated quarter ended October 31, 1998. as of February 28, 1997. (10.37) Third Amendment dated as of October 31, 1998 Incorporated by reference from to Master Lease between the Company and State the Company's Form 10-Q for the Street Bank and Trust Company (Trustee) dated as of quarter ended October 31, 1998. November 13, 1995. (10.38) Second Amendment dated as of October 31, 1998 Incorporated by reference from to Master Lease between the Company and State the Company's Form 10-Q for the Street Bank and Trust Company (Trustee) dated as of quarter ended October 31, 1998. February 28, 1997.
51
(10.39) Fourth Amendment dated as of October 31, 1998 Incorporated by reference from to Transaction Agreement between the Company the Company's Form 10-Q for the and State Street Bank and Trust Company (Trustee) quarter ended October 31, 1998. dated as of November 13, 1995. (10.40)* 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. (10.41)* 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. (10.42) Third Amendment dated as of January 21, 1999 to Master Lease between the Company and State Street Bank and Trust Company (Trustee) dated as of February 28, 1997. (10.43) Fourth Amendment dated as of January 21, 1999 to Transaction Agreement between the Company and State Street Bank and Trust Company (Trustee) dated as of February 28, 1997. (10.44) Fifth Amendment dated as of January 21, 1999 to Transaction Agreement between the Company and State Street Bank and Trust Company (Trustee) dated as of November 13, 1995. (10.45) Fourth Amendment dated as of January 21, 1999 to Master Lease between the Company and State Street Bank and Trust Company (Trustee) dated as of November 13, 1995. (10.46) Amendment No. 4 dated as of January 22, 1999 to the Amended and Restated Credit Agreement dated as of April 21, 1995 among the Company, the Banks signatory thereto and The Chase Manhattan Bank, as Agent. (10.47) Note purchase agreement dated January 26, 1999 The Company hereby agrees to relating to the sale of the Company's Series A file such document upon request and Series B Senior Notes used for the financing of the Securities and Exchange of the Company's self tender offer. Commission. (10.48) The Pep Boys - Manny, Moe & Jack Annual Incentive Bonus Plan, as amended and restated. (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent (27) Financial Data Schedule
(b) A Form 8-K was filed on January 19, 1999 relating to the the financing of the Company's self tender offer. A Form 8-K was filed on July 2, 1998 relating to the computation of ratio of earnings to fixed charges. * Management contract or compensatory plan or arrangement. 52 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, 1999 by: /s/ Michael J. Holden -------------- --------------------- Michael J. Holden Executive Vice President and Chief Financial Officer 53 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, President April 28, 1999 Mitchell G. Leibovitz and Chief Executive Officer (Principal Executive Officer) /s/ Michael J. Holden Executive Vice President - April 28, 1999 Michael J. Holden Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Lennox K. Black Director April 28, 1999 Lennox K. Black /s/ Bernard J. Korman Director April 28, 1999 Bernard J. Korman /s/ J. Richard Leaman, Jr. Director April 28, 1999 J. Richard Leaman, Jr. /s/ Malcolmn D. Pryor Director April 28, 1999 Malcolmn D. Pryor /s/ Lester Rosenfeld Director April 28, 1999 Lester Rosenfeld /s/ Benjamin Strauss Director April 28, 1999 Benjamin Strauss /s/ Myles H. Tanenbaum Director April 28, 1999 Myles H. Tanenbaum
54 FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K 55
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 January 30, 1999 $265 $1,643 $ - $912 $996 - ---------------------------------------------------------------------------------------------------------------------------- Year Ended January 31, 1998 $252 $541 $ - $528 $265 - ---------------------------------------------------------------------------------------------------------------------------- Year Ended February 1, 1997 $251 $317 $ - $316 $252 - ----------------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off. 56 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 26 Consolidated Balance Sheets - January 30, 1999 and January 31, 1998 27 Consolidated Statements of Earnings - Years ended January 30, 1999, January 31, 1998 and February 1, 1997 28 Consolidated Statements of Stockholders' Equity Years ended January 30, 1999, January 31, 1998 and February 1, 1997 29 Consolidated Statements of Cash Flows - Years ended January 30, 1999, January 31, 1998 and February 1, 1997 30 Notes to Consolidated Financial Statements 31 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 (10.42) Third Amendment dated as of January 21, 1999 to Master Lease between the Company and State Street Bank and Trust Company (Trustee) dated as of February 28, 1997. (10.43) Fourth Amendment dated as of January 21, 1999 to Transaction Agreement between the Company and State Street Bank and Trust Company (Trustee) dated as of February 28, 1997. (10.44) Fifth Amendment dated as of January 21, 1999 to Transaction Agreement between the Company and State Street Bank and Trust Company (Trustee) dated as of November 13, 1995. 57 (10.45) Fourth Amendment dated as of January 21, 1999 to Master Lease between the Company and State Street Bank and Trust Company (Trustee) dated as of November 13, 1995. (10.46) Amendment No. 4 dated as of January 22, 1999 to the Amended and Restated Credit Agreement dated as of April 21, 1995 among the Company, the Banks signatory thereto and The Chase Manhattan Bank, as Agent. (10.48) The Pep Boys - Manny, Moe & Jack Annual Incentive Bonus Plan, as amended and restated. (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent (27) Financial Data Schedules 58 EX-10.42 2 Exhibit 10.42 THIRD AMENDMENT TO MASTER LEASE (1997 Pep Boys II Leased Property Facility) This THIRD AMENDMENT TO MASTER LEASE dated as of January 21, 1999 (this "Amendment"), is entered into by and between STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, not individually but solely in its capacity as Trustee under that certain "Declaration of Trust" (herein so called) dated as of February 28, 1997 (in such capacity, and not individually, "Lessor"), having an address at Two International Place, Fourth Floor, Boston, Massachusetts 02110, Attn: Corporate Trust Department, THE PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation ("Lessee Parent"), THE PEP BOYS MANNY MOE & JACK OF CALIFORNIA, a California corporation ("Pep Boys - California"), and PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC. ("Pep Boys - Delaware"), each having an address at 3111 W. Allegheny Avenue, Philadelphia, Pennsylvania 19132. Lessee Parent, Pep Boys - California, and Pep Boys - Delaware are herein referred to, singly or collectively as the context may require, as the "Lessee." RECITALS On or about February 28, 1997, Lessor and Lessee entered into a certain Master Lease (as heretofore amended, supplemented or otherwise modified from time to time, the "Lease") relating to certain real property to be leased from time to time by Lessor to Lessee. