10-K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
 

___________

FORM 10-K
___________

 
                               (Mark One)

[X]   Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended January 31, 2004

OR

[   ]   Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

Commission file 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 incorporation or organization)	(I.R.S. employer identification no.)
3111 West Allegheny Avenue, Philadelphia, PA	19132
(Address of principal executive office)	(Zip code)
215-430-9000
(Registrant’s telephone number, including area code)

 

 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $1.00 par value	New York Stock Exchange
Common Stock Purchase Rights	New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [X] No [  ]

As of the close of business on August 1, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $767,656,038.

As of April 3, 2004, there were 57,725,962 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement, which will be filed with the Securities and Exchange 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, 2004 are incorporated by reference into Part III of this Form 10-K.

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, tires and accessories, automotive repairs and maintenance and the installation of parts. The Company’s primary operating unit is its SUPERCENTER format. As of January 31, 2004, the Company operated 595 stores consisting of 584 SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of 6,181 service bays, as well as 10 non-service/non-tire format PEP BOYS EXPRESS stores. The Company operates approximately 12,207,000 gross square feet of retail space, including service bays. The SUPERCENTERS average approximately 20,700 square feet and the 10 PEP BOYS EXPRESS stores average approximately 9,700 square feet. The Company believes that its unique SUPERCENTER format offers the broadest capabilities in the industry and positions the Company to gain market share and increase its profitability by serving “do-it-yourself” (retail) and “do-it-for-me” (service labor, installed merchandise and tires) customers with the highest quality merchandise and service offerings.

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As of January 31, 2004 the Company operated its stores in 36 states and Puerto Rico. The following table indicates, by state, the number of stores of the Company had in operation at the end of fiscal 2001, 2002 and 2003 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 2000 THROUGH 2003

State	2000 Year End		Opened		Closed		2001 Year End		Opened		Closed		2002 Year End		Opened		Closed		2003 Year End
Alabama		1		—		—		1		—		—		1		—		—		1
Arizona		23		—		—		23		—		—		23		—		1		22
Arkansas		1		—		—		1		—		—		1		—		—		1
California		135		—		—		135		—		1		134		—		12		122
Colorado		8		—		—		8		—		—		8		—		—		8
Connecticut		8		—		—		8		—		—		8		—		—		8
Delaware		6		—		—		6		—		—		6		—		—		6
Florida		47		—		—		47		—		—		47		—		4		43
Georgia		26		—		—		26		—		—		26		—		1		25
Illinois		24		—		—		24		—		—		24		—		1		23
Indiana		9		—		—		9		—		—		9		—		—		9
Kansas		2		—		—		2		—		—		2		—		—		2
Kentucky		4		—		—		4		—		—		4		—		—		4
Louisiana		10		—		—		10		—		—		10		—		—		10
Maine		1		—		—		1		—		—		1		—		—		1
Maryland		19		—		—		19		—		—		19		—		—		19
Massachusetts		8		—		—		8		—		—		8		—		1		7
Michigan		7		—		—		7		—		—		7		—		—		7
Minnesota		3		—		—		3		—		—		3		—		—		3
Missouri		1		—		—		1		—		—		1		—		—		1
Nevada		12		—		—		12		—		—		12		—		—		12
New Hampshire		4		—		—		4		—		—		4		—		—		4
New Jersey		28		—		—		28		1		—		29		—		1		28
New Mexico		8		—		—		8		—		—		8		—		—		8
New York		29		1		—		30		1		—		31		—		2		29
North Carolina		11		—		—		11		—		—		11		—		1		10
Ohio		13		—		—		13		—		—		13		—		1		12
Oklahoma		6		—		—		6		—		—		6		—		—		6
Pennsylvania		46		—		1		45		—		—		45		—		3		42
Puerto Rico		27		—		—		27		—		—		27		—		—		27
Rhode Island		3		—		—		3		—		—		3		—		—		3
South Carolina		6		—		—		6		—		—		6		—		—		6
Tennessee		7		—		—		7		—		—		7		—		—		7
Texas		60		—		—		60		—		—		60		—		5		55
Utah		6		—		—		6		—		—		6		—		—		6
Virginia		17		—		—		17		—		—		17		—		1		16
Washington		2		—		—		2		—		—		2		—		—		2
Total		628		1		1		628		2		1		629		—		34		595

 

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DEVELOPMENT

The Company’s primary focus in fiscal 2003 was improving the performance of its existing stores. As a result, the Company closed 33 under-performing stores on July 31, 2003. The Company believes this action will strengthen the remaining stores by allowing it to focus its energies and resources toward the more profitable stores.

In fiscal 2004, the Company plans to continue to focus much of its energy on improving the performance of its existing stores. The Company anticipates spending approximately $55,815,000 in connection with maintaining and improving its stores. During fiscal 2004, the Company will begin its store redesign plan on a market-by-market basis in order to better link its retail and service businesses, to promote cross-selling and improve the overall customer experience. This redesign plan is expected to be completed by the end of fiscal 2007. The Company expects to fund the redesign plan from net cash generated from operating activities, its existing line of credit and a portion of the proceeds from its March 24, 2004 sale of 4,646,464 shares of common stock.

PRODUCTS AND SERVICES

Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS store carries a similar product line, with variations based on the number and type of cars registered in the markets where the store is located. A full complement of inventory at a typical SUPERCENTER includes an average of approximately 23,000 items (approximately 22,000 items at a PEP BOYS EXPRESS store). The Company’s automotive product line includes: tires (not stocked at PEP BOYS EXPRESS stores); batteries; new and remanufactured parts for domestic and import vehicles; chemicals and maintenance items; fashion, electronic, and performance accessories; personal transportation merchandise; and garage and repair shop merchandise.

In addition to offering a wide variety of high quality name brand products, the Company sells an array of high quality products under various private label names. The Company sells tires under the names CORNELL® and FUTURA®; and batteries under the name PROSTART®. The Company also sells wheel covers under the name FUTURA®; water pumps and cooling system parts under the name PROCOOL®; air filters, anti-freeze, chemicals, cv axles, lubricants, oil, oil filters, oil treatments, transmission fluids and wiper blades under the name PROLINE®; shock absorbers under the name PRO RYDER®; alternators, battery booster packs and starters under the name PROSTART®; power steering hoses and power steering pumps under the name PROSTEER^TM; brakes under the name PROSTOP®; temperature gauges under the name PROTEMP®; and paints under the name VARSITY®. All products sold by the Company under various private label names accounted for approximately 33% of the Company’s merchandise sales in fiscal 2003 and 2002 and approximately 34% in fiscal 2001. Revenues from the sale of tires accounted for approximately 16% of the Company’s total revenues in fiscal years 2003 and 2002 and 17% in fiscal 2001. No other class of products accounted for as much as 10% of the Company’s total revenues.

The Company has service bays in 585 of its 595 locations. While each service department has the ability to perform virtually all types of automotive service (except body work), the Company is in the process of sharpening its focus on the most profitable maintenance services. Revenues from maintaining or repairing automobiles and installing products (exclusive of the product) accounted for approximately 19.0%, 19.1% and 19.1% of the Company’s total revenues from continuing operations in fiscal years 2003, 2002 and 2001, respectively.

The Company’s commercial automotive parts delivery program, branded PEP EXPRESS PARTS®, is designed to increase the Company’s market share with the professional installer and to leverage its inventory investment. The program satisfies the installed merchandise customer by taking advantage of the breadth and quality of its parts inventory as well as its experience supplying its own service bays and mechanics. As of January 31, 2004, 484, or approximately 81%, of the Company’s stores provide commercial parts delivery.

The Company has a point-of-sale system in all of its stores which gathers sales and gross profit data by stock-keeping unit from each store on a daily basis. This information is then used by the Company to help formulate its pricing, marketing and merchandising strategies. The Company has an electronic parts catalog and an electronic commercial invoicing system in all of its stores. The Company has an electronic work order system in all of its service centers. This system creates a service history for each vehicle, provides customers with a comprehensive sales document and enables the Company to maintain a service customer database.

The Company primarily uses an “Everyday Low Price” (EDLP) strategy in establishing its selling prices. Management believes that EDLP provides better value to its customers on a day-to-day basis, helps level customer

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demand and allows more efficient management of inventories. On a weekly basis, the Company employs a promotional pricing strategy on select items to drive increased customer traffic.

The Company uses various forms of advertising to promote its category-dominant product offering, its state-of-the-art service and repair capabilities and its commitment to customer service and satisfaction. The Company is committed to an effective promotional schedule with a weekly circular program, extra-effort promotions supported by ROP (Run of Paper) and radio and television advertising during highly seasonal times of the year and various in-store promotions. The Company uses a substantial amount of vendor co-op funds in support of its advertising program.

In fiscal 2003, approximately 47% of the Company’s total revenues were cash transactions (including personal checks) with the remainder being 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 generally has a manager, a service manager and one or more assistant managers. Each PEP BOYS EXPRESS store has a manager and one or more assistant managers. Stores with the PEP EXPRESS PARTS program have a commercial sales manager in addition to the management previously mentioned. A store manager’s average length of service with the Company is approximately eight years.

The Company coordinates the operation and merchandising of each store through a network of area directors. The area directors report to the Company’s one of six divisional Vice Presidents, each of who reports to the Company’s Senior Vice President—Store Operations, who reports to the Company’s 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 divisional Vice Presidents, area directors and loss prevention personnel.

All of the Company’s advertising, accounting, purchasing, management information systems, and most of its administrative functions are conducted at its corporate headquarters in Philadelphia, Pennsylvania. Certain administrative functions for the Company’s western, southwestern, southeastern, mid-western and Puerto Rican operations are performed at various regional offices of the Company. See “Properties.”

INVENTORY CONTROL AND DISTRIBUTION

Most of the Company’s merchandise is distributed to its stores from its warehouses primarily by dedicated and contract carriers. Target levels of inventory for each product have been established for each of the Company’s warehouses and stores and are based upon prior shipment history, sales trends and seasonal demand. Inventory on hand is compared to the target levels on a weekly basis at each warehouse. If the inventory on hand at a warehouse is below the target levels, the Company’s buyers order merchandise from its suppliers.

Each Pep Boys’ store has an automatic inventory replenishment system that automatically orders additional inventory when a store’s inventory on hand falls below the target level. In addition, the Company’s centralized buying system, coupled with continued advancement in its warehouse and distribution systems, has enhanced the Company’s ability to control its inventory.

SUPPLIERS

During fiscal 2003, the Company’s ten largest suppliers accounted for approximately 42% of the merchandise purchased by the Company. No single supplier accounted for more than 18% 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.

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COMPETITION

The business of the Company is highly competitive. The Company encounters competition from nationwide and regional chains and from local independent merchants. The Company’s competitors include general, full range, discount or traditional department stores which carry automotive parts and accessories and/or have automotive service centers, as well as specialized automotive retailers similar to the Company. Generally, the specialized automotive retailers focus on either the “do-it-yourself” or “do-it-for-me” areas of the business. The Company believes that its operation in both the “do-it-yourself” and “do-it-for-me” areas of the business positively differentiates it from most of its competitors. However, certain competitors are larger in terms of sales volume, store size, and/or number of stores. Therefore, these competitors have access to greater capital and management resources and have been operating longer in particular geographic areas than the Company.

Although the Company’s competition varies by geographic area, the Company believes that it generally has a favorable competitive position in terms of depth and breadth of product line, price, quality of personnel and customer service.

The Company believes that 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.

REGULATION

The Company is subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal of hazardous substances contained in the products we sell and use in our service bays, the recycling of batteries, tires and used lubricants, and the ownership and operation of real property.

EMPLOYEES

At January 31, 2004, the Company employed 21,331 persons as follows:

Description	Full-time Numbers		%		Part-time Numbers		%		Total Numbers		%
Store Sales		6,049		43.8		5,293		70.5		11,342		53.2
Store Service		6,014		43.5		2,060		27.4		8,074		37.8
STORE TOTAL		12,063		87.3		7,353		97.9		19,416		91.0
Warehouses		717		5.2		140		1.9		857		4.0
Offices		1,039		7.5		19		0.2		1,058		5.0
TOTAL EMPLOYEES		13,819		100.0		7,512		100.0		21,331		100.0

 

The Company had no union employees as of January 31, 2004. At the end of fiscal 2002, the Company employed approximately 14,582 full-time and 7,123 part-time employees.

RISK FACTORS

Our business faces significant risks. The risks described below may not be the only risks we face. If any of the events or circumstances described as risks below actually occurs, our business, results of operations or financial condition could be materially and adversely affected.

Risks Related to Pep Boys

If we are unable to generate sufficient cash flows from our operations, our liquidity will suffer and we may be unable to satisfy our obligations.

We require significant capital to fund our business. While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for the balance of fiscal 2004, circumstances could arise that would materially affect our liquidity. For example, cash flows from our operations could be affected by changes in

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consumer spending habits or the failure to maintain favorable vendor payment terms or our inability to successfully implement sales growth initiatives. We may be unsuccessful in securing alternative financing when needed, on terms that we consider acceptable, or at all.

The degree to which we are leveraged could have important consequences to your investment in our securities, including the following risks:

•   our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired in the future;

•   a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our debt, thereby reducing the funds available for other purposes;

•   our failure to comply with the financial and other restrictive covenants governing our debt, which, among other things, require us to maintain financial ratios and limit our ability to incur additional debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or our prospects; and

•   if we are substantially more leveraged than some of our competitors, we might be at a competitive disadvantage to those competitors that have lower debt service obligations and significantly greater operating and financial flexibility than we do.

We depend on our relationships with our vendors and a disruption of these relationships or of our vendors’ operations could have a material adverse effect on our business and results of operations.

Our business depends on developing and maintaining productive relationships with our vendors. Many factors outside our control may harm these relationships. For example, financial difficulties that some of our vendors may face may increase the cost of the products we purchase from them. In addition, our failure to promptly pay, or order sufficient quantities of inventory from, our vendors may increase the cost of products we purchase or may lead to vendors refusing to sell products to us at all. The recent trend towards consolidation among automotive parts suppliers may also disrupt our relationship with some vendors. To enhance our supply of top-quality, competitively-priced tires and batteries, we have selected a primary vendor who supplies over 90% of our needs in each of these two product categories. A disruption of our vendor relationships or a disruption in our vendors’ operations could have a material adverse effect on our business and results of operations.

We depend on our senior management team and our other personnel, and we face substantial competition for qualified personnel.

Our success depends on the efforts of our senior management team. Our continued success will also depend upon our ability to retain existing, and attract additional, qualified field personnel to meet our needs. We face substantial competition, both from within and outside of the automotive aftermarket to retain and attract qualified personnel. In addition, we believe that the number of qualified automotive service technicians in the industry is generally insufficient to meet demand.

We are subject to environmental laws and may be subject to environmental liabilities that could have a material adverse effect on us in the future.

We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal of hazardous substances contained in the products we sell and use in our service bays, the recycling of batteries, tires and used lubricants, and the ownership and operation of real property. As a result of investigations undertaken in connection with a number of our store acquisitions and financings, we are aware that soil or groundwater may be contaminated at some of our properties. Any failure by us to comply with environmental laws and regulations could have a material adverse effect on us.

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We are developing a new point-of-sale information system that is currently behind schedule, and further delays in its introduction could lead to increased demands on capital and a competitive disadvantage relative to our competitors.

We began developing in November 2001 a fully integrated point-of-sale information system for all of our stores that we believe will improve our stores’ operating efficiency and product sourcing. In the fourth quarter of 2003, due to concerns about the ability of the base software’s architecture to support a chain-wide roll-out, we decided to identify an alternative base software as the basis for our customized system. Consequently, despite the fact that we expect to utilize a portion of the assets developed to date, the roll-out of the new system has been delayed and we took a $13.2 million impairment charge against a portion of the system’s assets. In addition to the increased demand on capital caused by the difficulties in the development and introduction of our new point-of-sale system, further delays in its introduction could lead to a competitive disadvantage relative to our competitors.