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Lease. Lessor and Lessee, with the consent of Citicorp Leasing, Inc., as Agent on behalf of the Instrument Holders, have agreed to amend the Lease in certain respects. 1 NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereto have agreed to amend, and do hereby amend, the Lease as follows: AGREEMENTS 1. In the event that the modifications to the terms of Section 8(e) of the Lease Guarantee that are provided for in the amendment to the Lease Guarantee executed contemporaneously herewith become effective (i.e., if the conditions to the effectiveness of all or any of such modifications to the Lease Guarantee are satisfied) then (and only then) the definition of "Applicable Spread" contained in Paragraph C of Exhibit A attached to the Lease is hereby amended in its entirety as follows, with such amendment to be effective beginning on the first day of the month during which such modifications become effective: "Applicable Spread" means, as applicable, the amount based on the debt rating most recently issued by Standard & Poor's for Lessee's senior unsecured debt as of any Adjustment Date determined by reference to the following: Lessee's Most Recent Debt Rating Applicable Spread BBB+ (or higher) 83 basis points (0.83%) BBB 107 basis points (1.07%) BBB- 155 basis points (1.55%) less than BBB- 227 basis points (2.27%) 2. Until such time as the modifications to the terms of Section 8(e) of the Lease Guarantee that are provided for in the contemporaneous amendment to the Lease Guarantee hereinabove referred to become effective, the modifications to the Applicable Spread provided for above in Paragraph 1 of this Amendment above shall not be effective and the Applicable Spread (as previously amended) shall remain in effect. 3. Except as amended hereby, the terms and provisions of the Lease, as heretofore amended, shall be and remain in full force and effect and are hereby ratified and affirmed. By its execution hereof Lessee Parent hereby ratifies and affirms each and every representation, warranty, covenant, obligation and indemnity contained in the Lease as of the date hereof. 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. [SEE ATTACHED SIGNATURE PAGES] SIGNATURE PAGE OF LESSOR ATTACHED TO THIRD AMENDMENT TO MASTER LEASE LESSOR: STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, not in its individual capacity but solely as Trustee under the Declaration of Trust dated February 28, 1997 By: Donald E.Smith,Vice President 3 SIGNATURE PAGE OF LESSEE ATTACHED TO THIRD AMENDMENT TO MASTER LEASE LESSEE: THE PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation By: Name: Title: THE PEP BOYS MANNY MOE & JACK, OF CALIFORNIA, a California corporation By: Name: Title: PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC., a Delaware corporation By: Name: Title: SIGNATURE PAGE OF AGENT ATTACHED TO THIRD AMENDMENT TO MASTER LEASE The foregoing amendment is hereby approved. AGENT: CITICORP LEASING, INC. By: Edward S. Mundy,Vice President 4 EX-10.43 3 Exhibit 10.43 FOURTH AMENDMENT TO MASTER LEASE (1995 Pep Boys Leased Property Facility) This FOURTH AMENDMENT TO MASTER LEASE dated as of January 21, 1999 (this "Amendment"), is entered into by and between STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, not individually but solely in its capacity as Trustee under that certain "Declaration of Trust" (herein so called) dated November 13, 1995 (in such capacity, and not individually, "Lessor"), having an address at Two International Place, Fourth Floor, Boston, Massachusetts 02110, Attention: Corporate Trust Department, THE PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation ("Lessee Parent"), THE PEP BOYS MANNY MOE & JACK OF CALIFORNIA, a California corporation ("Pep Boys-California") and PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC., a Delaware corporation ("Pep Boys-Delaware"), each having an address at 3111 W. Allegheny Avenue, Philadelphia, Pennsylvania 19132. Lessee Parent, Pep Boys-California, and Pep Boys-Delaware are herein referred to, singularly or collectively as the context may require, as the "Lessee". RECITALS On or about November 13, 1995, Lessor and Lessee entered into a certain Master Lease (as heretofore amended, supplemented or otherwise modified from time to time, the "Lease") relating to certain real property to be leased from time to time by Lessor to Lessee. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Lease. Lessor and Lessee, with the consent of Citicorp Leasing, Inc., as Agent on behalf of the Instrument Holders, have agreed to amend the Lease in certain respects. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the parties hereto have agreed to amend, and do hereby amend, the Lease as follows: 1 AGREEMENTS 1. In the event that the modifications to the terms of Section 8(e) of the Lease Guarantee that are provided for in the amendment to the Lease Guarantee executed contemporaneously herewith become effective (i.e., if the conditions to the effectiveness of all or any of such modifications to the Lease Guarantee are satisfied) then (and only then) the definition of "Applicable Spread" contained in Paragraph C of Exhibit A attached to the Lease is hereby amended in its entirety as follows, with such amendment to be effective beginning on the first day of the month during which such modifications become effective: "Applicable Spread" means, as applicable, the amount based on the debt rating most recently issued by Standard & Poor's for Lessee's senior unsecured debt as of any Adjustment Date determined by reference to the following: Lessee's Most Recent Debt Rating Applicable Spread BBB+ (or higher) 83 basis points (0.83%) BBB 107 basis points (1.07%) BBB- 155 basis points (1.55%) less than BBB- 227 basis points (2.27%) 2. Until such time as the modifications to the terms of Section 8(e) of the Lease Guarantee that are provided for in the contemporaneous amendment to the Lease Guarantee hereinabove referred to become effective, the modifications to the Applicable Spread provided for above in Paragraph 1 of this Amendment above shall not be effective and the Applicable Spread (as previously amended) shall remain in effect. 3. Except as amended hereby, the terms and provisions of the Lease, as heretofore amended, shall be and remain in full force and effect and are hereby ratified and affirmed. By its execution hereof Lessee Parent hereby ratifies and affirms each and every representation, warranty, covenant, obligation and indemnity contained in the Lease as of the date hereof. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. 