Risks Related to Our Industry

Our industry is highly competitive, and price competition in some categories of the automotive aftermarket or a loss of trust in our participation in the “do-it-for-me” market, could cause a material decline in our revenues and earnings.

The automotive aftermarket retail and service industry is highly competitive and subjects us to a wide variety of competitors. We compete primarily with the following types of businesses in each category of the automotive aftermarket:

Do-It-Yourself

Retail

•   automotive parts and accessories stores;

•   automobile dealers that supply manufacturer replacement parts and accessories; and

•   mass merchandisers and wholesale clubs that sell automotive products.

Do-It-For-Me

Service Labor and Installed Merchandise

•   regional and local full service automotive repair shops;

•   automobile dealers that provide repair and maintenance services;

•   national and regional (including franchised) tire retailers that provide additional automotive repair and maintenance services; and

•   national and regional (including franchised) specialized automotive (such as exhaust, brake and transmission) repair facilities that provide additional automotive repair and maintenance services.

Tire Sales

•   national and regional (including franchised) tire retailers; and

•   mass merchandisers and wholesale clubs that sell tires.

A number of our competitors have more financial resources, are more geographically diverse or have better name recognition than us, which might place us at a competitive disadvantage to those competitors. Because we seek to offer competitive prices, if our competitors reduce their prices we may be forced to reduce our prices, which could cause a material decline in our revenues and earnings and hinder our ability to service our debt.

With respect to the service labor category, the majority of consumers are unfamiliar with their vehicle’s mechanical operation and, as a result, often select a service provider based on trust. Potential occurrences of negative publicity associated with the Pep Boys brand, the products we sell or installation or repairs performed in our service bays, whether or not factually accurate, could cause consumers to lose confidence in our products and services in the short or long term, and cause them to choose our competitors for their automotive service needs.

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Vehicle miles driven may decrease, resulting in a decline of our revenues and negatively affecting our results of operations.

Our industry depends on the number of vehicle miles driven. Factors that may cause the number of vehicle miles and our revenues and our results of operations to decrease include:

•   the weather—as vehicle maintenance may be deferred during periods of inclement weather;

•   the economy—as during periods of poor economic conditions, customers may defer vehicle maintenance or repair, and during periods of good economic conditions, consumers may opt to purchase new vehicles rather than service the vehicles they currently own and replace worn or damaged parts;

•   gas prices—as increases in gas prices may deter consumers from using their vehicles; and

•   travel patterns—as changes in travel patterns may cause consumers to rely more heavily on train and airplane transportation.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained herein including in Item 1 “Business” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,” “expects,” “anticipates,” “estimates,” “forecasts” and similar expressions are intended to identify these forward-looking statements. Forward-looking statements include management’s expectations regarding future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Our actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond our control, including the strength of the national and regional economies, retail and commercial consumers’ ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of our stores, competitive pricing, the location and number of competitors’ stores, product and labor costs and the additional factors described in our filings with the Commission. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

SEC REPORTING

We electronically file certain documents with, or furnish such documents to, the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, along with any related amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. From time-to-time, we may also file registration and related statements pertaining to equity or debt offerings. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish documents electronically with the SEC.

We provide free electronic access to our annual, quarterly and current reports (and all amendments to these reports) on our Internet website, www.pepboys.com. These reports are available on our website as soon as reasonably practicable after we electronically file or furnish such materials with or to the SEC. Information on our website does not constitute part of this Annual Report. You may also contact our investor relations department at 215-430-9720 for copies of these reports free of charge.

The Company’s Code of Ethics, the Board of Directors Code of Conduct and the charters of our audit, compensation and nominating and governance committees may be found under the About Pep Boys—Corporate Governance section of our website. A copy of the corporate governance materials is available upon written request.

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EXECUTIVE OFFICERS OF THE COMPANY

The following table indicates the names, ages and tenure with the Company and positions (together with the year of election to such positions) of the executive officers of the Company:

Name	Age	Tenure with Company	Position with the Company and Date of Election to Position
Lawrence N. Stevenson	47	8 months	Chief Executive Officer since May 2003
George Babich, Jr.	52	7 years	President since March 2002; Chief Financial Officer since March 2000
Harold L. Smith	53	5 months	Executive Vice President—Merchandising & Marketing since August 2003
Don L. Casey	52	3 years	Senior Vice President—Supply Chain & Logistics since July 2000
Mark L. Page	47	28 years	Senior Vice President—Store Operations since March 1993
Harry F. Yanowitz	37	7 months	Senior Vice President—Strategy & Business Development since June 2003
Bernard K. McElroy	52	23 years	Vice President—Chief Accounting Officer & Treasurer since April 2003

 

 
Lawrence N. Stevenson, Chief Executive Officer, joined Pep Boys in May 2003 after having most recently served as the CEO of Chapters, Canada’s largest book retailer. Prior to his seven years at Chapters, Mr. Stevenson spent nine years with Bain & Company, which included serving as the Managing Director of their Canadian operation.

George Babich, Jr. has been President and Chief Financial Officer since March 16, 2002. From March 2001 until March 2002, Mr. Babich served as Executive Vice President and Chief Financial Officer. From March 2000 until March 2001, Mr. Babich served as Senior Vice President—Finance and Chief Financial Officer. From September 1996 through March 2000, Mr. Babich served as Vice President—Finance.

Harold L. Smith, Executive Vice President—Merchandising & Marketing, joined the Company in August 2003 after most recently serving in such capacity for CSK Auto. Prior to CSK Auto, Mr. Smith held various merchandising positions with companies such as Bass Pro Shops and The Home Depot.

Don L. Casey, rejoined the Company as Senior Vice President—Supply Chain & Logistics in July 2000. From June 1999 through June 2000, Mr. Casey was Vice President of Purchasing and Supply Chain for Discount Auto Parts, Inc. From February 1987 through May 1999, Mr. Casey served the Company in various merchandising positions of increasing seniority.

Mark L. Page has been Senior Vice President—Store Operations since March 1993. Since June 1975, Mr. Page has served the Company in various store operations positions of increasing seniority.

Harry F. Yanowitz, Senior Vice President—Strategy & Business Development, joined the Company in June 2003 after having most recently served as Managing Director of Sherpa Investments, a private investment firm. Previously, he was President of Chapters during Mr. Stevenson’s tenure. Prior to joining Chapters, Mr. Yanowitz was a consultant with Bain & Company.

Bernard K. McElroy has been Vice President—Chief Accounting Officer & Treasurer since April 2003. Since May 1980, Mr. McElroy has served the Company in various financial positions of increasing seniority.

Each of the officers serves at the pleasure of the Board of Directors of the Company.

ITEM 2     PROPERTIES

The Company owns its five-story, approximately 300,000 square foot corporate headquarters in Philadelphia, Pennsylvania. The Company also owns the following administrative regional offices—approximately 4,000 square feet of space in each of Melrose Park, Illinois and Bayamon, Puerto Rico. In addition, the Company leases

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approximately 4,000 square feet of space for administrative regional offices in each of Decatur, Georgia and Richardson, Texas. The Company owns a three-story, approximately 60,000 square foot structure in Los Angeles, California in which it occupies 7,200 square feet and sublets the remaining square footage to tenants.

Of the 595 store locations operated by the Company at January 31, 2004, 326 are owned and 269 are leased.

The following table sets forth certain information regarding the owned and leased warehouse space utilized by the Company for its 595 store locations at January 31, 2004:

Warehouse Location	Products Warehoused		Square Footage		Owned or Leased		Stores Serviced		States Serviced
Los Angeles, CA		All except tires		216,000		Owned		151		AZ, CA, NM, NV, UT, WA
Los Angeles, CA		Tires/parts		73,000		Leased		151		AZ, CA, NM, NV, UT, WA
Los Angeles, CA		All except tires		137,000		Leased		151		AZ, CA, NM, NV, UT, WA
Atlanta, GA		All		392,000		Owned		133		AL, FL, GA, LA, NC, PR, SC, TN, VA
Mesquite, TX		All		244,000		Owned		91		AR, AZ, CO, LA, NM, OK, TX
Plainfield, IN		All		403,000		Leased		78		IL, IN, KS, KY, MI, MN, MO, OH, OK, PA, TN, VA
Chester, NY		All		400,400		Leased		142		CT, DE, MA, MD, ME, NH, NJ, NY, PA, RI, VA
Total				1,865,400

 

The Company plans to expand the square footage at its Chester, New York distribution center from 400,400 square feet to 600,000 square feet. In 2004, the Company began leasing a 70,000 square foot warehouse in Indianapolis that will be used to store some of the import merchandise items. The Company anticipates that its existing and future warehouse space and its access to outside storage will accommodate inventory necessary to support future store expansion and any increase in stock-keeping units through the end of fiscal 2004.

ITEM 3    LEGAL PROCEEDINGS

In the third quarter, the Company reached an agreement, through binding arbitration, to settle the consolidated action entitled “Dubrow et al vs. The Pep Boys—Manny Moe & Jack”. The two consolidated actions, originally filed on March 29, 2000 and July 25, 2000 in the California Superior Court in Orange County, involved former and current store management employees who claimed that they were improperly classified as exempt from the overtime provisions of California law and sought to be compensated for all overtime hours worked. The settlement was paid by the Company in the first quarter of fiscal 2004.

An action entitled “Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys” was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company’s motion for summary judgment was granted and the case was dismissed. The plaintiff has until April 28, 2004 to appeal.

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The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

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 31, 2004.

PART II

ITEM 5     MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of The Pep Boys—Manny, Moe & Jack is listed on the New York Stock Exchange under the symbol “PBY”. There were 7,209 registered shareholders as of March 18, 2004. 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 31, 2004	High		Low			Per Share
First Quarter	$	10.69		$	6.00		$	0.0675
Second Quarter		15.90			8.54			0.0675
Third Quarter		19.94			14.05			0.0675
Fourth Quarter		23.99			18.53			0.0675
Fiscal year ended February 1, 2003
First Quarter	$	19.38		$	13.55		$	0.0675
Second Quarter		19.04			10.75			0.0675
Third Quarter		15.23			8.75			0.0675
Fourth Quarter		12.64			10.06			0.0675

 

It is the present intention of the Company’s Board of Directors to continue to pay regular quarterly cash dividends; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company and other factors which the Board of Directors deems relevant.

EQUITY COMPENSATION PLANS

The following table sets forth the Company’s shares authorized for issuance under its equity compensation plans at January 31, 2004:

	Equity compensation plans approved by shareholders		Equity compensation plans not approved by shareholders				Total
Number of securities to be issued upon exercise of outstanding options		6,736,070			174,540	1			6,910,610
Weighted average exercise price of outstanding options	$	16.51		$	8.70			$	16.31
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in top row)		1,504,004			—				1,504,004

 

¹ Inducement options granted to the current CEO in connection with his hire.

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ITEM 6    SELECTED FINANCIAL DATA

The following tables set 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.

(dollar amounts are in thousands except per share amounts)
Year ended	Jan. 31, 2004			Feb. 1, 2003			Feb. 2, 2002			Feb. 3, 2001			Jan. 29, 2000
STATEMENT OF OPERATIONS DATA
Merchandise sales	$	1,728,386		$	1,697,628		$	1,707,190		$	1,891,046		$	1,887,771
Service revenue		405,884			400,149			403,505			444,233			424,717
Total revenues		2,134,270			2,097,777			2,110,695			2,335,279			2,312,488
Gross profit from merchandise sales		490,239	1		514,490	2		500,037	3		436,033	4		520,228
Gross profit from service revenue		96,504	1		102,056	2		101,053	3		78,243	4		82,295
Total gross profit		586,743	1		616,546	2		601,090	3		514,276	4		602,523
Selling, general and administrative expenses		569,834	1		504,163	2		497,798	3		542,048	4		512,434
Operating profit (loss)		16,909	1		112,383	2		103,292	3		(27,772	)4		90,089
Non-operating income		3,339			3,097			4,623			7,314			2,327
Interest expense		38,255			47,237			53,709			59,718			51,557
(Loss) earnings from continuing operations before income taxes and cumulative effect of change in accounting principle		(18,007	)1		68,243	2		54,206	3		(80,176	)4		40,859
Net (loss) earnings from continuing operations before cumulative effect of change in accounting principle		(11,399	)1		42,992	2		34,693	3		(50,929	)4		26,625
(Loss) earnings from discontinued operations, net of tax		(18,263	)		808			642			(165	)		2,678
Cumulative effect of change in accounting principle, net of tax		(2,484	)		—			—			—			—
Net (loss) earnings		(32,146	)1		43,800	2		35,335	3		(51,094	)4		29,303
BALANCE SHEET DATA
Working capital	$	76,227		$	130,680		$	115,201		$	122,741		$	185,206
Current ratio	1.10 to 1			1.24 to 1			1.21 to 1			1.22 to 1			1.35 to 1
Merchandise inventories	$	553,562		$	488,882		$	519,473		$	547,735		$	582,898
Property and equipment-net		986,186			1,030,486			1,058,842			1,134,164			1,273,446
Total assets		1,841,023			1,799,910			1,806,135			1,898,084			2,064,948
Long-term debt (includes all convertible debt)		408,016			525,577			544,418			654,194			784,024
Total stockholders’ equity		615,594			649,992			617,790			594,766			658,284
DATA PER COMMON SHARE
Basic (loss) earnings from continuing operations before cumulative effect of change in accounting principle	$	(.22	)1	$	.83	2	$	.68	3	$	(1.00	)4	$	.53
Basic (loss) earnings		(.62	)1		.85	2		.69	3		(1.00	)4		.58
Diluted (loss) earnings from continuing operations before cumulative effect of change in accounting principle		(.22	)1		.80	2		.67	3		(1.00	)4		.53
Diluted net (loss) earnings		(.62	)1		.82	2		.68	3		(1.00	)4		.58
Cash dividends		.27			.27			.27			.27			.27
Stockholders’ equity		11.66			12.59			12.01			11.60			12.91
Common share price range:
high		23.99			19.38			18.48			7.69			21.63
low		6.00			8.75			4.40			3.31			7.13
OTHER STATISTICS
Return on average stockholders’ equity		(5.1	)%		6.9	%		5.8	%		(8.2	)%		4.0	%
Common shares issued and outstanding		52,787,148			51,644,578			51,430,861			51,260,663			50,994,099
Capital expenditures	$	43,262		$	43,911		$	25,375		$	57,336		$	104,446
Number of retail outlets		595			629			628			628			662
Number of service bays		6,181			6,527			6,507			6,498			6,895

 

¹ Includes pretax charges of $89,730 related to corporate restructuring and other one-time events of which $30,058 reduced gross profit from merchandise sales, $3,278 reduced gross profit from service revenue and $56,394 was included in selling, general and administrative expenses.

² Includes pretax charges of $2,529 related to the Profit Enhancement Plan of which $2,014 reduced the gross profit from merchandise sales, $491 reduced gross profit from service revenue and $24 was included in selling, general and administrative expenses.

³ Includes pretax charges of $5,197 related to the Profit Enhancement Plan of which $4,169 reduced the gross profit from merchandise sales, $813 reduced gross profit from service revenue and $215 was included in selling, general and administrative expenses.

⁴ Includes pretax charges of $74,945 related to the Profit Enhancement Plan of which $67,085 reduced the gross profit from merchandise sales, $5,232 reduced gross profit from service revenue and $2,628 was included in selling, general and administrative expenses.

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ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Introduction

Pep Boys is a leader in the automotive aftermarket, with 595 stores and more than 6,000 service bays located throughout 36 states and Puerto Rico. All of our stores feature the nationally recognized Pep Boys brand name, established through more than 80 years of providing high-quality automotive merchandise and services, and are company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, accessories, tires and parts under one roof, positioning us to achieve our goal of becoming the category dominant one-stop shop for automotive maintenance and accessories.

Of our 595 stores, 584 are what we call Supercenters, which feature an average of 11 state-of-the-art service bays, with an average of more than 20,000 square feet per Supercenter. Our store size allows us to display and sell a more complete offering of merchandise in a wider array of categories than our competitors, with a focus on the high-growth accessories segment and a comprehensive tire offering. We leverage this investment in inventory through our ability to install what we sell in our service bays and by offering this merchandise to both commercial and retail customers.