2 [SEE ATTACHED SIGNATURE PAGES] SIGNATURE PAGE OF LESSOR ATTACHED TO FOURTH AMENDMENT TO MASTER LEASE LESSOR: STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, not in its individual capacity but solely as Trustee under the Declaration of Trust dated November 13, 1995 By: Donald E. Smith, Vice President 3 SIGNATURE PAGE OF LESSEE ATTACHED TO FOURTH AMENDMENT TO MASTER LEASE LESSEE: THE PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation By: Name: Title: THE PEP BOYS MANNY MOE & JACK, OF CALIFORNIA, a California corporation By: Name: Title: PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC., a Delaware corporation By: Name: Title: SIGNATURE PAGE OF AGENT ATTACHED TO FOURTH AMENDMENT TO MASTER LEASE The foregoing amendment is hereby approved. AGENT: CITICORP LEASING, INC. By: Edward S. Mundy, Vice President 4 EX-10.44 4 Exhibit 10.44 FIFTH AMENDMENT TO TRANSACTION AGREEMENT (1995 Pep Boys Leased Property Facility) This FIFTH AMENDMENT TO TRANSACTION AGREEMENT dated as of the 21st day of January, 1999 (this "Amendment"), is entered into by and among THE PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation ("Lessee" and "Lease Guarantor"); STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, not in its individual capacity except as expressly stated in the Transaction Agreement, but solely as Trustee under the Declaration of Trust (State Street Bank and Trust Company, when acting in its capacity as such Trustee, together with any successor trustee under the Declaration of Trust, is herein referred to as the "Trustee", and State Street Bank and Trust Company, when acting in its individual capacity, is herein referred to as "Trust Company"); CITICORP LEASING, INC., a Delaware corporation ("CLI"), on behalf of itself as the initial Purchaser and initial Instrument Holder under the Transaction Agreement and on behalf of the other financial institutions that may, from time to time, become Purchasers or Instrument Holders thereunder; and CITICORP LEASING, INC., a Delaware corporation ("Agent"), in its capacity as the initial administrative agent for the Instrument Holders under the Transaction Agreement. Capitalized terms used but not otherwise defined in this Amendment shall have the meanings set forth in the Transaction Agreement. RECITALS A. Effective as of November 13, 1995, Lessee, Trustee and CLI, for itself and as Agent, entered into that certain Transaction Agreement (as heretofore amended, supplemented or otherwise modified from time to time, the "Transaction Agreement") pursuant to the terms of which Trustee has acquired the Property. The Property has been leased to Lessee (and, where applicable, certain Additional Lessees that are wholly-owned subsidiaries of Lessee) by Trustee (and in certain cases by a co- trustee appointed pursuant to the terms of Section 8.04 of the Declaration of Trust) under that certain Master Lease of even date with the Transaction Agreement between Trustee, as lessor, and Lessee, as lessee (as heretofore amended, supplemented or otherwise modified from time to time, the "Lease"). 1 B. Pursuant to the terms and provisions of that certain Lease Guarantee dated of even date with the Lease ("Lease Guarantee"), the Obligations (as defined in the Lease Guarantee) of Lessee under the Lease have been guaranteed by Lease Guarantor. C. The parties have agreed to certain modifications to the Transaction Agreement. NOW, THEREFORE, in consideration of the premises and agreements set forth herein and therein, the parties agree as follows: 1. In the event that the modifications to the terms of Section 8(e) of the Lease Guarantee that are provided for in the amendment to the Lease Guarantee executed contemporaneously herewith become effective (i.e., if the conditions to the effectiveness of all or any of such modifications to the Lease Guarantee are satisfied) then (and only then) the definition of "Spread" contained in Schedule 1 attached to the Transaction Agreement is hereby amended in its entirety as follows, with such amendment to be effective as of the first day of the Interest Period during which such modifications become effective: "'Spread' shall be either (A) in the case of the Certificates, 275 basis points, or (B) in the case of the A- Notes and the B-Notes, the number of basis points determined by reference to the following chart, based on the Debt Rating of Lessee as of the beginning of the applicable Interest Period: Lessee's Most Recent Debt Rating Applicable Spread BBB+ (or higher) 75 basis points (0.75%) BBB 100 basis points (1.00%) BBB- 150 basis points (1.50%) less than BBB- 225 basis points (2.25%)" 2. Until such time as the modifications to the terms of Section 8(c) of the Lease Guarantee that are provided for in the contemporaneous amendment to the Lease Guarantee referred to hereinabove become effective, the modifications to the Spread provided for in paragraph 1 of this Amendment shall not be effective and the Spread (as previously amended) shall remain in effect. 3. Except as amended hereby, the terms and provisions of the Transaction Agreement shall be and remain in full force and effect and are hereby ratified and affirmed. By its execution hereof Lessee Parent hereby ratifies and affirms each and every representation, warranty, covenant, obligation and indemnity contained in the Transaction Agreement as of the date hereof. 2 4. By its execution hereof, Lease Guarantor hereby ratifies and affirms each and every representation, warranty, covenant, obligation and indemnity contained in the Lease Guarantee as of the date hereof and acknowledges that the Lease Guarantee remains in full force and effect. 5. By their execution hereof, Lessee, Pep Boys - Manny, Moe & Jack of Delaware, Inc., a Delaware corporation ("Pep Boys- Delaware"), and The Pep Boys Manny Moe & Jack of California, a California corporation ("Pep Boys-California"), as Indemnitors, hereby ratify and affirm each and every representation, warranty, covenant, obligation and indemnity contained in that certain Environmental Indemnity Agreement dated of even date with the Transaction Agreement as of the date hereof and acknowledge that the Environmental Indemnity Agreement remains in full force and effect. 6. By their execution hereof, Pep Boys-Delaware and Pep Boys-California, in their capacity as Additional Lessees under the Lease, along with Lessee Parent in its capacity as Lessee under the Lease, hereby ratify and affirm each and every representation, warranty, covenant, obligation and indemnity contained in the Lease as of the date hereof and acknowledge that the Lease remains in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the date first above written. 