We have a new leadership team of experienced retailers in place. This team has come together over the last year and combines new hires and tenured executives with automotive aftermarket, big box retail and proven business building experience.

We have successfully implemented the final phase of our Profit Enhancement Plan (“PEP”) that we launched in late 2000 and are continuing to focus upon improving the performance of our existing stores in order to provide a solid base for growth and expansion in the $131.7 billion car and light truck automotive aftermarket.

We had total revenues of $2.1 billion and operating profit of $16.9 million in fiscal 2003. During 2003, we were able to reduce our total debt and increase our cash and cash equivalents by $102.4 million and $18.2 million, respectively. This was accomplished by continued improvement in our inventory to accounts payable ratio, which resulted in net cash provided by operating activities of $152.1 million, a 10% improvement over the prior year. Since 1950, we have paid a quarterly cash dividend on an uninterrupted basis, and we are currently paying an annual dividend of $0.27 per share.

On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share) at a price of $24.75 per share for net proceeds (before expenses) of $109,250,000.

Business Strategy

Our strategy to become the category dominant one-stop shop for automotive maintenance and accessories includes:

•   Building Upon a Successful Restructuring. In July 2003, we initiated the final phase of our comprehensive Profit Enhancement Plan (PEP), which was launched in November 2000. The key elements of PEP included closing under-performing stores, closing and consolidating distribution centers, streamlining our corporate management structure, significantly reducing in-store, service and field management and eliminating certain unprofitable merchandise offerings. Following completion of the final phase of PEP, we estimate that the contribution to earnings resulting from PEP will be approximately $95 million per year ($84 million from the initial phase and $11 million from the final phase) as compared to fiscal 2000.

•   Improving Our Merchandising Capabilities. We will continue to fill our stores with a new and flexible merchandising mix designed to increase customer traffic. We will take advantage of our industry-leading average retail square footage to improve and intensify our merchandise displays. We utilize product-specific advertising to highlight promotional items and pricing, primarily through weekly print advertising.

•   Enhancing Our Stores. We have begun to reinvest in our existing stores to completely redesign their interiors and enhance their exterior appeal. We believe that this layout will provide customers with a clear and concise way of finding what they need and will promote cross-selling.

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•   Focusing Our Service Offering and Introducing Name Brand Tires. We continue to build upon the competitive advantage that our service offering provides over our parts-only competitors by sharpening our focus on the most profitable maintenance services and introducing name brand tires. By narrowing our service offering, we believe that we can improve our financial performance, both by eliminating less profitable heavy repair services and by better managing the skills of our staff. In addition, the introduction of name brand tires is expected to attract more customers and to help establish those customer relationships earlier in the post-warranty period of their car’s life.

•   New Store Growth. We expect new store growth to begin in fiscal 2006. This growth will focus primarily upon increasing penetration in our existing markets to further leverage our investments. We are likely to grow our total number of service bays through a combination of acquisitions and building new stores. The format of these new stores is likely to include both Supercenters and a service-only format that will utilize existing Supercenters for most of their inventory needs.

CAPITAL & LIQUIDITY

Capital Resources and Needs

The Company’s cash requirements arise principally from the capital expenditures related to existing stores, offices and warehouses and to purchase inventory. The primary capital expenditures for fiscal 2003 were attributed to capital maintenance of the Company’s existing stores and offices. The Company opened no new stores in 2003 compared with two new stores in fiscal 2002, and one new store in fiscal 2001. In fiscal 2003, with an increase in accounts payable offset in part by capital expenditures and an increase in merchandise inventories, the Company decreased its debt by $102,380,000 and increased its cash and cash equivalents by $18,214,000. In fiscal 2002, with an increase in capital expenditures and decrease in accounts payable offset, in part, by a decrease in merchandise inventories, the Company decreased its debt by $41,574,000 and increased its cash and cash equivalents by $26,789,000. In fiscal 2001, with a decrease in merchandise inventories coupled with decreased levels of capital expenditures and an increase in accounts payable, the Company decreased its debt by $143,913,000 and increased its cash and cash equivalents by $7,986,000. The Company has no plans to open any new stores in fiscal 2004. Management estimates capital expenditures relating to existing stores, warehouses and offices during fiscal 2004 will be approximately $72,500,000. The Company anticipates that its net cash provided by operating activities, its existing line of credit, and a portion of the proceeds of its March 24, 2004 common stock offering will exceed its principal cash requirements in fiscal 2004.

In fiscal 2003, merchandise inventories increased as the Company commenced merchandising initiatives designed to improve the overall product mix of its stores. These new products average a higher carrying cost per product, which caused an increase in merchandise inventories even though the Company decreased the average number of stock-keeping units per store to approximately 23,000 in fiscal 2003, compared to 24,000 in fiscal 2002 and 25,000 in fiscal 2001. In fiscal 2002, merchandise inventories decreased as the Company continued its focus on inventory management. In fiscal 2001, merchandise inventories decreased as the Company maintained its net store count and completed the exit of the two distribution centers closed in fiscal 2000 as part of the Profit Enhancement Plan.

The Company’s working capital was $76,227,000 at January 31, 2004, $130,680,000 at February 1, 2003, and $115,201,000 at February 2, 2002. The Company’s long-term debt, as a percentage of its total capitalization, was 40% at January 31, 2004, 45% at February 1, 2003 and 47% at February 2, 2002. As of January 31, 2004, the Company had an available line of credit totaling $198,754,000.

In the third quarter, the Company reached an agreement, through binding arbitration, to settle the consolidated action entitled “Dubrow et al vs. The Pep Boys—Manny Moe & Jack”. The two consolidated actions, originally filed on March 29, 2000 and July 25, 2000 in the California Superior Court in Orange County, involved former and current store management employees who claimed that they were improperly classified as exempt from the overtime provisions of California law and sought to be compensated for all overtime hours worked. The settlement was paid by the Company in the first quarter of fiscal 2004.

On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share) at a price of $24.75 per share for net proceeds (before expenses) of $109,250,000. The Company used the net proceeds from

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the sale of common stock offered in this offering to repay the outstanding balance under its revolving credit facility, which was used along with cash to repay the $57,000,000 aggregate principal amount of Medium-Term Notes that matured on March 3, 2004 and March 10, 2004, and to prepay the approximately $22,400,000 aggregate principal amount outstanding under the Company’s Senior Secured Credit Facility, with the balance to be applied to store redesigns.

Contractual Obligations

The following chart represents the Company’s total contractual obligations and commercial commitments as of January 31, 2004:

(dollar amounts in thousands)
Obligation	Total		Due in less than 1 year			Due in 1–3 years			Due in 3–5 years			Due after 5 years
Long-term debt (1)	$	525,031		$	117,015		$	257,485		$	150,306		$	225
Operating leases		475,132			51,266			89,299			76,076			258,491
Capital leases		48			48			—			—			—
Unconditional purchase obligation		15,569			8,112			7,457			—			—
Total cash obligations	$	1,015,780		$	176,441		$	354,241		$	226,382		$	258,716

 

(1) Long-term debt includes current maturities.

(dollar amounts in thousands)
Commercial Commitments	Total		Due in less than 1 year			Due in 1–3 years			Due in 3–5 years			Due after 5 years
Import letters of credit		$1,682		$	1,682			$—			$—			$—
Standby letters of credit		39,204			39,204			—			—			—
Surety bonds		7,724			7,724			—			—			—
Total commercial commitments	$	48,610			$48,610		$	—		$	—		$	—

 

Long-term Debt

In November 2003, the Company retired $6,000,000 of aggregate principal notes with an original maturity date of January 1, 2004.

In the fourth quarter of fiscal 2003, the Company reclassified $16,000,000 aggregate principal amount of 6.67% Medium-Term Notes with a stated maturity date of November 5, 2004 and $35,000,000 aggregate principal amount of 6.71% Medium-Term Notes with a stated maturity date of November 3, 2004 to current liabilities on the balance sheet. The Company anticipates being able to repurchase these notes with cash from operations and its existing line of credit.

On August 1, 2003, the Company extended its revolving line of credit, which was set to expire September 22, 2004, to August 1, 2008. Thereafter, it automatically renews for annual periods, unless terminated by either party on 60 days notice prior to the applicable termination date. The line of credit provides up to $226,000,000 of borrowing availability, subject to certain required reserves, and is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to August 1, 2008. The loans bear interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00%, subject to 0.25% incremental increases as excess availability under the line of credit falls below $50,000,000. The line of credit is subject to financial covenants. The weighted average interest rate on borrowings under the revolving credit agreement was 3.4% and 3.8% at January 31, 2004 and February 1, 2003, respectively.

On May 15, 2003, upon maturity, the Company retired $75,000,000 aggregate principal amount of 6.625% notes.

In the first quarter of fiscal 2003, the Company reclassified $32,000,000 aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a stated maturity date of March 3, 2004 to current liabilities on the consolidated balance sheet. The Company repurchased these notes in March 2004, with cash from operations and its existing line of credit.

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In the third quarter of fiscal 2002, the Company retired $42,875,000 aggregate principal amount of the remaining $43,005,000 of the Medium-Term Notes with an original maturity date of September 2007. These notes were redeemed at the option of the holders. The Company repurchased these notes with a portion of the proceeds from the sale of the 4.25% Senior Convertible Notes.

In the second quarter of fiscal 2002, the Company retired $49,915,000 aggregate principal amount of the $50,000,000 Medium-Term Note with an original maturity date of July 2007. These notes were redeemed at the option of the holders. The Company repurchased these notes with a portion of the proceeds from the sale of the 4.25% Senior Convertible Notes.

On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company’s wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California, Pep Boys—Manny, Moe & Jack of Delaware, Inc. and Pep Boys—Manny, Moe & Jack of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes is payable by the Company on June 1 and December 1 of each year, beginning December 1, 2002. The proceeds from the sale of the notes were used to retire debt.

In fiscal 2001, the Company repurchased the remaining $241,504,000 face value of its Liquid Yield Option Notes (LYONs). The book value of the repurchased LYONs was $161,812,000.

In June 2001, the Company obtained $90,000,000 in a Senior Secured Credit Facility, which was satisfied in full on April 1, 2004.

Other Contractual Obligations

In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773,000 over four years. As of January 31, 2004, the Company was obligated to purchase an outstanding balance of $15,569,000. The minimum required purchases for each of the remaining two years of this commitment are as follows: 2004—$8,112,000; 2005—$7,457,000.

The Company has letters of credit arrangements with selected vendors to assure collectibility of balances owed to these vendors. The Company was contingently liable for $1,682,000 in outstanding import letters of credit and $39,204,000 in outstanding standby letters of credit as of January 31, 2004.

The Company was also contingently liable for surety bonds in the amount of approximately $7,724,000 as of January 31, 2004. The surety bonds guarantee certain payments (for example utilities, easement repairs, workers’ compensation, customs fees, etc.) for the Company’s stores.

Off-balance Sheet Arrangements

On August 1, 2003, the Company refinanced $132,000,000 in operating leases. These leases, which expire on August 1, 2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in accordance with the original guidance of Financial Interpretation Number (FIN) 46 and has determined that it is not required to consolidate the leasing entity. The leases include a residual value guarantee with a maximum value of approximately $105,000,000. The Company expects the fair market value of the leased real estate to substantially reduce or eliminate the Company’s payment under the residual guarantee at the end of the lease term.

In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee related to this operating lease. As of January 31, 2004, the current value of this liability was $4,488,000 which is recorded in other long-term liabilities on the consolidated balance sheets.

In May 2001, the Company sold certain operating assets for $14,000,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease is being accounted for as an operating lease and the gain of $3,817,000 from the sale of the certain operating assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales and costs of service revenue.

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The Company leases certain property and equipment under operating leases which contain renewal and escalation clauses. Total operating lease commitments as of January 31, 2004 were $475,132,000.

Pension Plans

The Company has a defined benefit pension plan covering its full-time employees hired on or before February 1, 1992 and an unfunded Supplemental Executive Retirement Plan (SERP). The pension expense for fiscal 2003, 2002 and 2001, was $11,937,000, $3,243,000 and $1,754,000, respectively. This expense is calculated based upon a number of actuarial assumptions, including an expected return on plan assets of 6.75% and a discount rate of 6.75%. In developing the expected return on asset assumptions, the Company evaluated input from its actuaries, including their review of asset class return expectations. The discount rate utilized by the Company is based on a review of AA bond performance. Due to the effect of the unrecognized actuarial losses and based upon an expected return on plan assets of 6.75%, a discount rate of 6.25% and various other assumptions, the Company estimates the pension expense will approximate $3,587,000 for both plans in fiscal 2004. The Company will continue to evaluate its actuarial assumptions and adjust as necessary. In fiscal 2003, the Company contributed $13,151,000 to the defined benefit pension plan and the SERP. Based upon the current funded status of the defined benefit pension plan and the unfunded SERP, cash contributions are expected to be $1,055,000 in fiscal 2004.

In fiscal 2003, the Company settled an obligation of $12,620,000 related to the SERP obligation for the former Chairman and CEO. Also, the Company curtailed the benefits for 15 covered individuals as of January 31, 2004, and transferred a portion of their accrued benefits to a new defined contribution plan. These obligations resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” of approximately $5,231,000 and $2,191,000, respectively, in fiscal 2003.

RESULTS OF OPERATIONS

Restructuring

Building upon the Profit Enhancement Plan launched in October 2000, the Company, during fiscal 2003, conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon the Company’s profitability. The Company expects these actions, including the disposal and sublease of the Company’s real properties, to be substantially completed by the end of the second quarter 2004 and estimates the costs, including future costs that were not accrued, to be approximately $71,000,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and Statement of Financial Accounting Standards (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. These initiatives included:

Closure of 33 under-performing stores on July 31, 2003

The charges related to these closures included a $33,887,000 write-down of fixed assets, $1,122,000 in long-term lease and other related obligations, net of subleases, and $980,000 in workforce reduction costs. These charges are included in discontinued operations of the consolidated statement of operations. The write-down of fixed assets includes the adjustment to the market value of those owned stores that are now classified as assets held for disposal in accordance with SFAS 144 and the write-down of leasehold improvements. The assets held for disposal have been valued at the lower of their carrying amount or their estimated fair value, net of disposal costs. The long-term lease and other related obligations represent the fair value of such obligations less the estimated net sublease income. The workforce reduction costs represent the involuntary termination benefits payable to approximately 900 store employees, all of who were notified on or prior to July 31, 2003. Severance for these employees was accrued in accordance with SFAS 146. Approximately 61% of these employees were terminated as of November 1, 2003. The remaining employees accepted other positions within the Company subsequent to the July 31, 2003 notification date. The accrued severance of $557,000 related to employees that accepted other positions was reversed in the

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third quarter of fiscal 2003. An additional $187,000 in accrued severance was reversed in the fourth quarter of fiscal 2003 due to a change in the estimate of severance payable. These reversals were recorded in discontinued operations on the consolidated statement of operations.

Discontinuation of certain merchandise offerings

In the second quarter, the Company recorded a $24,580,000 write-down of inventory as a result of a decision to discontinue certain merchandising offerings. This write-down was recorded in cost of merchandise sales on the consolidated statement of operations.

Corporate realignment

The charges related to this realignment included $3,070,000 in workforce reduction costs, $2,543,000 of expenses incurred in the development of the restructuring plan, a $536,000 write-down of certain assets and $467,000 in costs related to two warehouse lease terminations. The workforce reduction costs represent the involuntary termination benefits payable to 150 Store Support Center employees and field managers. All of these employees were terminated as of November 1, 2003. The realignment charges were recorded in selling, general and administrative expenses and cost of merchandise sales on the consolidated statement of operations.

Reserve summary

The following chart details the reserve balances through January 31, 2004. The reserve includes remaining rent on leases net of sublease income, other contractual obligations associated with leased properties and employee severance.

(Dollar amounts in thousands)	Severance			Lease Expenses				Contractual Obligations				Total
Reserve balance at Feb. 1, 2003	$	—			$	—			$	—			$	—
Original reserve		4,050				2,332				887				7,269
Provision for present value of liabilities		—				92				25				117
Changes in assumptions about future sublease income, lease termination, contractual obligations and severance		(744	)			2,098				(44	)			1,310
Cash payments		(2,933	)			(2,154	)			(405	)			(5,492	)
Reserve balance at Jan. 31, 2004	$	373			$	2,368			$	463			$	3,204

 

Discontinued Operations

In accordance with SFAS No.144, the Company’s discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company’s corporate restructuring. The results for the fifty-two weeks ended January 31, 2004, February 1, 2003 and February 2, 2002 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results:

(Dollar amounts in thousands)
Fifty-two weeks ended	January 31, 2004			February 1, 2003			February 2, 2002
Total Revenues	$	37,722			$	74,711		$	73,865
Total Gross (Loss) Profit		(18,851	)			17,565			17,151
Selling, General, and Administrative Expenses		9,981				16,283			16,148
(Loss) Earnings from Discontinued Operations Before Income Taxes		(28,832	)			1,282			1,003
(Loss) Earnings from Discontinued Operations, Net of Tax	$	(18,263	)		$	808		$	642

 

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Additionally, the Company has made certain reclassifications to its consolidated balance sheets to reflect the assets held for disposal and assets from discontinued operations associated with the 33 stores closed on July 31, 2003. As of January 31, 2004 and February 1, 2003, these reclassifications were as follows:

(Dollar amounts in thousands)	January 31, 2004			February 1, 2003
Land	$	(8,954	)		$	(15,008	)
Building and improvements		(7,975	)			(45,872	)
Furniture, fixtures and equipment		—				(23,785	)
		(16,929	)			(84,665	)
Less accumulated depreciation and amortization		—				(27,114	)
Property and Equipment—Net	$	(16,929	)		$	(57,551	)
Assets held for disposal	$	16,929			$	—
Assets from discontinued operations	$	—			$	57,551

 

During fiscal 2003, the Company sold assets held for disposal for proceeds of $12,068,000 resulting in a gain of $7,097,000 which was recorded in discontinued operations on the consolidated statement of operations.

Impairment Charges

During the second quarter 2003, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that their carrying value may not be fully recoverable. An impairment charge of $2,121,000 was recorded for these stores in costs of merchandise sales on the consolidated statement of operations. The charge reflects the difference between these stores’ carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. Management’s judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates.

In November 2001, the Company began developing a fully integrated point-of-sale information system for all of its stores. Due to concerns about the ability of the base software’s architecture to support a chain-wide roll-out, the Company decided to identify an alternative base software as the basis for our customized system. Consequently, the Company took a $13,164,000 impairment charge against a portion of the system’s assets in the fourth quarter of fiscal 2003. This charge was recorded in selling, general and administrative expenses on the consolidated statement of operations.

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Analysis of Statement of Operations

The following table presents, for the periods indicated, certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.

	Percentage of Total Revenues										Percentage Change
Year ended	Jan. 31, 2004 (fiscal 2003)			Feb. 1, 2003 (Fiscal 2002)			Feb. 2, 2002 (Fiscal 2001)			Fiscal 2003 vs. Fiscal 2002				Fiscal 2002 vs. Fiscal 2001
Merchandise Sales		81.0	%		80.9	%		80.9	%			1.8	%		(0.6	)%
Service Revenue1		19.0			19.1			19.1				1.4			(0.8	)
Total Revenues		100.0			100.0			100.0				1.7			(0.6	)
Costs of Merchandise Sales2		71.6	3		69.7	3		70.7	3			4.7			(2.0	)
Costs of Service Revenue2		76.2	3		74.5	3		75.0	3			3.8			(1.4	)
Total Costs of Revenues		72.5			70.6			71.5				4.5			(1.9	)
Gross Profit from Merchandise Sales		28.4	3		30.3	3		29.3	3			(4.7	)		2.9
Gross Profit from Service Revenue		23.8	3		25.5	3		25.0	3			(5.4	)		1.0
Total Gross Profit		27.5			29.4			28.5				(4.8	)		2.6
Selling, General and Administrative Expenses		26.7			24.0			23.6				13.0			1.3
Operating Profit		0.8			5.4			4.9				(85.0	)		(8.8	)
Non-operating Income		0.2			0.1			0.2				7.8			(33.0	)
Interest Expense		1.8			2.2			2.5				(19.0	)		(12.1	)
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle		(0.8	)		3.3			2.6				(126.4	)		25.9
Income Tax (Benefit) Expense		36.7	4		37.0	4		36.0	4			(126.2	)		29.4
(Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle		(0.5	)		2.0			1.6				(126.5	)		23.9
(Loss) Earnings from Discontinued Operations, Net of Tax		(0.9	)		0.1			0.1				(2,360.3	)		25.9
Cumulative Effect of Change in Accounting Principle, Net of Tax		(0.1	)		—			—				—			—
Net (Loss) Earnings		(1.5	)		2.1			1.7				(173.4	)		24.0

 

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 (loss) earnings before income taxes.

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Fiscal 2003 vs. Fiscal 2002

Total revenues for fiscal 2003 increased 1.7%. This increase was due primarily to an increase in comparable store revenues (revenues generated by stores in operation during the same period) of 1.6%. Comparable store service revenue increased 1.3% while comparable store merchandise sales increased 1.7%.

Gross profit from merchandise sales decreased, as a percentage of merchandise sales, to 28.4% in fiscal 2003 from 30.3% in fiscal 2002. This decrease, as a percentage of merchandise sales, was due primarily to a $24,580,000 inventory write-down associated with the corporate restructuring, increased store occupancy costs, increased warehousing costs and an impairment charge of $2,121,000. The increase in store occupancy was due to higher rent and utilities expenses. The increase in warehousing costs was due to higher rent and delivery expenses.

Gross profit from service revenue decreased, as a percentage of service revenue, to 23.8% in fiscal 2003 from 25.5% in fiscal 2002. This decrease, as a percentage of service revenue, was due primarily to an increase in workers’ compensation expense.

Selling, general and administrative expenses increased, as a percentage of total revenues, to 26.7% in fiscal 2003 from 24.0% in fiscal 2002. This was a $65,671,000 or 13.0% increase over the prior year. This increase, as a percentage of total revenues, was due primarily to an increase in general office costs, net media expense and employee benefits, as a percentage of total revenues. The increase in general office costs was due primarily to an increase in the Company’s legal reserves of approximately $26,692,000, a $13,164,000 impairment charge for a portion of the point-of-sale information system project, and $5,613,000 of costs associated with the corporate restructuring. The increase in net media expense is due primarily to increased radio and circular advertising expense and a decrease in cooperative advertising. The increase in employee benefits was due primarily to the settlement of retirement plan obligations and increased health benefits expense.

Interest expense decreased 19.0% or $8,982,000 due primarily to lower debt levels coupled with lower average interest rates.

Earnings from discontinued operations decreased $19,071,000, net of tax, due primarily to the charges associated with the corporate restructuring.

Net earnings decreased, as a percentage of total revenues, due primarily to a decrease in gross profit from merchandise sales, as a percentage of merchandise sales, a decrease in gross profit from service revenue, as a percentage of service revenue, an increase in selling, general and administrative expenses, as a percentage of total revenues, a cumulative effect of change in accounting principle of $2,484,000, net of tax, and a decrease in earnings from discontinued operations offset, in part, by a decrease in interest expense.

Fiscal 2002 vs. Fiscal 2001

Total revenues for fiscal 2002 decreased 0.6%. This decrease was due primarily to a decrease in comparable store revenues (revenues generated by stores in operation during the same period) of 0.6%, offset slightly by an increase in the number of stores in operation in fiscal 2002 versus fiscal 2001. Comparable store service revenue decreased 0.9%, while comparable store merchandise sales decreased 0.6%.

Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 30.3% in fiscal 2002 from 29.3% in fiscal 2001. This increase was due primarily to higher merchandise margins, as a percentage of merchandise sales, offset, in part, by a charge related to the Profit Enhancement Plan of $2,014,000 in fiscal 2002 versus $4,169,000 in fiscal 2001. The improved merchandise margins were a result of a combination of an improvement in the mix of sales, selectively higher retail pricing, lower product acquisition costs and improved inventory controls.

Selling, general and administrative expenses increased, as a percentage of total revenues, to 24.0% in fiscal 2002 from 23.6% in fiscal 2001. This increase, as a percentage of total revenues, was due primarily to obligations associated with the non-renewal of the former Chairman and CEO’s employment agreement and related search fees, coupled with $4,905,000, or 72%, higher net media expense. The increase in selling, general and administrative expenses, as a percentage of total revenues, was offset, in part, by a decrease in store operating expenses. The increase in net media expense was due to increases in radio and circular advertising expenses, offset, in part, by

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a decrease in television advertising expense and an increase in cooperative advertising. The decrease in store expenses, as a percentage of total revenues, was due primarily to decreases in store payroll, as a percentage of total revenues.

Interest expense decreased $6,472,000, or 12.1%, due primarily to lower debt levels coupled with lower average interest rates on the Company’s borrowings.

Net earnings increased, as a percentage of total revenues, due primarily to an increase in gross profit from merchandise sales, as a percentage of merchandise sales, and a decrease in interest expense, offset by an increase in selling, general and administrative expenses, as a percentage of total revenues, and a net charge related to the Profit Enhancement Plan of $1,593,000 in fiscal 2002 versus $3,326,000 in fiscal 2001.

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 all fiscal years presented.

Industry Comparison

The Company operates in the U.S. automotive aftermarket, which as described in the industry overview section is split into two areas: the Do-It-For-Me (“DIFM”) (service labor, installed merchandise and tires) market and the Do-It-Yourself (“DIY”) (retail merchandise) market. Generally, the specialized automotive retailers focus on either the “DIY” or “DIFM” areas of the business. The Company believes that its operation in both the “DIY” and “DIFM” areas of the business positively differentiates it from most of its competitors. Although the Company manages its store performance at a store level in aggregation, management believes that the following presentation shows the comparison against competitors within the two areas. The Company competes in the “DIY” area of the business through its retail sales floor and commercial sales business (Retail Business). The Company considers its Service Business (labor and installed merchandise and tires) to compete in the DIFM area of the industry. The following table presents the revenues and gross profit for each area of the business.

(Dollar amounts in thousands)
Year-ended	January 31, 2004		February 1, 2003			February 2, 2002
Retail Revenues	$	1,195,757		$	1,163,808		$	1,092,192
Service Business Revenues		938,513			933,969			1,018,503
Total Revenues	$	2,134,270		$	2,097,777		$	2,110,695
Gross Profit from Retail Revenues1	$	310,688		$	327,852		$	304,696
Gross Profit from Service Business Revenues1		276,055			288,694			296,394
Total Gross Profit	$	586,743		$	616,546		$	601,090

 

¹ Gross Profit from Retail Revenues includes the cost of products sold, buying, warehousing and store occupancy costs. Gross Profit from Service Business Revenues includes the cost of installed products sold, buying, warehousing, service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes that the following represent its more critical estimates and assumptions used in the preparation of the consolidated financial statements, although not inclusive:

•   The Company evaluates whether inventory is stated at the lower of cost or market based on historical experience with the carrying value and life of inventory. The assumptions used in this evaluation are based on current market conditions and the Company believes inventory is stated at the lower of cost or market in the consolidated financial statements. In addition, historically the Company has been able to return excess items to vendors for credit. Future changes by vendors in their policies or willingness to accept returns of excess inventory could require a revision in the estimates.

•   The Company has risk participation arrangements with respect to casualty and health care insurance. The amounts included in the Company’s costs related to these arrangements are estimated and can vary based on changes in assumptions, claims experience or the providers included in the associated insurance programs.

•   The Company records reserves for future product returns and warranty claims. The reserves are based on current sales of products and historical claim experience. If claims experience differs from historical levels, revisions in the Company’s estimates may be required.

•   The Company has significant pension costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates and merit and promotion increases. The Company is required to consider current market conditions, including changes in interest rates in selecting these assumptions. Changes in the related pension costs or liabilities may occur in the future due to changes in the assumptions.

•   The Company periodically evaluates its long-lived assets for indicators of impairment. Management’s judgments are based on market and operational conditions at the time of evaluation. Future events could cause management’s conclusion on impairment to change, requiring an adjustment of these assets to their then current fair market value.

•   The Company provides estimates of fair value for real estate assets and lease liabilities related to store closures when appropriate to do so based on accounting principles generally accepted in the United States. Future circumstances may result in the Company’s actual future costs or the amounts recognized upon the sale of the property to differ substantially from original estimates.

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RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132 (revised 2003) revises employers’ disclosures about pension plans and postretirement benefit plans. SFAS No. 132 (revised 2003) does not change the measurement and recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” SFAS No. 132 (revised 2003) retains the original disclosure requirements contained in SFAS No. 132 and requires additional expanded annual and interim disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement benefit plans. Except for certain provisions, the adoption of this Statement is required for financial statements with fiscal years ending after December 15, 2003. The Company has adopted the provisions of SFAS No. 132 (revised 2003) in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements. The revised disclosure requirements are reflected in Note 10 of the consolidated financial statements included in Item 8 herein.

In December 2003, the FASB revised FIN 46, “Consolidation of Variable Interest Entities.” FIN 46, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of any expected losses from the variable interest entity’s activities, is entitled to receive any expected residual returns of the variable interest entity, or both. The guidance contained in FIN 46R is effective no later than the end of the first reporting period that ends after March 15, 2004. If an entity has applied the original guidance in this Interpretation prior to the effective date of FIN 46R, the entity, shall continue to apply FIN 46 until the effective date or apply this Interpretation at an earlier date. On August 1, 2003 the Company refinanced its real estate operating lease facility, which qualified as a variable interest entity into a new entity. The Company evaluated this leasing transaction in accordance with the original guidance of FIN 46 and determined it does not have to consolidate this leasing entity. The Company has adopted the revised guidance of FIN 46R for variable interest entities created prior to December 31, 2003 in the fourth quarter of 2003 with no material effect on its consolidated financial statements.

In November 2003, the Emerging Issues Task Force (EITF) reached a consensus on EITF 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers”. This consensus addresses the application of EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”. EITF 02-16 addresses accounting issues pertaining to cash consideration received by a reseller from a vendor entered into after December 31, 2002. The provisions of EITF No. 03-10 would be applied to new arrangements, including modifications to existing arrangements, entered into or redeemed in fiscal periods beginning after November 25, 2003. The Company has adopted the provisions of EITF 03-10 in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 affects how an entity measures and reports financial instruments that have characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003 and for all other instruments for interim periods beginning after June 15, 2003. The FASB continues to address certain implementation issues associated with the application of SFAS No. 150, including those related to mandatory redeemable financial instruments representing non-controlling interests in subsidiaries’ consolidated financial statements. The Company will continue to monitor the actions of the FASB and assess the impact, if any, on its consolidated financial statements. The Company has adopted the effective provisions of SFAS No. 150 in the third quarter of fiscal 2003 with no material effect on its consolidated financial statements.

In May 2003, the EITF reached a consensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” This consensus addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. The guidance in this EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company has elected early adoption for the provisions of this consensus prospectively in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.

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In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, resulting primarily from decisions made by the FASB’s Derivatives Implementation Group following the issuance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and is effective for hedging relationships designated after June 30, 2003. The Company adopted this statement in the second quarter of fiscal 2003 with no material effect on its consolidated financial statements.