3 [SEE ATTACHED SIGNATURE PAGES] SIGNATURE PAGE OF THE PEP BOYS - MANNY, MOE & JACK ATTACHED TO FIFTH AMENDMENT TO TRANSACTION AGREEMENT LESSEE, LESSEE PARENT, LEASE GUARANTOR AND INDEMNITOR: THE PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation By: Name: Title: SIGNATURE PAGE OF TRUSTEE AND TRUST COMPANY ATTACHED TO FIFTH AMENDMENT TO TRANSACTION AGREEMENT TRUSTEE: STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (not in its individual capacity, but solely as Trustee) By: Donald E. Smith, Vice President TRUST COMPANY: STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (in its individual capacity, but only as expressly stated herein) By: Donald E. Smith, Vice President 4 SIGNATURE PAGE OF CLI AND AGENT ATTACHED TO FIFTH AMENDMENT TO TRANSACTION AGREEMENT AGENT and CLI: CITICORP LEASING, INC., a Delaware corporation By: Edward S. Mundy, Vice President SIGNATURE PAGE OF ADDITIONAL LESSEES ATTACHED TO FIFTH AMENDMENT TO TRANSACTION AGREEMENT ADDITIONAL LESSEES AND INDEMNITORS: PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC., a Delaware corporation By: Name: Title: THE PEP BOYS MANNY MOE & JACK OF CALIFORNIA, a California corporation By: Name: Title: 5 EX-10.45 5 Exhibit 10.45 FOURTH AMENDMENT TO TRANSACTION AGREEMENT (1997 Pep Boys II Leased Property Facility) This FOURTH AMENDMENT TO TRANSACTION AGREEMENT dated as of the 21st day of January, 1999 (this "Amendment"), is entered into by and among THE PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation ("Lessee" and "Lease Guarantor"); STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, not in its individual capacity except as expressly stated in the Transaction Agreement, but solely as Trustee under the Declaration of Trust (State Street Bank and Trust Company, when acting in its respective capacities as such Trustee, together with any successor trustee under the Declaration of Trust, is herein referred to as the "Trustee" and State Street Bank and Trust Company, when acting in its individual capacity, is herein referred to as "Trust Company"); CITICORP LEASING, INC., a Delaware corporation ("CLI"), on behalf of itself as a Purchaser and Instrument Holder under the Transaction Agreement and on behalf of the other financial institutions that may, from time to time, become Purchasers or Instrument Holders thereunder; BANK OF MONTREAL ("Bank of Montreal"), as a Purchaser and Instrument Holder under the Transaction Agreement; and CITICORP LEASING, INC., a Delaware corporation ("Agent"), in its capacity as the administrative agent for the Instrument Holders under the Transaction Agreement. Capitalized terms used but not otherwise defined in this Amendment shall have the meanings set forth in the Transaction Agreement. 1 RECITALS A. Effective as of February 28, 1997, Lessee, Trustee, CLI, Bank of Montreal, and Agent entered into that certain Transaction Agreement (as heretofore amended, supplemented or otherwise modified from time to time, the "Transaction Agreement") pursuant to the terms of which Trustee has acquired the Property. The Property has been leased to Lessee (and, where applicable, certain Additional Lessees that are wholly-owned subsidiaries of Lessee) by Trustee (and in certain cases by a co- trustee appointed pursuant to the terms of Section 8.04 of the Declaration of Trust) under that certain Master Lease of even date with the Transaction Agreement between Trustee, as lessor, and Lessee, as lessee (as heretofore amended, supplemented or otherwise modified from time to time, the "Lease"). B. Pursuant to the terms and provisions of that certain Lease Guarantee dated of even date with the Lease ("Lease Guarantee"), the Obligations (as defined in the Lease Guarantee) of Lessee under the Lease have been guaranteed by Lease Guarantor. C. The parties have agreed to certain modifications to the Transaction Agreement. NOW, THEREFORE, in consideration of the premises and agreements set forth herein and therein, the parties agree as follows: 1. In the event that the modifications to the terms of Section 8(e) of the Lease Guarantee that are provided for in the amendment to the Lease Guarantee executed contemporaneously herewith become effective (i.e., if the conditions to the effectiveness of all or any of such modifications to the Lease Guarantee are satisfied) then (and only then) the definition of "Spread" contained in Schedule 1 attached to the Transaction Agreement is hereby amended in its entirety as follows, with such amendment to be effective as of the first day of the Interest Period during which such modifications become effective: 2 "'Spread' shall be either (A) in the case of the Certificates, 275 basis points, or (B) in the case of the A- Notes and the B-Notes, the number of basis points determined by reference to the following chart, based on the Debt Rating of Lessee as of the beginning of the applicable Interest Period: Lessee's Most Recent Debt Rating Applicable Spread BBB+ (or higher) 75 basis points (0.75%) BBB 100 basis points (1.00%) BBB- 150 basis points (1.50%) less than BBB- 225 basis points (2.25%)" 2. Until such time as the modifications to the terms of Section 8(c) of the Lease Guarantee that are provided for in the contemporaneous amendment to the Lease Guarantee referred to hereinabove become effective, the modifications to the Spread provided for in paragraph 1 of this Amendment shall not be effective and the Spread (as previously amended) shall remain in effect. 3. Except as amended hereby, the terms and provisions of the Transaction Agreement shall be and remain in full force and effect and are hereby ratified and affirmed. By its execution hereof Lessee Parent hereby ratifies and affirms each and every representation, warranty, covenant, obligation and indemnity contained in the Transaction Agreement as of the date hereof. 4. By its execution hereof, Lease Guarantor hereby ratifies and affirms each and every representation, warranty, covenant, obligation and indemnity contained in the Lease Guarantee as of the date hereof and acknowledges that the Lease Guarantee remains in full force and effect. 5. By their execution hereof, Lessee, Pep Boys - Manny, Moe & Jack of Delaware, Inc., a Delaware corporation ("Pep Boys- Delaware"), and The Pep Boys Manny Moe & Jack of California, a California corporation ("Pep Boys-California"), as Indemnitors, hereby ratify and affirm each and every representation, warranty, covenant, obligation and indemnity contained in that certain Environmental Indemnity Agreement dated of even date with the Transaction Agreement as of the date hereof and acknowledge that the Environmental Indemnity Agreement remains in full force and effect. 3 6. By their execution hereof, Pep Boys-Delaware and Pep Boys-California, in their capacity as Additional Lessees under the Lease, along with Lessee Parent in its capacity as Lessee under the Lease, hereby ratify and affirm each and every representation, warranty, covenant, obligation and indemnity contained in the Lease as of the date hereof and acknowledge that the Lease remains in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the date first above written. 4 [SEE ATTACHED SIGNATURE PAGES] SIGNATURE PAGE OF THE PEP BOYS - MANNY, MOE & JACK ATTACHED TO FOURTH AMENDMENT TO TRANSACTION AGREEMENT LESSEE, LESSEE PARENT, LEASE GUARANTOR AND INDEMNITOR: THE PEP BOYS - MANNY, MOE & JACK, a Pennsylvania corporation By: Name: Title: SIGNATURE PAGE OF TRUSTEE AND TRUST COMPANY ATTACHED TO FOURTH AMENDMENT TO TRANSACTION AGREEMENT TRUSTEE: STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (not in its individual capacity, but solely as Trustee) By: Donald E. Smith, Vice President TRUST COMPANY: STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (in its individual capacity, but only as expressly stated herein) By: Donald E. Smith, Vice President 5 SIGNATURE PAGE OF CLI AND AGENT ATTACHED TO FOURTH AMENDMENT TO TRANSACTION AGREEMENT AGENT and CLI: CITICORP LEASING, INC., a Delaware corporation By: Edward S. Mundy, Vice President SIGNATURE PAGE OF BANK OF MONTREAL ATTACHED TO FOURTH AMENDMENT TO TRANSACTION AGREEMENT Bank of Montreal: BANK OF MONTREAL By: Name: Title: SIGNATURE PAGE OF ADDITIONAL LESSEES ATTACHED TO FOURTH AMENDMENT TO TRANSACTION AGREEMENT ADDITIONAL LESSEES