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” As a result of rescinding FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, “Reporting the Results of Operations.” This statement also amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company has adopted the provisions of SFAS No. 145 in the first quarter of fiscal 2003. Accordingly, reclassifications of gains and losses from extinguishment of debt have been made for fiscal 2002 and 2001 to maintain comparability for the reported periods.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company has adopted the provisions of SFAS No. 143 in the first quarter of fiscal 2003 and has recognized an initial asset of $2,844,000, accumulated depreciation of $2,247,000, a liability of $4,540,000 and a cumulative effect of a change in accounting principle before taxes of $3,943,000 ($2,484,000 net of tax) on its consolidated financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company’s primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement and senior secured credit facility, changes in the lenders’ LIBOR could affect the rates at which the Company could borrow funds thereunder. At January 31, 2004, the Company had outstanding borrowings of $22,469,000 against these credit facilities. Additionally, the Company has $132,000,000 of real estate operating leases which vary based on changes in LIBOR. The Company has entered into an interest rate swap, which was designated as a cash flow hedge to convert the variable LIBOR portion of these lease payments to a fixed rate of 2.90% (see interest rate swap discussion below). The table below summarizes the fair value and contract terms of fixed rate debt instruments held by the Company at January 31, 2004:

(dollar amounts in thousands)	Amount		Average Interest Rate
Fair value at January 31, 2004	$	534,459
Expected maturities:
2004		108,000		6.7	%
2005		100,000		7.0
2006		143,000		6.9
2007		150,215		4.3
2008		—		—

 

At February 1, 2003, the Company had outstanding $582,215,000 of fixed rate notes with an aggregate fair market value of $550,491,000.

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On June 3, 2003, the Company entered into an interest rate swap for a notional amount of $130,000,000. The Company has designated the swap as a cash flow hedge of the Company’s real estate operating lease payments. The interest rate swap converts the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. As of January 31, 2004, the fair value of the interest rate swap was $2,195,000 ($1,389,000, net of tax) and this change in value was included in accumulated other comprehensive loss on the consolidated balance sheets.

ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The material in Item 7 of this filing titled “Quantitative and Qualitative Disclosures about Market Risk” are hereby incorporated herein by reference.

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ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS’ REPORT

Board of Directors and Stockholders
The Pep Boys—Manny, Moe & Jack

We have audited the accompanying consolidated balance sheets of The Pep Boys—Manny, Moe & Jack and subsidiaries (the “Company”) as of January 31, 2004 and February 1, 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended January 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Pep Boys—Manny, Moe & Jack and subsidiaries as of January 31, 2004 and February 1, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
April 9, 2004

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CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except per share amounts) The Pep Boys—Manny, Moe & Jack and Subsidiaries

	January 31, 2004			February 1, 2003
ASSETS
Current Assets:
Cash and cash equivalents	$	60,984			$	42,770
Accounts receivable, less allowance for uncollectible accounts of $739 and $422		30,562				17,916
Merchandise inventories		553,562				488,882
Prepaid expenses		39,480				43,746
Deferred income taxes		20,826				13,723
Other		81,096				56,687
Assets held for disposal		16,929				1,146
Total Current Assets		803,439				664,870
Property and Equipment—at cost:
Land		263,907				264,101
Buildings and improvements		899,114				890,898
Furniture, fixtures and equipment		586,607				580,746
Construction in progress		12,800				19,450
		1,762,428				1,755,195
Less accumulated depreciation and amortization		776,242				724,709
Total Property and Equipment—Net		986,186				1,030,486
Other		51,398				47,003
Assets from discontinued operations		—				57,551
Total Assets	$	1,841,023			$	1,799,910
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	342,584			$	200,053
Accrued expenses		267,565				232,255
Current maturities of long-term debt and obligations under capital lease		117,063				101,882
Total Current Liabilities		727,212				534,190
Long-term debt and obligations under capital leases, less current maturities		258,016				375,577
Convertible long-term debt		150,000				150,000
Other long-term liabilities		28,802				25,156
Deferred income taxes		57,492				60,663
Deferred gain on sale leaseback		3,907				4,332
Commitments and Contingencies
Stockholders’ Equity:
Common stock, par value $1 per share: Authorized 500,000,000 shares; Issued 63,910,577		63,911				63,911
Additional paid-in capital		177,317				177,244
Retained earnings		577,793				630,847
Accumulated other comprehensive loss		(15	)			(151	)
		819,006				871,851
Less cost of shares in treasury—8,928,159 and 10,070,729 shares		144,148				162,595
Less cost of shares in benefits trust—2,195,270 shares		59,264				59,264
Total Stockholders’ Equity		615,594				649,992
Total Liabilities and Stockholders’ Equity	$	1,841,023			$	1,799,910

 

See notes to the consolidated financial statements

29

CONSOLIDATED STATEMENTS OF OPERATIONS
(dollar amounts in thousands, except per share amounts) The Pep Boys—Manny, Moe & Jack and Subsidiaries

Year ended	January 31, 2004			February 1, 2003			February 2, 2002
Merchandise Sales	$	1,728,386			$	1,697,628		$	1,707,190
Service Revenue		405,884				400,149			403,505
Total Revenues		2,134,270				2,097,777			2,110,695
Costs of Merchandise Sales		1,238,147				1,183,138			1,207,153
Costs of Service Revenue		309,380				298,093			302,452
Total Costs of Revenues		1,547,527				1,481,231			1,509,605
Gross Profit from Merchandise Sales		490,239				514,490			500,037
Gross Profit from Service Revenue		96,504				102,056			101,053
Total Gross Profit		586,743				616,546			601,090
Selling, General and Administrative Expenses		569,834				504,163			497,798
Operating Profit		16,909				112,383			103,292
Non-operating Income		3,339				3,097			4,623
Interest Expense		38,255				47,237			53,709
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle		(18,007	)			68,243			54,206
Income Tax (Benefit) Expense		(6,608	)			25,251			19,513
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle		(11,399	)			42,992			34,693
(Loss) Earnings from Discontinued Operations, Net of Tax of $(10,569), $475 and $361		(18,263	)			808			642
Cumulative Effect of Change in Accounting Principle, Net of Tax		(2,484	)			—			—
Net (Loss) Earnings	$	(32,146	)		$	43,800		$	35,335
Basic (Loss) Earnings per Share:
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle	$	(0.22	)		$	.83		$	.68
(Loss) Earnings from Discontinued Operations, Net of Tax		(0.35	)			.02			.01
Cumulative Effect of Change in Accounting Principle, Net of Tax		(0.05	)			—			—
Basic (Loss) Earnings per Share	$	(0.62	)		$	.85		$	.69
Diluted (Loss) Earnings per Share:
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle	$	(0.22	)		$	.80		$	.67
(Loss) Earnings from Discontinued Operations, Net of Tax		(0.35	)			.02			.01
Cumulative Effect of Change in Accounting Principle, Net of Tax		(0.05	)			—			—
Diluted (Loss) Earnings per Share	$	(0.62	)		$	.82		$	.68

 

See notes to the consolidated financial statements

30

CONSOLIDATED STATEMENTS OF
     STOCKHOLDERS’ EQUITY
(dollar amounts in thousands, except per share amounts) The Pep Boys—Manny, Moe & Jack and Subsidiaries

																					Accumulated
		Common Stock				Additional									Treasury Stock						Other								Total
						Paid-in				Retained											Comprehensive				Benefits				Stockholders’
	Shares		Amount			Capital				Earnings				Shares			Amount				Income (Loss)				Trust				Equity
Balance, February 3, 2001		63,910,577		$	63,911		$	177,244			$	581,668			(10,454,644	)		$	(168,793	)		$	—			$	(59,264	)		$	594,766
Comprehensive income –
Net earnings												35,335
Total comprehensive income																															35,335
Cash dividends ($.27 per share)												(13,864	)																		(13,864	)
Effect of stock options and related tax benefits												(94	)		17,000				275												181
Dividend reinvestment plan												(1,101	)		153,198				2,473												1,372
Balance, February 2, 2002		63,910,577			63,911			177,244				601,944			(10,284,446	)			(166,045	)			—				(59,264	)			617,790
Comprehensive income –
Net earnings												43,800
Minimum pension liability adjustment, net of tax																							(151	)
Total Comprehensive Income																															43,649
Cash dividends ($.27 per share)												(13,911	)																		(13,911	)
Effect of stock options and related tax benefits								(21	)			(632	)		111,000				1,792												1,139
Dividend reinvestment plan								21				(354	)		102,717				1,658												1,325
Balance, February 1, 2003		63,910,577			63,911			177,244				630,847			(10,070,729	)			(162,595	)			(151	)			(59,264	)			649,992
Comprehensive loss:
Net loss												(32,146	)
Minimum pension liability adjustment, net of tax																							(1,253	)
Fair market value adjustment on derivatives, net of tax																							1,389
Total Comprehensive Loss																															(32,010	)
Cash dividends ($.27 per share)												(14,089	)																		(14,089	)
Effect of stock options and related tax benefits								(39	)			(6,499	)		1,054,250				17,021												10,483
Dividend reinvestment plan								112				(320	)		88,320				1,426												1,218
Balance, January 31, 2004		63,910,577		$	63,911		$	177,317			$	577,793			(8,928,159	)		$	(144,148	)		$	(15	)		$	(59,264	)		$	615,594

 

See notes to the consolidated financial statements

31

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands, except per share amounts) The Pep Boys—Manny, Moe & Jack and Subsidiaries

Year ended	January 31, 2004			February 1, 2003				February 2, 2002
Cash Flows from Operating Activities:
Net (Loss) Earnings	$	(32,146	)		$	43,800			$	35,335
Net (Loss) Earnings from discontinued operations		(18,263	)			808				642
Net (Loss) Earnings from continuing operations		(13,883	)			42,992				34,693
Adjustments to Reconcile Net (Loss) Earnings From Continuing Operations to Net Cash Provided by Continuing Operations:
Depreciation and amortization		69,611				75,933				80,990
Cumulative effect of change in accounting principle, net of tax		2,484				—				—
Accretion of asset disposal obligation		163				—				—
Deferred income taxes		(355	)			(1,176	)			7,424
Deferred gain on sale leaseback		(425	)			(112	)			(26	)
Accretion of bond discount		—				—				3,256
Loss on assets held for disposal		—				826				2,349
Loss on asset impairments		15,285				—				—
Loss (gain) from sale of assets		162				(1,909	)			(1,096	)
Gain from extinguishment of debt		—				—				(755	)
Changes in operating assets and liabilities:
Increase in accounts receivable, prepaid expenses and other		(32,050	)			(13,031	)			(17,206	)
(Increase) decrease in merchandise inventories		(64,680	)			30,591				28,262
Increase (decrease) in accounts payable		142,531				(16,032	)			11,330
Increase in accrued expenses		27,180				14,145				11,734
Increase in other long-term liabilities		3,646				1,276				2,226
Net Cash Provided by Continuing Operations		149,669				133,503				163,181
Net Cash Provided by Discontinued Operations		2,401				4,897				4,712
Net Cash Provided by Operating Activities		152,070				138,400				167,893
Cash Flows from Investing Activities:
Capital expenditures from continuing operations		(43,262	)			(41,889	)			(23,361	)
Capital expenditures from discontinued operations		—				(2,022	)			(2,014	)
Proceeds from sales of assets		3,316				2,636				22,489
Proceeds from sales of assets held for disposal		13,214				8,422				4,271
Net Cash (Used in) Provided by Investing Activities		(26,732	)			(32,853	)			1,385
Cash Flows from Financing Activities:
Net payments under line of credit agreements		(497	)			(70,295	)			(56,876	)
Repayment of life insurance policy loan		—				(20,686	)			—
Payments for finance issuance costs		(2,356	)			—				—
Payments on capital lease obligations		(700	)			(642	)			—
Reduction of long-term debt		(101,183	)			(121,938	)			(18,571	)
Reduction of convertible debt		—				—				(161,056	)
Net proceeds from issuance of notes		—				146,250				87,522
Dividends paid		(14,089	)			(13,911	)			(13,864	)
Proceeds from exercise of stock options		10,483				1,139				181
Proceeds from dividend reinvestment plan		1,218				1,325				1,372
Net Cash Used in Financing Activities		(107,124	)			(78,758	)			(161,292	)
Net Increase in Cash		18,214				26,789				7,986
Cash and Cash Equivalents at Beginning of Year		42,770				15,981				7,995
Cash and Cash Equivalents at End of Year	$	60,984			$	42,770			$	15,981
Supplemental Disclosure of Cash Flow Information:
Cash Paid during the year for:
Income taxes	$	6,553			$	22,856			$	6,570
Interest, net of amounts capitalized		35,048				44,840				47,081
Non-cash financing activities:
Equipment capital leases		—				1,301				88

 

See notes to the consolidated financial statements

32

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS  The Pep Boys-Manny, Moe & Jack and subsidiaries (the “Company”) is engaged principally in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of stores. The Company currently operates stores in 36 states and Puerto Rico.

FISCAL YEAR END  The Company’s fiscal year ends on the Saturday nearest to January 31. Fiscal years 2003, 2002 and 2001 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 accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

MERCHANDISE INVENTORIES  Merchandise inventories are valued at the lower of cost (last-in, first-out) or market. If the first-in, first-out method of valuing inventories had been used by the Company, the inventory valuation difference would have been immaterial on both January 31, 2004 and February 1, 2003.

CASH AND CASH EQUIVALENTS  Cash equivalents include all short-term, highly liquid investments with a maturity of three months or less when purchased.

PROPERTY AND EQUIPMENT  Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 to 40 years; furniture, fixtures and equipment, 3 to 10 years.

SOFTWARE CAPITALIZATION  The Company, in accordance with Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, capitalizes certain direct development costs associated with internal-use software, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.

CAPITALIZED INTEREST  Interest on borrowed funds is capitalized in connection with the construction of certain long-term assets. Capitalized interest has been immaterial in all periods presented.

REVENUE RECOGNITION  The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold. Service revenues are recognized upon completion of the service. The Company records revenue net of an allowance for estimated future returns. Return activity is immaterial to revenue and results of operations in all periods presented.

VENDOR SUPPORT FUNDS  The Company receives various incentives in the form of discounts and allowances from its vendors based on the volume of purchases or for services that the Company provides to the vendors. These incentives received from vendors include rebates, allowances and promotional funds. Typically, these funds are dependent on purchase volumes and advertising activities. The amounts received are subject to changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for the Company.

The Company accounts for vendor support funds in accordance with Emerging Issues Task Force (EITF) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor.” Rebates and other miscellaneous incentives are earned based on purchases or product sales. These incentives are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.

33

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Certain vendor allowances are used exclusively for promotions and to partially or fully offset certain other direct expenses. These allowances are netted against the appropriate expense it offsets.

WARRANTY RESERVE  The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by its vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions.

Components of the reserve for warranty costs for fiscal years ending January 31, 2004 and February 1, 2003 are as follows:

Beginning balance at February 2, 2002	$	2,277
Additions related to current year sales		8,813
Warranty costs incurred in current year		(10,179	)
Adjustments to accruals related to prior year sales		—
Ending Balance at February 1, 2003		911
Additions related to current year sales		6,677
Warranty costs incurred in current year		(6,974	)
Adjustments to accruals related to prior year sales		—
Ending Balance at January 31, 2004	$	614

 

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 (Revised 2003).”

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 certain cooperative advertising reimbursements against specific, incremental, identifiable costs incurred in connection with selling the vendor’s product. Any excess reimbursement is characterized as a reduction of inventory and is recognized as a reduction to cost of sales as the inventories are sold. Net advertising expense for fiscal years 2003, 2002 and 2001 was $19,714, $11,733 and $6,828, respectively. No advertising costs were recorded as assets as of January 31, 2004 or February 1, 2003.

STORE OPENING COSTS  The costs of opening new stores are expensed as incurred.

IMPAIRMENT OF LONG-LIVED ASSETS  The Company accounts for impaired long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are both held and used or to be disposed of. The Company evaluates the ability to recover long-lived assets whenever

34

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds the fair value. In addition, the Company reports assets to be disposed of at the lower of the carrying amount or the fair market value less selling costs.

During the second quarter 2003, the Company, as a result of its ongoing review of the performance of its stores, identified certain stores whose cash flow trend indicated that their carrying value may not be fully recoverable. An impairment charge of $2,121 was recorded for these stores in costs of merchandise sales on the consolidated statement of operations. The charge reflects the difference between these stores’ carrying value and fair value. Fair value was based on sales of similar assets or other estimates of fair value developed by Company management. Management’s judgment is necessary to estimate fair value. Accordingly, actual results could vary from such estimates.

In November 2001, the Company began developing a fully integrated point-of-sale information system for all of its stores. Due to concerns about the ability of the base software’s architecture to support a chain-wide roll-out, the Company decided to identify an alternative base software as the basis for our customized system. Consequently, the Company took a $13,164 impairment charge against a portion of the system’s assets in fiscal 2003. This charge was recorded in selling, general and administrative expenses on the consolidated statement of operations.

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  At January 31, 2004, the Company has three stock-based employee compensation plans, which are described in full in Note 12, “Stock Option Plans.” The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net (loss) earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

	January 31, 2004			February 1, 2003				February 2, 2002
Net (loss) earnings:
As reported	$	(32,146	)		$	43,800			$	35,335
Less: Total stock-based compensation expense determined under fair value-based method, net of tax		(2,839	)			(3,510	)			(3,892	)
Pro forma	$	(34,985	)		$	40,290			$	31,443
Net (loss) earnings per share:
Basic:
As reported	$	(.62	)		$	.85			$	.69
Pro forma	$	(.67	)		$	.78			$	.62
Diluted:
As reported	$	(.62	)		$	.82			$	.68
Pro forma	$	(.67	)		$	.75			$	.61

 

35

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The fair value of each option granted during fiscal years 2003, 2002 and 2001 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Year ended	January 31, 2004			February 1, 2003			February 2, 2002
Dividend yield		1.57	%		1.44	%		1.29	%
Expected volatility		41	%		41	%		39	%
Risk-free interest rate range:
High		4.6	%		5.4	%		5.5	%
Low		1.5	%		2.3	%		2.8	%
Ranges of expected lives in years		4-8			4-8			4-8

 

COMPREHENSIVE (LOSS) INCOME  Comprehensive (loss) income is reported in accordance with SFAS No. 130, “Reporting Comprehensive Income.” Other comprehensive (loss) income includes minimum pension liability and fair market value of cash flow hedge.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES  The Company reports derivatives and hedging activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149. 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.

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. 31, 2004		Feb. 1, 2003			Feb. 2, 2002
Parts and Accessories	$	1,392,179		$	1,362,112		$	1,357,603
Tires		336,207			335,516			349,587
Total Merchandise Sales		1,728,386			1,697,628			1,707,190
Service		405,884			400,149			403,505
Total Revenues	$	2,134,270		$	2,097,777		$	2,110,695

 

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.

36

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RECENTLY ADOPTED ACCOUNTING STANDARDS

In December 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132 (revised 2003) revises employers’ disclosures about pension plans and postretirement benefit plans. SFAS No. 132 (revised 2003) does not change the measurement and recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” SFAS No. 132 (revised 2003) retains the original disclosure requirements contained in SFAS No. 132 and requires additional expanded annual and interim disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement benefit plans. Except for certain provisions, the adoption of this Statement is required for financial statements with fiscal years ending after December 15, 2003. The Company has adopted the provisions of SFAS No. 132 (revised 2003) in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements. The revised disclosure requirements are reflected in Note 10 of the consolidated financial statements.

In December 2003, the FASB revised Financial Interpretation Number (FIN) 46, “Consolidation of Variable Interest Entities.” FIN 46, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of any expected losses from the variable interest entity’s activities, is entitled to receive any expected residual returns of the variable interest entity, or both. The guidance contained in FIN 46R is effective no later than the end of the first reporting period that ends after March 15, 2004. If an entity has applied the original guidance in this Interpretation prior to the effective date of FIN 46R, the entity shall continue to apply FIN 46 until the effective date or apply this Interpretation at an earlier date. On August 1, 2003, the Company refinanced its real estate operating lease facility, which qualified as a variable interest entity into a new entity. The Company evaluated this leasing transaction in accordance with the original guidance of FIN 46 and determined it does not have to consolidate this leasing entity. The Company has adopted the revised guidance of FIN 46R for variable interest entities created prior to December 31, 2003 in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.

In November 2003, the EITF reached a consensus on EITF 03-10, “Application of Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers”. This consensus addresses the application of EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”. EITF 02-16 addresses accounting issues pertaining to cash consideration received by a reseller from a vendor entered into after December 31, 2002. The provisions of EITF No. 03-10 would be applied to new arrangements, including modifications to existing arrangements, entered into or redeemed in fiscal periods beginning after November 25, 2003. The Company has adopted the provisions of EITF 03-10 in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 affects how an entity measures and reports financial instruments that have characteristics of both liabilities and equity, and is effective for financial instruments entered into or modified after May 31, 2003 and for all other instruments for interim periods beginning after June 15, 2003. The FASB continues to address certain implementation issues associated with the application of SFAS No. 150, including those related to mandatory redeemable financial instruments representing non-controlling interests in subsidiaries’ consolidated financial statements. The Company will continue to monitor the actions of the FASB and assess the impact, if any, on its consolidated financial statements. The Company has adopted the effective provisions of SFAS No. 150 in the third quarter of fiscal 2003 with no material effect on its consolidated financial statements.

37

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In May 2003, the EITF reached a consensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” This consensus addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. The guidance in this EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company has elected early adoption for the provisions of this consensus prospectively in the fourth quarter of fiscal 2003 with no material effect on its consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, resulting primarily from decisions made by the FASB’s Derivatives Implementation Group following the issuance of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and is effective for hedging relationships designated after June 30, 2003. The Company adopted this statement in the second quarter of fiscal 2003 with no material effect on its consolidated financial statements.

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” As a result of rescinding FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB Opinion No. 30, “Reporting the Results of Operations.” This statement also amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Additional amendments include changes to other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company has adopted the provisions of SFAS No. 145 in the first quarter of fiscal 2003. Accordingly, reclassifications of these items have been made for fiscal 2002 and 2001 to maintain comparability for the reported periods.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company has adopted the provisions of SFAS No. 143 in the first quarter of fiscal 2003 and has recognized an initial asset of $2,844, accumulated depreciation of $2,247, a liability of $4,540 and a cumulative effect of a change in accounting principle before taxes of $3,943 ($2,484 net of tax) on its consolidated financial statements.

RECLASSIFICATIONS  Certain reclassifications have been made to the prior years’ consolidated financial statements to provide comparability with the current year’s presentation.

38

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 2—DEBT

LONG-TERM DEBT

	January 31, 2004		February 1, 2003
Medium-Term Notes, 6.7% to 6.9%, due March 2004 through March 2006	$	100,000		$	100,000
7% Notes due June 2005		100,000			100,000
6.92% Term Enhanced ReMarketable Securities, due July 2016		100,000			100,000
6.625% Notes due May 2003		—			75,000
Medium-Term Notes, 6.4% to 6.7%, due November 2004 through September 2007		51,215			51,215
Senior Secured Credit Facility, payable through July 2006		22,419			42,588
Other notes payable, 3.8% to 8%		1,347			7,361
Capital lease obligations, payable through July 2004		48			748
Revolving credit agreement		50			547
		375,079			477,459
Less current maturities		117,063			101,882
Total Long-term Debt	$	258,016		$	375,577

 

In November 2003, the Company retired $6,000 of aggregate principal notes with an original maturity date of January 1, 2004.

In the fourth quarter of fiscal 2003, the Company reclassified $16,000 aggregate principal amount of 6.67% Medium-Term Notes with a stated maturity date of November 5, 2004 and $35,000 aggregate principal amount of 6.71% Medium-Term Notes with a stated maturity date of November 3, 2004 to current liabilities on the balance sheet.

On August 1, 2003, the Company extended its revolving line of credit, which was set to expire September 22, 2004, to August 1, 2008. Thereafter, it automatically renews for annual periods, unless terminated by either party on 60 days notice prior to the applicable termination date. The line of credit provides up to $226,000 of borrowing availability, subject to certain required reserves, and is collateralized by inventory and accounts receivable. Funds may be drawn and repaid anytime prior to August 1, 2008. The loans bear interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00%, subject to 0.25% incremental increases as excess availability under the line of credit falls below $50,000. The line of credit is subject to financial covenants. The weighted average interest rate on borrowings under the revolving credit agreement was 3.4% and 3.8% at January 31, 2004 and February 1, 2003, respectively.

On May 15, 2003, upon maturity, the Company retired $75,000 aggregate principal amount of 6.625% notes.

In the first quarter of fiscal 2003, the Company reclassified $32,000 aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004 and $25,000 aggregate principal amount of 6.65% Medium-Term Notes with a stated maturity date of March 3, 2004 to current liabilities on the consolidated balance sheet.

In the third quarter of fiscal 2002, the Company retired $42,875 aggregate principal amount of the remaining $43,005 of the Medium-Term Notes with an original maturity date of September 2007. These notes were redeemed at the option of the holders.

In the second quarter of fiscal 2002, the Company retired $49,915 aggregate principal amount of the $50,000 Medium-Term Notes with an original maturity date of July 2007. These notes were redeemed at the option of the holders.

39

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 2—DEBT (Continued)

In June 2001, the Company obtained $90,000 in a Senior Secured Credit Facility, which was satisfied in full on April 1, 2004. The Facility, which was secured by certain equipment and real estate with a total book value as of January 31, 2004 of $103,104, was issued in two tranches. Tranche A was a term loan for $45,000 with an interest rate based on LIBOR plus 3.65%. Tranche A was structured as a two-year term loan payable in equal installments with the final payment made in fiscal 2003. The weighted average interest rate on Tranche A was 4.98% at January 31, 2004 and 5.5% at February 1, 2003. Tranche B was a term loan for $45,000 with an interest rate of LIBOR plus 3.95%. Tranche B was structured as a five-year term loan payable in equal installments with the final payment due in 2006. The weighted average interest rate on Tranche B was 5.18% at January 31, 2004 and 5.8% at February 1, 2003. The Senior Secured Credit Facility was subject to certain financial covenants.

In February 1998, the Company established a Medium-Term Note program which permitted the Company to issue up to $200,000 of Medium-Term Notes. Under this program the Company sold $100,000 principal amount of Senior Notes, ranging in annual interest rates from 6.7% to 6.9% and due March 2004 and March 2006. Additionally, in July 1998, under this note program, the Company sold $100,000 of Term Enhanced ReMarketable Securities with a stated maturity date of July 2016. 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 2016. The level yield to maturity on the securities is approximately 6.85% and the coupon rate is 6.92%.

The other notes payable have a weighted average interest rate of 5.1% at January 31, 2004 and 5.7% at February 1, 2003, and mature at various times through August 2016. Certain of these notes are collateralized by land and buildings with an aggregate carrying value of approximately $6,984 and $7,116 at January 31, 2004 and February 1, 2003, respectively.

CONVERTIBLE DEBT

	January 31, 2004		February 1, 2003
4.25% Senior convertible notes, due June 2007	$	150,000		$	150,000
Subtotal		150,000			150,000
Less current maturities		—			—
Total Long-term Convertible Debt	$	150,000		$	150,000

 

On May 21, 2002, the Company issued $150,000 aggregate principal amount of 4.25% Convertible Senior Notes due June 1, 2007. The notes are unsecured and jointly and severally guaranteed by the Company’s wholly-owned direct and indirect operating subsidiaries, The Pep Boys Manny Moe & Jack of California, Pep Boys—Manny, Moe & Jack of Delaware, Inc. and Pep Boys—Manny, Moe & Jack of Puerto Rico, Inc. The notes may be converted into shares of Pep Boys common stock at any time prior to their maturity unless they have been previously repurchased or redeemed by the Company. The conversion rate is 44.6484 shares per each $1,000 principal amount of notes, equivalent to a conversion price of approximately $22.40 per share. Interest on the notes is payable by the Company on June 1 and December 1 of each year.

Several of the Company’s debt agreements require the maintenance of certain financial ratios and compliance with covenants. Approximately $18,046 of the Company’s net worth was not restricted by these covenants as of January 31, 2004. The Company was in compliance with all such ratios and covenants at January 31, 2004.

40

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 2—DEBT (Continued)

The annual maturities of all long-term debt and capital lease commitments for the next five years are:

Year	Long-Term Debt		Capital Leases			Total
2004	$	117,015		$	48		$	117,063
2005		109,017			—			109,017
2006		148,468			—			148,468
2007		150,235			—			150,235
2008		71			—			21
Thereafter		225			—			275
Total	$	525,031		$	48		$	525,079

 

The Company was contingently liable for outstanding letters of credit in the amount of approximately $40,886 at January 31, 2004. The Company was also contingently liable for surety bonds in the amount of approximately $7,724 at January 31, 2004.

NOTE 3—ACCRUED EXPENSES

The Company’s accrued expenses for fiscal years ended January 31, 2004 and February 1, 2003 were as follows:

	January 31, 2004		February 1, 2003
Medical and casualty risk insurance	$	136,599		$	124,571
Accrued compensation and related taxes		51,043			49,923
Legal reserves		26,576			6,054
Other		53,347			51,707
Total	$	267,565		$	232,255

 

NOTE 4—OTHER CURRENT ASSETS

The Company’s other current assets for fiscal years ended January 31, 2004 and February 1, 2003 were as follows:

	January 31, 2004		February 1, 2003
Reinsurance premiums receivable	$	67,326		$	56,445
Income taxes receivable		13,517			—
Other		253			242
Total	$	81,096		$	56,687

 

NOTE 5—LEASE AND OTHER COMMITMENTS

On August 1, 2003, the Company refinanced $132,000 in operating leases. These leases, which expire on August 1, 2008, have lease payments with an effective rate of LIBOR plus 2.06%. The Company has evaluated this transaction in accordance with the original guidance of FIN 46 and has determined that it is not required to consolidate the leasing entity. The leases include a residual value guarantee with a maximum value of approximately $105,000. The Company expects the fair market value of the leased real estate to substantially reduce or eliminate the Company’s payment under the residual guarantee at the end of the lease term.

41

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 5—LEASE AND OTHER COMMITMENTS (Continued)

In accordance with FIN 45, the Company has recorded a liability for the fair value of the guarantee related to this operating lease. As of January 31, 2004, the current value of this liability was $4,488, which is recorded in other long-term liabilities on the consolidated balance sheets.

In May 2001, the Company sold certain operating assets for $14,000. The assets were leased back from the purchaser in a lease structured as a one-year term with three one-year renewal options. The resulting lease is being accounted for as an operating lease and the gain of $3,817 from the sale of the certain operating assets is deferred until the lease term is completed and the residual guarantee is satisfied, at which time the gain will be recorded in costs of merchandise sales and costs of service revenue.

The Company leases certain property and equipment under operating leases and capital leases which contain renewal and escalation clauses. Future minimum rental commitments for noncancelable operating leases and capital leases in effect as of January 31, 2004 are shown in the table below. All amounts are exclusive of lease obligations and sublease rentals applicable to stores for which reserves in conjunction with the restructuring have previously been established. The aggregate minimum rental commitments for such leases having terms of more than one year are approximately:

Year	Operating Leases		Capital Leases
2004	$	51,266		$	48
2005		45,629			—
2006		43,670			—
2007		41,442			—
2008		34,634			—
Thereafter		258,491			—
Aggregate minimum lease commitments	$	475,132			48
Less: interest on capital leases					—
Present Value of Net Minimum Lease Commitments				$	48

 

Rental expenses incurred for operating leases in fiscal years 2003, 2002 and 2001 were $63,057, $61,516 and $61,859, respectively.

In October 2001, the Company entered into a contractual commitment to purchase media advertising services with equal annual purchase requirements totaling $39,773 over four years. As of January 31, 2004, the Company was obligated to purchase an outstanding balance of $15,569. The minimum required purchases for each of the remaining two years of this commitment are as follows: 2004—$8,112; 2005—$7,457.

NOTE 6—STOCKHOLDERS’ EQUITY

SHARE REPURCHASE—TREASURY STOCK  On February 1, 1999, the Company repurchased 11,276,698 of its common shares outstanding pursuant to a Dutch Auction self-tender offer at a price of $16.00 per share. The repurchased shares included 1,276,698 common shares which were repurchased as a result of the Company exercising its option to purchase an additional 2% of its outstanding shares. Expenses related to the share repurchase were approximately $1,638 and were included as part of the cost of the shares acquired. A portion of the treasury shares will be used by the Company to provide benefits to employees under its compensation plans and in conjunction with the Company’s dividend reinvestment program. As of January 31, 2004, the Company has reflected 8,928,159 shares of its common stock at a cost of $144,148 as “cost of shares in treasury” on the Company’s consolidated balance sheet.