AND INDEMNITORS: PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC., a Delaware corporation By: Name: Title: THE PEP BOYS MANNY MOE & JACK OF CALIFORNIA, a California corporation By: Name: Title: 6 EX-10.46 6 Exhibit 10.46 AMENDMENT NO. 4 AMENDMENT NO. 4 dated as of January 22, 1999 to the AMENDED AND RESTATED CREDIT AGREEMENT dated as of April 21, 1995 among THE PEP BOYS - MANNY, MOE & JACK, the Banks signatory thereto and THE CHASE MANHATTAN BANK, as Agent. W I T N E S S E T H: WHEREAS, the Company, the Banks and the Agent are parties to the Amended and Restated Credit Agreement referred to above (as heretofore amended, the "Credit Agreement") pursuant to which the Banks have agreed to extend credit to the Company as provided therein; WHEREAS, the Company intends to repurchase up to $200,000,000 of its outstanding common stock; WHEREAS, in connection with the aforesaid stock repurchase, the Company has requested the Banks and the Agent to amend the Credit Agreement as herein after set forth; WHEREAS, the Majority Banks and the Agent are agreeable to such amendment on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein it is hereby agreed as follows: 1. Definitions. All terms defined in the Credit Agreement shall be used herein as defined in the Credit Agreement unless otherwise defined herein or the context otherwise requires. 1 2. Amendments to the Agreement. (a) Section 9.07 of the Credit Agreement is hereby further amended by restating it in its entirety to read as follows: "9.07 Leverage Ratio. The company will not at any time permit the Leverage Ratio to exceed (a) 2.35 to 1.0, for the period from January 30, 1999 through January 29, 2000; (b) 2.20 to 1.0, for the period from January 30, 2000 through February 3, 2001; (c) 2.0 to 1.0 for the period from February 4, 2001 to February 2, 2002 and (d) 1.60 to 1.0, at any time thereafter. (b) Section 9.10 of the Agreement is hereby amended by restating it in its entirety to read as follows: "9.10 NOP/Interest Charges Ratio. The Company will not at any time permit the NOP/Interest Charges Ratio to be less than: (a) 1.65 to 1.0, for the period from January 30, 1999 through April 30, 1999; (b) 1.75 to 1.0, for the period from May 1, 1999 through October 29, 1999; (c) 2.0 to 1.0, for the period from October 30, 1999 through January 28, 2000; and (d) 2.50 to 1.0, at any time thereafter." 2 (c) The Pricing Schedule is hereby amended in its entirety to read as follows: "PRICING SCHEDULE Each of the 'Applicable Margin,' 'Commitment Fee Rate' and 'Facility Fee Rate' means, for any day, the per annum rates set forth below in the column under such term and in the row corresponding to the 'Debt to Capital Ratio' that exists on such day; provided that until the Company maintains the NOP/Interest Charges Ratio at 2.25 to 1.0 or greater, the 'Applicable Margin,' 'Commitment Fee Rate,' and 'Facility Fee Rate' shall be no less than the per annum rate set forth below in the column under such term and in the row corresponding to the 'Debt to Capital Ratio' in the range of 0.45 to < or = 0.50; provided further that, if the Company's long term debt rating from either Standard & Poor's or Moody's Investors Service, Inc. falls below investment grade, the Applicable Margin for each of the tiers set forth below shall be increased by an additional 0.25% until the Company's ratings from both Standard & Poor's or Moody's Investors Service, Inc. are investment grade. The aforesaid increase in the percentages set forth below shall be effective as of the date on which it is first announced by the applicable rating agency that the Company's rating has fallen below investment grade. Debt to Applicable Commitment Facility Capital Margin for Fee Rate Fee Rate Ratio Eurodollar Loans <0.40 0.425% 0.025% 0.20 % >0.40 but < or = 0.45 0.50% 0.05% 0.25% 0.45 but < or = 0.50 0.70% 0.05% 0.30% 0.50 but < or = 0.55 0.90% 0.05% 0.35% > 0.55 1.10% 0.05% 0.40% 3 3. Representations and Warranties. In order to induce the Majority Banks and the Agent to make this Amendment, the Company hereby represents that: (a) the execution and delivery of this Amendment and the performance of the Company thereunder and under the Credit Agreement as amended hereby (i) have been duly authorized by all necessary corporate action, will not violate any provision of law, or the Company's charter or by-laws, or result in the breach of or constitute a default, or require a consent, under any indenture or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or their respective property may be bound or affected, and (ii) each of this Amendment and the Credit Agreement as amended hereby constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms; (b) the representations and warranties in Section 8 of the Credit Agreement are true and correct as of the Closing Date (hereinafter defined) as if they were being made on such date; and (c) no Event of Default or event which with notice or lapse of time, or both, would constitute an Event of Default, has occurred and is continuing on the Closing Date. 4. Conditions of Effectiveness. This Amendment shall be effective (as of the date hereof) on the date when all of the following conditions shall have been met, and such date shall be the "Closing Date": (a) Counterparts of this Amendment shall have been executed by the Company, the Banks and the Agent; (b) The Agent shall have received a certificate dated the Closing Date specifying the names and titles and including specimen signatures of the officers authorized to sign this Amendment; (c) The Company shall have repurchased more than $50,000,000 of its outstanding common stock; and 4 (d) The Company shall have paid to the Agent, for the account of each Bank that has executed and delivered a counterpart of this Amendment on or prior to January 22, 1999 (or advised the Agent in a manner satisfactory to it that such Bank has executed this Amendment on or prior to January 22, 1999), an amendment fee equal to 0.20% of the amount of such Bank's Commitment. The amendment fee shall be payable in two equal installments, the first installment shall be payable on the date on which the Company signs this Amendment and the second installment shall be payable on the date on which the Company shall have repurchased more than $50,000,000 of its outstanding common stock. 5. Miscellaneous. (a) Except as specifically amended hereby, all the provisions of the Credit Agreement shall remain unamended and in full force and effect, and the term "Credit Agreement", and words of like import shall be deemed to refer to the Credit Agreement as amended by this Amendment unless otherwise provided herein or the context otherwise requires. Nothing herein shall affect the obligations of the Company under the Credit Agreement with respect to any period prior to the effective date hereof. (b) This Amendment shall be governed by and construed and interpreted in accordance with the laws of the State of New York. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers as of the day and year first above written. THE PEP BOYS - MANNY, MOE & JACK By Title: THE CHASE MANHATTAN BANK, as Agent and a Bank By Title: THE PEP BOYS - MANNY, MOE & JACK OF CALIFORNIA, as a Guarantor By_____________________________________ Title: PBY CORPORATION, as a Guarantor By_____________________________________ Title: THE PEP BOYS - MANNY, MOE & JACK OF DELAWARE, INC., as a Guarantor By__________________________________ Title: THE PEP BOYS - MANNY, MOE & JACK OF PUERTO RICO, INC., as a Guarantor By___________________________________ Title: 6 CARRUS SUPPLY CORPORATION, as a Guarantor By_________________________________ Title: BANK OF AMERICA NT&SA By_____________________________________ Title: SUN TRUST BANKS INC.. By_____________________________________ Title: FIRST UNION NATIONAL BANK By_____________________________________ Title: PNC BANK. By_____________________________________ Title: FLEET BANK By_____________________________________ Title: UNION BANK of CA By_____________________________________ Title: CREDIT SUISSE FIRST BOSTON By__________________________________ Title: 7 EX-10.48 7 Exhibit 10.48 THE PEP BOYS - MANNY, MOE & JACK ANNUAL INCENTIVE BONUS PLAN (as amended and restated as of March 31, 1998) The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation (the "Company"), established, effective January 29, 1989, an Executive Incentive Bonus Plan for the benefit of officers of the Company who were eligible to participate as provided therein. On March 31, 1992, March 30, 1994, and March 31, 1995, the Board of Directors of the Company (the "Board") amended the plan in numerous respects. By action of the Board on March 31, 1998, the plan was further amended to read in its entirety as hereinafter set forth (the "Plan"). 1. Purpose. The Plan is intended to increase the profitability of the Company by giving employees of the Company holding positions at the levels of officer or director (such employees being hereinafter collectively referred to as the "Eligible Employees") a financial stake in the growth and profitability of the Company. The Plan has the further objective of enhancing the Company's compensation packages for Eligible Employees, thus enabling the Company to attract and retain officers and other key employees of the highest ability. The Plan is intended to provide Eligible Employees with incentive opportunities that: (a) provide compensation opportunities which are competitive with other companies of similar size and industry focus; (b) focus Eligible Employees' attention on the accomplishment of specific Company goals; and (c) recognize different levels and types of individual contributions by 1 providing a portion of the incentive payout for the achievement of individual objectives. The Plan is intended to supplement, not replace, any other bonus paid by the Company to any of its Eligible Employees and is not intended to preclude the continuation of such arrangements or the adoption of additional bonus or incentive plans, programs or contracts. 2. Definitions. (a) "Award Period" shall mean a measuring period of one Fiscal Year. (b) "Bonus" shall mean a cash payment made by the Company to a Participant after an Award Period, based on performance against specific predetermined performance objectives for both the Company and the Participant, as calculated in accordance with the provisions of this Plan document. (c) "Bonus Level" shall mean the level at which a Participant shall participate in the Plan as set forth in Paragraph 4(b) hereof. (d) "CEO" shall mean the person elected to the office of Chief Executive Officer of the Company by the Board of Directors. (e) "COO" shall mean the person elected to the office of Chief Operating Officer of the Company by the Board of Directors. (f) "Compensation Committee" shall mean the Compensation Committee of the Board. (g) "Fiscal Year" shall mean the Fiscal Year of the Company which ends on the Saturday nearest January 31 in each year. 2 (h) "Participant" shall have the meaning set forth in Paragraph 4 hereof. (i) "Salary" shall mean the base salary of a Participant for a Fiscal Year, including amounts which Participant 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, exclusive of all bonuses paid or accrued with respect to that Fiscal Year, whether or not pursuant to a plan or program. 3. Administration, Amendment and Termination. (a) The Plan shall be administered by the Compensation Committee acting by a majority vote of its members. The Compensation Committee shall have the power and authority to take all actions and make all determinations which it deems necessary or desirable to effectuate, administer or interpret the Plan. The Company's adoption and continuation of the Plan is voluntary. The Compensation Committee shall have the power and authority to extend, amend, modify or terminate the Plan at any time, including without limitation, to change Award Periods, to determine the time or times of paying Bonuses, to establish and approve Company and individual performance goals and the relative weightings of the goals, and to establish such other measures as may be necessary to meet the objectives of the Plan. In particular, but without limitation of the foregoing, the 3 Compensation Committee shall have the power and authority to make any amendments or modifications to the Plan which may be necessary for the Plan to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended. An action to terminate or to substantively amend or modify the Plan shall become effective immediately upon its adoption or on such date as specified by the Compensation Committee, but not with respect to any Fiscal Year prior to the Fiscal Year in which the Compensation Committee so acts. (b) All actions taken and all determinations made by the Compensation Committee in accordance with the power and authority conferred upon the Compensation Committee under Paragraph 3(a) above shall be final, binding and conclusive on all parties, including the Company and all Participants. 4. Participants. (a) Each Eligible Employee shall be entitled to participate in the Plan for each Fiscal Year or portion thereof in which such employee holds a position at the level of officer or director of the Company (the "Participants", or individually, "Participant"), unless excluded from participation by the Compensation Committee or as provided by Paragraph 10 hereof. With respect to an individual who becomes an Eligible Employee during an Award Period, such individual shall become a Participant, unless excluded from participation by the Compensation Committee or as provided in Paragraph 10 hereof, and shall be eligible to receive an amount equal to the amount which 4 would have been paid if the Participant had been an Eligible Employee for the entire Award Period, multiplied by a fraction, the numerator of which is the number of days during the Award Period that the Participant was an Eligible Employee of the Company and the denominator of which is the number of days in the Award Period. (b) Each Participant shall participate in the Plan and earn Bonuses at one of six Bonus Levels, as set forth below: Bonus Level Participant Group Tier I CEO Tier II COO Tier III Executive Vice Presidents and Senior Vice Presidents Tier IV Vice Presidents Tier V Assistant Vice Presidents and Senior Directors Tier VI Directors 5 With respect to any Participant who was employed at more than one of the Bonus Levels during an Award Period, the total Bonus amount for such Award Period for which such Participant shall be eligible shall be the sum of prorated Bonus payments corresponding to the applicable Bonus Levels. Each such prorated Bonus payment shall equal the amount which would have been paid if the Participant had been an Eligible Employee at the applicable Bonus Level for the entire Award Period, multiplied by a fraction, the numerator of which is the number of days during the Award Period that the Participant was employed at such Bonus Level and the denominator of which is the number of days in the Award Period. 