42

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 6—STOCKHOLDERS’ EQUITY (Continued)

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 non-redeemable. The rights expire on December 31, 2007.

BENEFITS TRUST  On April 29, 1994, the Company established a flexible employee benefits trust with the intention of purchasing up to $75,000 worth of the Company’s common shares. The repurchased shares will be held in the trust and will be used to fund the Company’s existing benefit plan obligations including healthcare programs, savings and retirement plans and other benefit obligations. The trust will allocate or sell the repurchased shares through 2023 to fund these benefit programs. As shares are released from the trust, the Company will charge or credit additional paid-in capital for the difference between the fair value of shares released and the original cost of the shares to the trust. For financial reporting purposes, the trust is consolidated with the accounts of the Company. All dividend and interest transactions between the trust and the Company are eliminated. In connection with the Dutch Auction self-tender offer, 37,230 shares were tendered at a price of $16.00 per share in fiscal 1999. At January 31, 2004, the Company has reflected 2,195,270 shares of its common stock at a cost of $59,264 as “cost of shares in benefits trust” on the Company’s consolidated balance sheet.

NOTE 7—RESTRUCTURING

Building upon the Profit Enhancement Plan launched in October 2000, the Company, during fiscal 2003, conducted a comprehensive review of its operations including individual store performance, the entire management infrastructure and its merchandise and service offerings. On July 31, 2003, the Company announced several initiatives aimed at realigning its business and continuing to improve upon the Company’s profitability. The Company expects these actions, including the disposal and sublease of the Company’s real properties, to be substantially completed by the end of the second quarter 2004 and estimates the costs, including future costs that were not accrued, to be approximately $71,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. These initiatives included:

Closure of 33 under-performing stores on July 31, 2003

The charges related to these closures included a $33,887 write-down of fixed assets, $1,122 in long-term lease and other related obligations, net of subleases, and $980 in workforce reduction costs. These charges are included in discontinued operations of the consolidated statement of operations. The write-down of fixed assets includes the adjustment to the market value of those owned stores that are now classified as assets held for disposal in accordance with SFAS 144 and the write-down of leasehold improvements. The assets held for disposal have been valued at the lower of their carrying amount or their estimated fair value, net of disposal costs. The long-term lease and other related obligations represent the fair value of such obligations less the estimated net sublease income. The workforce reduction costs represent the involuntary termination benefits payable to approximately 900 store employees, all of who were notified on or prior to July 31, 2003. Severance for these employees was accrued in accordance with SFAS 146. Approximately 61% of these employees were terminated as of November 1, 2003. The remaining employees accepted other positions within the Company subsequent to the July 31, 2003 notification date. The

43

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 7—RESTRUCTURING (Continued)

accrued severance of $557 related to employees that accepted other positions was reversed in the third quarter of fiscal 2003. An additional $187 in accrued severance was reversed in the fourth quarter of fiscal 2003 for a change in the estimate of severance payable. These reversals were recorded in discontinued operations on the consolidated statement of operations.

Discontinuation of certain merchandise offerings

In the second quarter, the Company recorded a $24,580 write-down of inventory as a result of a decision to discontinue certain merchandising offerings. This write-down was recorded in cost of merchandise sales on the consolidated statement of operations.

Corporate realignment

The charges related to this realignment included $3,070 in workforce reduction costs, $2,543 of expenses incurred in the development of the restructuring plan, a $536 write-down of certain assets and $467 in costs related to two warehouse lease terminations. The workforce reduction costs represent the involuntary termination benefits payable to 150 Store Support Center employees and field managers. All of these employees were terminated as of November 1, 2003. The realignment charges were recorded in selling, general and administrative expenses and cost of merchandise sales on the consolidated statement of operations.

Reserve Summary

The following chart details the reserve balances through January 31, 2004. The reserve includes remaining rent on leases net of sublease income, other contractual obligations associated with leased properties and employee severance.

	Severance			Lease Expenses				Contractual Obligations				Total
Reserve balance at Feb. 1, 2003	$	—			$	—			$	—			$	—
Original reserve		4,050				2,332				887				7,269
Provision for present value of liabilities		—				92				25				117
Changes in assumptions about future sublease income, lease termination, contractual obligations and severance		(744	)			2,098				(44	)			1,310
Cash payments		(2,933	)			(2,154	)			(405	)			(5,492	)
Reserve balance at Jan. 31, 2004	$	373			$	2,368			$	463			$	3,204

 

44

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 8—DISCONTINUED OPERATIONS

In accordance with SFAS No. 144, the Company’s discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company’s corporate restructuring. The results for the fiscal years ended January 31, 2004, February 1, 2003, and February 2, 2002 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results:

Year ended	January 31, 2004			February 1, 2003			February 2, 2002
Total Revenues	$	37,722			$	74,711		$	73,865
Total Gross (Loss) Profit		(18,851	)			17,565			17,151
Selling, General, and Administrative Expenses		9,981				16,283			16,148
(Loss) Earnings from Discontinued Operations Before Income Taxes		(28,832	)			1,282			1,003
(Loss) Earnings from Discontinued Operations, Net of Tax	$	(18,263	)		$	808		$	642

 

Additionally, the Company has made certain reclassifications to its consolidated balance sheets to reflect the assets held for disposal and assets from discontinued operations associated with the 33 stores closed on July 31, 2003. As of January 31, 2004 and February 1, 2003, these reclassifications were as follows:

	January 31, 2004			February 1, 2003
Land	$	(8,954	)		$	(15,008	)
Building and improvements		(7,975	)			(45,872	)
Furniture, fixtures and equipment		—				(23,785	)
		(16,929	)			(84,665	)
Less accumulated depreciation and amortization		—				(27,114	)
Property and Equipment—Net	$	(16,929	)		$	(57,551	)
Assets held for disposal	$	16,929			$	—
Assets from discontinued operations	$	—			$	57,551

 

During fiscal 2003, the Company sold assets held for disposal for proceeds of $12,068, resulting in a gain of $7,097 which was recorded in discontinued operations on the consolidated statement of operations.

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES

On May 21, 2002, the Company issued $150,000 aggregate principal amount of 4.25% Convertible Senior Notes. The notes are jointly and severally guaranteed by the Company’s wholly-owned direct and indirect operating subsidiaries (“subsidiary guarantors”), The Pep Boys Manny Moe & Jack of California, Pep Boys—Manny, Moe & Jack of Delaware, Inc. and Pep Boys—Manny, Moe & Jack of Puerto Rico, Inc.

The following are consolidating balance sheets of the Company as of January 31, 2004 and February 1, 2003 and the related consolidating statements of operations and consolidating statements of cash flows for the fiscal years ended January 31, 2004, February 1, 2003 and February 2, 2002:

45

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES (Continued)

CONSOLIDATING BALANCE SHEET

As of January 31, 2004	Pep Boys			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Elimination				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	43,929			$	9,070		$	7,985		$	—			$	60,984
Accounts receivable, net		14,573				15,989			—			—				30,562
Merchandise inventories		191,111				362,451			—			—				553,562
Prepaid expenses		25,860				16,714			17,656			(20,750	)			39,480
Deferred income taxes		7,224				8,354			5,248			—				20,826
Other		17,891				7,457			55,748			—				81,096
Assets held for disposal		8,083				8,846			—			—				16,929
Total Current Assets		308,671				428,881			86,637			(20,750	)			803,439
Property and Equipment—at cost:
Land		87,484				176,423			—			—				263,907
Buildings and improvements		308,066				591,048			—			—				899,114
Furniture, fixtures and equipment		286,472				300,135			—			—				586,607
Construction in progress		12,800				—			—			—				12,800
		694,822				1,067,606			—			—				1,762,428
Less accumulated depreciation and amortization		344,773				431,469			—			—				776,242
Total Property and Equipment—Net		350,049				636,137			—			—				986,186
Investment in subsidiaries		1,473,013				—			1,162,965			(2,635,978	)
Intercompany receivable		—				410,107			356,382			(766,489	)			—
Other		48,240				3,158			—			—				51,398
Total Assets	$	2,179,973			$	1,478,283		$	1,605,984		$	(3,423,217	)		$	1,841,023
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	342,575			$	9		$	—		$	—			$	342,584
Accrued expenses		43,670				85,790			158,855			(20,750	)			267,565
Current maturities of long-term debt and obligations under capital leases		117,063				—			—			—				117,063
Total Current Liabilities		503,308				85,799			158,855			(20,750	)			727,212
Long-term debt and obligations under capital leases, less current maturities		257,983				33			—			—				258,016
Convertible long-term debt, less current maturities		150,000				—			—			—				150,000
Other long-term liabilities		9,952				18,850			—			—				28,802
Intercompany liabilities		607,168				159,321			—			(766,489	)			—
Deferred income taxes		34,811				22,681			—			—				57,492
Deferred gain on sale leaseback		1,157				2,750			—			—				3,907
Stockholders’ Equity:
Common stock		63,911				1,501			101			(1,602	)			63,911
Additional paid-in capital		177,317				240,359			200,398			(440,757	)			177,317
Retained earnings		577,793				946,989			1,246,630			(2,193,619	)			577,793
Accumulated other comprehensive loss		(15	)			—			—			—				(15	)
		819,006				1,188,849			1,447,129			(2,635,978	)			819,006
Less:
Cost of shares in treasury		144,148				—			—			—				144,148
Cost of shares in benefits trust		59,264				—			—			—				59,264
Total Stockholders’ Equity		615,594				1,188,849			1,447,129			(2,635,978	)			615,594
Total Liabilities and Stockholders’ Equity	$	2,179,973			$	1,478,283		$	1,605,984		$	(3,423,217	)		$	1,841,023

 

46

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES (Continued)

CONSOLIDATING BALANCE SHEET

As of February 1, 2003	Pep Boys			Subsidiary Guarantors				Non- Guarantor Subsidiaries			Elimination				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	32,654			$	9,714			$	402		$	—			$	42,770
Accounts receivable, net		8,122				9,794				—			—				17,916
Merchandise inventories		166,166				322,716				—			—				488,882
Prepaid expenses		29,176				16,308				17,637			(19,375	)			43,746
Deferred income taxes		6,812				(819	)			7,730			—				13,723
Other		107				—				56,580			—				56,687
Assets held for disposal		—				1,146				—			—				1,146
Total Current Assets		243,037				358,859				82,349			(19,375	)			664,870
Property and Equipment—at cost:
Land		88,271				175,830				—			—				264,101
Buildings and improvements		303,200				587,698				—			—				890,898
Furniture, fixtures and equipment		279,884				300,862				—			—				580,746
Construction in progress		14,764				4,686				—			—				19,450
		686,119				1,069,076				—			—				1,755,195
Less accumulated depreciation and amortization		319,005				405,704				—			—				724,709
Total Property and Equipment—Net		367,114				663,372				—			—				1,030,486
Investment in subsidiaries		1,455,877				—				1,121,299			(2,577,176	)			—
Intercompany receivable		—				631,438				335,640			(967,078	)			—
Other		41,972				5,031				—			—				47,003
Assets from discontinued operations		14,219				43,332				—			—				57,551
Total Assets	$	2,122,219			$	1,702,032			$	1,539,288		$	(3,563,629	)		$	1,799,910
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	200,044			$	9			$	—		$	—			$	200,053
Accrued expenses		59,625				48,567				143,438			(19,375	)			232,255
Current maturities of long-term debt and obligations under capital leases		101,882				—				—			—				101,882
Total Current Liabilities		361,551				48,576				143,438			(19,375	)			534,190
Long—term debt and obligations under capital leases, less current maturities		375,216				361				—			—				375,577
Convertible long-term debt, less current maturities		150,000				—				—			—				150,000
Other long-term liabilities		5,955				19,201				—			—				25,156
Intercompany liabilities		544,877				422,201				—			(967,078	)			—
Deferred income taxes		33,322				27,341				—			—				60,663
Deferred gain on sale leaseback		1,306				3,026				—			—				4,332
Stockholders’ Equity:
Common stock		63,911				1,501				101			(1,602	)			63,911
Additional paid-in capital		177,244				240,359				200,398			(440,757	)			177,244
Retained earnings		630,847				939,466				1,195,351			(2,134,817	)			630,847
Accumulated other comprehensive loss		(151	)			—				—			—				(151	)
		871,851				1,181,326				1,395,850			(2,577,176	)			871,851
Less:
Cost of shares in treasury		162,595				—				—			—				162,595
Cost of shares in benefits trust		59,264				—				—			—				59,264
Total Stockholders’ Equity		649,992				1,181,326				1,395,850			(2,577,176	)			649,992
Total Liabilities and Stockholders’ Equity	$	2,122,219			$	1,702,032			$	1,539,288		$	(3,563,629	)		$	1,799,910

 

47

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS

Year ended January 31, 2004	Pep Boys			Subsidiary Guarantors				Non- Guarantor Subsidiaries				Elimination				Consolidated
Merchandise Sales	$	591,505			$	1,136,881			$	—			$	—			$	1,728,386
Service Revenue		141,304				264,580				—				—				405,884
Other Revenue		—				—				26,825				(26,825	)			—
Total Revenues		732,809				1,401,461				26,825				(26,825	)			2,134,270
Costs of Merchandise Sales		424,858				813,289				—				—				1,238,147
Costs of Service Revenue		105,473				203,907				—				—				309,380
Costs of Other Revenue		—				—				31,636				(31,636	)			—
Total Costs of Revenues		530,331				1,017,196				31,636				(31,636	)			1,547,527
Gross Profit from Merchandise Sales		166,647				323,592				—				—				490,239
Gross Profit from Service Revenue		35,831				60,673				—				—				96,504
Gross Loss from Other Revenue		—				—				(4,811	)			4,811				—
Total Gross Profit (Loss)		202,478				384,265				(4,811	)			4,811				586,743
Selling, General and Administrative Expenses		192,228				372,454				341				4,811				569,834
Operating Profit (Loss)		10,250				11,811				(5,152	)			—				16,909
Equity in Earnings of Subsidiaries		17,136				—				41,666				(58,802	)			—
Non-Operating (Expense) Income		(17,056	)			48,550				19,915				(48,070	)			3,339
Interest Expense		61,675				24,650				—				(48,070	)			38,255
(Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle		(51,345	)			35,711				56,429				(58,802	)			(18,007	)
Income Tax (Benefit) Expense		(24,225	)			12,467				5,150				—				(6,608	)
Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle		(27,120	)			23,244				51,279				(58,802	)			(11,399	)
Loss from Discontinued Operations, Net of Tax		(4,127	)			(14,136	)			—				—				(18,263	)
Cumulative Effect of Change in Accounting Principle, Net of Tax		(899	)			(1,585	)			—				—				(2,484	)
Net (Loss) Earnings	$	(32,146	)		$	7,523			$	51,279			$	(58,802	)		$	(32,146	)

 