5. Company Performance Measures. Under the Plan, for each Award Period the Compensation Committee will establish minimum, target and maximum performance goals for the Company using one or more of the following business criteria (the "Company Performance Measures"): (a) earnings growth; (b) net sales; (c) cash flow; (d) return on capital; and (e) customer satisfaction. In addition, the Compensation Committee will establish relative weightings for the respective Company Performance Measures being used. 6 6. Individual Performance Measures. Under the Plan, for each Award Period the Company will establish individual or "small team" performance goals for each Participant (the "Individual Performance Measures"). 7. Establishment of Plan Components. (a) During the first ninety (90) days of each Award Period, the Compensation Committee, after consultation with the CEO, will establish and approve the following components of the Plan for the Award Period: (i) the Participants; (ii) the minimum, target and maximum Company performance levels for each Company Performance Measure being used; (iii) the relative weightings of the respective Company Performance Measures being used; (iv) the target, minimum and maximum Bonus amounts (each expressed as a percentage of salary) at each Bonus Level; and (v) the percentages of the Bonus amounts at each of the Bonus Levels which are attributable to the Company's performance and the individual Participant's performance, respectively, during the Award Period. 7 (b) Attached to this Plan document as Exhibit A is a table listing the following components of the Plan for the Company's current Fiscal Year, as determined by the Compensation Committee: (i) the Bonus Levels; (ii) the Participants in each Bonus Level (classified by title of position held); (iii) the target Bonus amount for each Bonus Level (expressed as a percentage of salary); and (iv) the percentages of the Bonus amounts at each of the Bonus Levels which are attributable to the Company's performance and the individual Participant's performance, respectively, during the Fiscal Year. (c) Attached to this Plan document as Exhibit B is a table listing the following components of the Plan for the Company's current Fiscal Year, as determined by the Compensation Committee: (i) the Company Performance Measures being used under the Plan for the Company's current Fiscal Year; (ii) the relative weightings of each such Company Performance Measure; and (iii) the minimum, target and maximum performance levels for each such Company Performance Measure. 8 (d) Attached to this Plan document as Exhibit C is a graph illustrating how the actual performance level for each Company Performance Measure corresponds to an "incentive factor" for the Company's current fiscal year, as determined by the Compensation Committee. The incentive factor shall be multiplied by the weighting assigned to the particular measure (as set forth on Exhibit B) in order to determine the actual resulting incentive attributable to such measure. Each such actual resulting incentive shall be expressed as a percentage of the portion of a Participant's target Bonus amount attributable to company performance. (e) Attached to this Plan document as Exhibit D is a hypothetical example demonstrating how a particular Participant's total Bonus amount for the Award Period corresponding to the Company's current Fiscal Year would be determined and calculated under the Plan, based upon the assumptions contained therein. 9 (f) During the first ninety (90) days of each Award Period, the Company will prepare, and the Compensation Committee will review and approve, new versions of Exhibits A, B, C and D to this Plan document, which versions will describe the components of the Plan in effect during such Award Period and how Bonus amounts for such Award Period will be determined and calculated under the Plan. 8. Determination of Bonus. Within sixty (60) days after the end of the Award Period, actual performance will be compared to the predetermined performance levels for both Company Performance Measures and Individual Performance Measures, and the resulting actual Bonus amounts for Participants will be reviewed by the CEO and submitted to the Compensation Committee for final approval. Nothing in this Paragraph 8 shall be used to create any presumption that Bonuses under the Plan are the exclusive means of providing incentive compensation for Eligible Employees, it being expressly understood and agreed that the Compensation Committee has the authority to recommend to the Board of Directors payments to any of the Eligible Employees, in cash or otherwise, based on performance measures or otherwise, other than Bonuses under this Plan to Participants. 10 9. Payment of Awards. Bonuses shall be paid in cash within ninety (90) days after the end of the Award Period. 10. Termination of Employment. (a) If a Participant's employment with the Company has terminated during an Award Period, for any reason whatsoever, with or without cause, then the Participant may not receive a Bonus for such Award Period, except as otherwise provided in Paragraph 10(b) below or in a separate written agreement between the Company and the Participant. (b) If during an Award Period, a Participant dies; becomes disabled; or retires on or after his Early Retirement Date (as defined in the Company's defined benefit pension plan), such Participant (or the Participant's designated beneficiary) shall be paid an amount equal to the amount which would have been paid if the Participant had been employed by the Company throughout the entire Award Period, multiplied by a fraction, the numerator of which is the number of days during the Award Period that the Participant was employed by the Company and the denominator of which is the number of days in the Award Period. 11. Assignment and Alienation of Benefits. (a) To the maximum extent permitted by law, a Participant's right or benefits under this Plan shall not be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. 11 (b) If any Participant becomes bankrupt or attempts to anticipate, alienate, sell, assign, pledge, encumber, or charge any rights to a benefit hereunder, then such right or benefit, in the discretion of the Compensation Committee, may be terminated. In such event, the Company may hold or apply the same or any part thereof for the benefit of the Participant, his or her spouse, children or dependents, or any of them, in such manner and portion as the Compensation Committee may deem proper. 12. Miscellaneous. (a) The establishment of this Plan shall not be construed as granting any Participant the right to remain in the employ of the Company, nor shall this Plan be construed as limiting the right of the Company to discharge a Participant from employment at any time for any reason whatsoever, with or without cause. (b) The Company may withhold from any amounts payable under the Plan such Federal, state or local taxes as may be required to be withheld pursuant to any applicable law or regulation. (c) The paragraph headings in this Plan are for convenience only; they form no part of the Plan and shall not affect its interpretation. (d) This Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. THE PEP BOYS - MANNY, MOE & JACK By: 12 EX-11 8 EXHIBIT 11
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES Exhibit 11 - Computation of Earnings per Share (in thousands, except per share data) - --------------------------------------------------------------------------------------------------------------------- Fiscal 1998 Fiscal 1997 Fiscal 1996 ------------------------------- ----------------------------- ------------------------------- Earnings Shares Per Earnings Shares Per Earnings Shares Per (Num- (Denom- Share (Num- (Denom- Share (Num- (Denom- Share erator) inator) Amount erator) inator) Amount erator) inator) Amount ------- ------- ------ ------- ------- ------ ------- ------- ------ Basic EPS Earnings available to common stockholders $4,974 61,543 $.08 $49,611 61,133 $.81 $100,824 60,305 $1.67 ==== ===== ===== Effect of Dilutive Securities Adjustment for interest on 4% convertible subordinated notes, net of tax - - - - 2,168 2,104 Adjustment for interest on 4% zero coupon subordinated notes, net of tax - - - - 1,409 1,303 Common Shares assumed issued upon exercise of dilutive stock options - 197 - 524 - 893 ------- ------ ------- ------ -------- ------ Diluted EPS Earnings available to common stockholders assuming conversion $4,974 61,740 $.08 $49,611 61,657 $.80 $104,401 64,605 $1.62 ====== ====== ==== ======= ====== ===== ======= ====== ===== (Table Restubbed Below) (in thousands, except per share data) - ------------------------------------------------------------------------------------------------------- Fiscal 1995 Fiscal 1994 ----------------------------------------------------------------- Earnings Shares Per Earnings Shares Per (Num- (Denom- Share (Num- (Denom- Share erator) inator) Amount erator) inator) Amount ------- ------- ------ ------- ------- ------ Basic EPS Earnings available to common stockholders $81,494 59,581 $1.37 $ 75,708(1) 59,252 $1.28(1) ===== ===== Effect of Dilutive Securities Adjustment for interest on 4% convertible subordinated notes, net of tax 2,200 2,104 897 873 Adjustment for interest on 4% zero coupon subordinated notes, net of tax - - - - Common Shares assumed issued upon exercise of dilutive stock options - 903 - 1,313 ------- ----- -------- ------ Diluted EPS Earnings available to common stockholders assuming conversion $83,694 62,588 $1.34 $ 76,605(1) 61,438 $1.25(1) ====== ====== ===== ======= ====== =====
- ------------------------------------------------------------------------------- (1) Includes a $4,300, or $.07 per share charge, from the cumulative effect of an accounting change for postemployment benefits. Basic earnings and basic earnings per share before the accounting change was $80,008 and $1.35, respectively. Diluted earnings and diluted earnings per share before the accounting change was $80,905 and $1.32, respectively. EX-12 9 EXHIBIT 12
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES Exhibit 12 - Statement Regarding Computation of Ratios of Earnings to Fixed Charges (in thousands, except ratios) - ---------------------------------------------------------------------------------------------------------------------- January 30, January 31, February 1, Fiscal year 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Interest $ 48,930 $ 39,656 $ 30,306 Interest factor in rental expense 19,052 16,368 11,205 Capitalized interest 1,020 1,861 1,575 - ---------------------------------------------------------------------------------------------------------------------- (a) Fixed charges, as defined $ 69,002 $ 57,885 $ 43,086 Earnings before income taxes and cumulative effect of change in accounting principle $ 7,284 $ 75,456 $ 159,229 Fixed charges 69,002 57,885 43,086 Capitalized interest (1,020) (1,861) (1,575) - ---------------------------------------------------------------------------------------------------------------------- (b) Earnings, as defined $ 75,266 $ 131,480 $ 200,740 - ---------------------------------------------------------------------------------------------------------------------- (c) Ratio of earnings to fixed charges (b/a) 1.1x 2.3x 4.7x - ---------------------------------------------------------------------------------------------------------------------- (Table Restubbed Below) (in thousands, except ratios) - ---------------------------------------------------------------------------------------- Febraury 3, January 28, Fiscal year 1996 1995 - ---------------------------------------------------------------------------------------- Interest $ 32,072 $ 25,931 Interest factor in rental expense 7,743 6,157 Capitalized interest 1,407 1,850 - ---------------------------------------------------------------------------------------- (a) Fixed charges, as defined $ 41,222 $ 33,938 Earnings before income taxes and cumulative effect of change in accounting principle $ 129,452 $ 126,482 Fixed charges 41,222 33,938 Capitalized interest (1,407) (1,850) - ---------------------------------------------------------------------------------------- (b) Earnings, as defined $ 169,267 $ 158,570 - ---------------------------------------------------------------------------------------- (c) Ratio of earnings to fixed charges (b/a) 4.1x 4.7x - ----------------------------------------------------------------------------------------
EX-21 10 EXHIBIT 21 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 7 Burlington Square Burlington, VT 05401 Vermont 100% PBY Corporation Suite 946 1105 North Market Street Wilmington, DE 19899 Delaware 100% Carrus Supply Corporation 1013 Centre Road Wilmington, DE 19805 Delaware 100%
EX-23 11 EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Numbers 2-81733, 33-3420, 33-31765, 33-64248, 33-35592, 33-61429, 33-32857 and 333-40363 of The Pep Boys - Manny, Moe & Jack and subsidiaries on Form S-8 of our report dated March 18, 1998, appearing in the Annual Report on Form 10-K of The Pep Boys - Manny, Moe & Jack and subsidiaries for the year ended January 30, 1999. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania April 26, 1999 EX-27 12 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JANUARY 30, 1999 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE FIFTY-TWO WEEK PERIOD ENDED JANUARY 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-30-1999 JAN-30-1999 114,548 0 17,393 996 527,397 754,144 1,816,904 486,648 2,096,112 512,406 691,714 0 0 63,848 747,936 2,096,112 1,991,340 2,398,708 1,498,897 1,826,812 0 0 48,930 7,284 2,310 4,974 0 0 0 4,974 .08 .08
-----END PRIVACY-ENHANCED MESSAGE-----