48

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS

Year ended February 1, 2003	Pep Boys			Subsidiary Guarantors			Non- Guarantor Subsidiaries				Elimination				Consolidated
Merchandise Sales	$	585,819			$	1,111,809		$	—			$	—			$	1,697,628
Service Revenue		140,419				259,730			—				—				400,149
Other Revenue		—				—			26,075				(26,075	)			—
Total Revenues		726,238				1,371,539			26,075				(26,075	)			2,097,777
Costs of Merchandise Sales		406,192				776,946			—				—				1,183,138
Costs of Service Revenue		101,443				196,650			—				—				298,093
Costs of Other Revenue		—				—			29,498				(29,498	)			—
Total Costs of Revenues		507,635				973,596			29,498				(29,498	)			1,481,231
Gross Profit from Merchandise Sales		179,627				334,863			—				—				514,490
Gross Profit from Service Revenue		38,976				63,080			—				—				102,056
Gross Loss from Other Revenue		—				—			(3,423	)			3,423				—
Total Gross Profit (Loss)		218,603				397,943			(3,423	)			3,423				616,546
Selling, General and Administrative Expenses		168,327				332,096			317				3,423				504,163
Operating Profit (Loss)		50,276				65,847			(3,740	)			—				112,383
Equity in Earnings of Subsidiaries		67,153				—			70,805				(137,958	)			—
Non-Operating (Expense) Income		(16,977	)			47,332			21,113				(48,371	)			3,097
Interest Expense		70,099				25,509			—				(48,371	)			47,237
Earnings from Continuing Operations Before Income Taxes		30,353				87,670			88,178				(137,958	)			68,243
Income Tax (Benefit) Expense		(12,828	)			32,013			6,066				—				25,251
Net Earnings from Continuing Operations		43,181				55,657			82,112				(137,958	)			42,992
Earnings from Discontinued Operations, Net of Tax		619				189			—				—				808
Net Earnings	$	43,800			$	55,846		$	82,112			$	(137,958	)		$	43,800

 

49

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS

Year ended February 2, 2002	Pep Boys			Subsidiary Guarantors		Non- Guarantor Subsidiaries			Elimination			Consolidated
Merchandise Sales	$	587,319		$	1,119,871	$	—		$	—		$	1,707,190
Service Revenue		143,267			260,238		—			—			403,505
Other Revenue		—			—		22,588			(22,588	)		—
Total Revenues		730,586			1,380,109		22,588			(22,588	)		2,110,695
Costs of Merchandise Sales		415,805			791,348		—			—			1,207,153
Costs of Service Revenue		105,848			196,604		—			—			302,452
Costs of Other Revenue		—			—		26,118			(26,118	)		—
Total Costs of Revenues		521,653			987,952		26,118			(26,118	)		1,509,605
Gross Profit from Merchandise Sales		171,514			328,523		—			—			500,037
Gross Profit from Service Revenue		37,419			63,634		—			—			101,053
Gross Loss from Other Revenue		—			—		(3,530	)		3,530			—
Total Gross Profit (Loss)		208,933			392,157		(3,530	)		3,530			601,090
Selling, General and Administrative Expenses		167,733			326,231		304			3,530			497,798
Operating Profit (Loss)		41,200			65,926		(3,834	)		—			103,292
Equity in Earnings of Subsidiaries		65,109			—		73,910			(139,019	)		—
Non-Operating (Expense) Income		(15,616	)		49,962		22,979			(52,702	)		4,623
Interest Expense		74,617			31,794		—			(52,702	)		53,709
Earnings from Continuing Operations Before Income Taxes		16,076			84,094		93,055			(139,019	)		54,206
Income Tax (Benefit) Expense		(18,754	)		31,566		6,701			—			19,513
Net Earnings from Continuing Operations		34,830			52,528		86,354			(139,019	)		34,693
Earnings from Discontinued Operations, Net of Tax		505			137		—			—			642
Net Earnings	$	35,335		$	52,665	$	86,354		$	(139,019	)	$	35,335

 

50

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year ended January 31, 2004	Pep Boys			Subsidiary Guarantors				Non- Guarantor Subsidiaries				Elimination				Consolidated
Cash Flows from Operating Activities:
Net (Loss) Earnings	$	(32,146	)		$	7,523			$	51,279			$	(58,802	)		$	(32,146	)
Net Loss from Discontinued Operations		(4,127	)			(14,136	)			—				—				(18,263	)
Net (Loss) Earnings from Continuing Operations		(28,019	)			21,659				51,279				(58,802	)			(13,883	)
Adjustments to Reconcile Net (Loss) Earnings to Net Cash Provided By Continuing Operations:
Depreciation and amortization		29,171				40,440				—				—				69,611
Cumulative effect of change in accounting principle, net of tax		899				1,585				—				—				2,484
Accretion of asset disposal obligation		38				125				—				—				163
Equity in earnings of subsidiaries		(17,136	)			—				(41,666	)			58,802				—
Deferred income taxes		3,248				(6,085	)			2,482				—				(355	)
Deferred gain on sale leaseback		(149	)			(276	)			—				—				(425	)
Loss on asset impairments		13,164				2,121				—				—				15,285
(Gain) loss from sale of assets		(7	)			169				—				—				162
Changes in operating assets and liabilities: (Increase) decrease in accounts receivable, prepaid expenses and other		(22,501	)			(11,737	)			813				1,375				(32,050	)
Increase in merchandise inventories		(24,945	)			(39,735	)			—				—				(64,680	)
Increase in accounts payable		142,531				—				—				—				142,531
(Decrease) increase in accrued expenses		(19,689	)			32,827				15,417				(1,375	)			27,180
Increase (decrease) in other long-term liabilities		3,997				(351	)			—				—				3,646
Net Cash Provided by Continuing Operations		80,602				40,742				28,325				—				149,669
Net Cash Provided by Discontinued Operations		367				2,034				—				—				2,401
Net Cash Provided by Operating Activities		80,969				42,776				28,325				—				152,070
Cash Flows from Investing Activities:
Capital expenditures from continuing operations		(27,724	)			(15,538	)			—				—				(43,262	)
Proceeds from sales of assets		870				2,446				—				—				3,316
Proceeds from sales of assets held for disposal		—				13,214				—				—				13,214
Net Cash (Used in) Provided by Investing Activities		(26,854	)			122				—				—				(26,732	)
Cash Flows from Financing Activities:
Net payments under line of credit agreements		(169	)			(328	)			—				—				(497	)
Payments for finance issuance costs		(2,356	)			—				—				—				(2,356	)
Payments on capital lease obligations		(700	)			—				—				—				(700	)
Reduction of long-term debt		(101,183	)			—				—				—				(101,183	)
Intercompany loan		63,956				(43,214	)			(20,742	)			—				—
Dividends paid		(14,089	)			—				—				—				(14,089	)
Proceeds from exercise of stock options		10,483				—				—				—				10,483
Proceeds from dividend reinvestment plan		1,218				—				—				—				1,218
Net Cash Used In Financing Activities		(42,840	)			(43,542	)			(20,742	)			—				(107,124	)
Net Increase (Decrease) in Cash		11,275				(644	)			7,583				—				18,214
Cash and Cash Equivalents at Beginning of Year		32,654				9,714				402				—				42,770
Cash and Cash Equivalents at End of Year	$	43,929			$	9,070			$	7,985			$	—			$	60,984

 

51

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year ended February 1, 2003	Pep Boys			Subsidiary Guarantors				Non- Guarantor Subsidiaries				Elimination				Consolidated
Cash Flows from Operating Activities:
Net Earnings	$	43,800			$	55,846			$	82,112			$	(137,958	)		$	43,800
Net Earnings from Discontinued Operations		619				189				—				—				808
Net Earnings from Continuing Operations		43,181				55,657				82,112				(137,958	)			42,992
Adjustments to Reconcile Net Earnings to Net Cash Provided By Continuing Operations:
Depreciation and amortization		32,928				43,005				—				—				75,933
Deferred income taxes		2,823				(3,211	)			(788	)			—				(1,176	)
Deferred gain on sale leaseback		(11	)			(101	)			—				—				(112	)
Equity in earnings of subsidiaries		(67,153				—				(70,805	)			137,958				—
Loss on assets held for disposal		11				815				—				—				826
Gain from sale of assets		(216	)			(1,693	)			—				—				(1,909	)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, prepaid expenses and other		15,147				(41,241	)			10,938				2,125				(13,031	)
Decrease in merchandise inventories		10,530				20,061				—				—				30,591
Decrease in accounts payable		(16,032	)			—				—				—				(16,032	)
Increase in accrued expenses		2,956				361				12,953				(2,125	)			14,145
(Decrease) increase in other long-term liabilities		(384	)			1,660				—				—				1,276
Net Cash Provided by Continuing Operations		23,780				75,313				34,410				—				133,503
Net Cash Provided by Discontinued Operations		1,911				2,986				—				—				4,897
Net Cash Provided by Operating Activities		25,691				78,299				34,410				—				138,400
Cash Flows from Investing Activities:
Capital expenditures from continuing operations		(27,005	)			(14,884	)			—				—				(41,889	)
Capital expenditures from discontinued operations		(163	)			(1,859	)			—				—				(2,022	)
Proceeds from sales of assets		816				1,820				—				—				2,636
Proceeds from assets held for disposal		1,234				7,188				—				—				8,422
Net Cash Used in Investing Activities		(25,118	)			(7,735	)			—				—				(32,853	)
Cash Flows from Financing Activities:
Net payments under line of credit agreements		(23,841	)			(46,454	)			—				—				(70,295	)
Repayment of life insurance policy loan		(17,908	)			(2,778	)			—				—				(20,686	)
Payments on capital lease obligations		(642	)			—				—				—				(642	)
Reduction of long-term debt		(121,938	)			—				—				—				(121,938	)
Net proceeds from issuance of notes		146,250				—				—				—				146,250
Intercompany loan		56,811				(22,492	)			(34,319	)			—				—
Dividends paid		(13,911	)			—				—				—				(13,911	)
Proceeds from exercise of stock options		1,139				—				—				—				1,139
Proceeds from dividend reinvestment plan		1,325				—				—				—				1,325
Net Cash Provided by (Used in) Financing Activities		27,285				(71,724	)			(34,319	)			—				(78,758	)
Net Increase (Decrease) in Cash		27,858				(1,160	)			91				—				26,789
Cash and Cash Equivalents at Beginning of Year		4,796				10,874				311				—				15,981
Cash and Cash Equivalents at End of Year	$	32,654			$	9,714			$	402			$	—			$	42,770

 

52

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 9—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Year ended February 2, 2002	Pep Boys			Subsidiary Guarantors				Non- Guarantor Subsidiaries				Elimination				Consolidated
Cash Flows from Operating Activities:
Net Earnings	$	35,335			$	52,665			$	86,354			$	(139,019	)		$	35,335
Net Earnings from Discontinued Operations		505				137				—				—				642
Net Earnings from Continuing Operations		34,830				52,528				86,354				(139,019	)			34,693
Adjustments to Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing Operations:
Depreciation and amortization		35,657				45,333				—				—				80,990
Deferred income taxes		1,110				6,730				(416	)			—				7,424
Deferred gain on sale leaseback		(12	)			(14	)			—				—				(26	)
Equity in earnings of subsidiaries		(65,109	)			—				(73,910	)			139,019				—
Loss on assets held for disposal		3,256				—				—				—				3,256
Gain from sale of assets		24				2,325				—				—				2,349
Gain from extinguishment of debt		(47	)			(1,049	)			—				—				(1,096	)
Changes in operating assets and liabilities:		(755	)			—				—				—				(755	)
(Increase) decrease in accounts receivable, prepaid expenses and other		(33,052	)			35,258				(18,087	)			(1,325	)			(17,206	)
Decrease in merchandise inventories		9,674				18,588				—				—				28,262
Increase in accounts payable		11,330				—				—				—				11,330
(Decrease) increase in accrued expenses		(16,831	)			18,176				9,064				1,325				11,734
Increase in other long-term liabilities		219				2,007				—				—				2,226
Net Cash (Used in) Provided by Continuing Operations		(19,706	)			179,882				3,005				—				163,181
Net Cash Provided by Discontinued Operations		1,808				2,904				—				—				4,712
Net Cash (Used in) Provided by Operating Activities		(17,898	)			182,786				3,005				—				167,893
Cash Flows from Investing Activities:
Capital expenditures from continuing operations		(14,133	)			(9,228	)			—				—				(23,361	)
Capital expenditures from discontinued operations		(259	)			(1,755	)			—				—				(2,014	)
Proceeds from sales of assets		5,181				17,308				—				—				22,489
Proceeds from sales of assets held for disposal		2,024				2,247				—				—				4,271
Net Cash (Used in) Provided by Investing Activities		(7,187	)			8,572				—				—				1,385
Cash Flows from Financing Activities:
Net payments under line of credit agreements		(19,147	)			(37,729	)			—				—				(56,876	)
Reduction of long-term debt		(18,571	)			—				—				—				(18,571	)
Reduction of convertible debt		(161,056	)			—				—				—				(161,056	)
Net proceeds from issuance of notes		87,522				—				—				—				87,522
Intercompany loan		152,962				(149,793	)			(3,169	)			—				—
Dividends paid		(13,864	)			—				—				—				(13,864	)
Proceeds from exercise of stock options		181				—				—				—				181
Proceeds from dividend reinvestment plan		1,372				—				—				—				1,372
Net Cash Provided by (Used in) Financing Activities		29,399				(187,522	)			(3,169	)			—				(161,292	)
Net Increase (Decrease) in Cash		4,314				3,836				(164	)			—				7,986
Cash and Cash Equivalents at Beginning of Year		482				7,038				475				—				7,995
Cash and Cash Equivalents at End of Year	$	4,796			$	10,874			$	311			$	—			$	15,981

 

53

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 10—PENSION AND SAVINGS PLANS

The Company has a defined benefit pension plan covering substantially all of its full-time employees hired on or before February 1, 1992. Normal retirement age is 65. Pension benefits are based on salary and years of service. The Company’s policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA.

The actuarial computations are made using the “projected unit credit method.” Variances between actual experience and assumptions for costs and returns on assets are amortized over the remaining service lives of employees under the plan.

As of December 31, 1996, the Company froze the accrued benefits under the plan and active participants became fully vested. The plan’s trustee will continue to maintain and invest plan assets and will administer benefit payments.

The Company also has a Supplemental Executive Retirement Plan (SERP). This unfunded plan provides key employees designated by the Board of Directors with retirement and death benefits. Retirement benefits are based on salary and bonuses; death benefits are based on salary. Benefits paid to a participant under the defined pension plan are deducted from the benefits otherwise payable under the SERP.

Effective March 25, 2002, the Company modified the benefit formula of the SERP. These modifications resulted in a $2,101 change in benefit obligation in fiscal 2002.

In fiscal 2003, the Company settled an obligation of $12,620 related to the SERP obligation for the former Chairman and CEO. Also, the Company curtailed the benefits for 15 covered individuals as of January 31, 2004, and transferred a portion of their accrued benefits to a new defined contribution plan. These obligations resulted in an expense under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” of approximately $5,231 and $2,191 respectively in fiscal 2003.

Pension expense includes the following:

Year ended	Jan. 31, 2004			Feb. 1, 2003				Feb. 2, 2002
Service cost	$	611			$	587			$	328
Interest cost		3,056				2,934				2,526
Expected return on plan assets		(2,064	)			(2,300	)			(2,162	)
Amortization of transitional obligation		274				274				60
Amortization of prior service cost		615				297				10
Recognized actuarial loss		1,723				1,451				992
Net periodic benefit cost		4,215				3,243				1,754
FAS 88 curtailment charge		2,191				—				—
FAS 88 settlement charge		5,231				—				—
FAS 88 special termination benefits		300				—				—
Total Pension Expense	$	11,937			$	3,243			$	1,754

 

54

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 10—PENSION AND SAVINGS PLANS (Continued)

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:

Year ended	January 31, 2004			February 1, 2003
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	46,587			$	37,098
Service cost		611				587
Interest cost		3,056				2,934
Plan amendments		2,282				2,101
Curtailment gain		(505	)			—
Settlement loss		5,576				—
Special termination benefits		300				—
Liability transfer		(671	)			—
Actuarial loss		4,201				5,202
Benefits paid		(14,240	)			(1,335	)
Benefit Obligation at End of Year	$	47,197			$	46,587
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	31,087			$	27,314
Actual return on plan assets (net of expenses)		4,732				(1,867	)
Employer contributions		13,151				6,975
Benefits paid		(14,240	)			(1,335	)
Fair Value of Plan Assets at End of Year	$	34,730			$	31,087
Reconciliation of the Funded Status:
Funded status	$	(12,468	)		$	(15,500	)
Unrecognized transition obligation		1,143				2,194
Unrecognized prior service cost		2,083				1,829
Unrecognized actuarial loss		10,937				11,857
Amount contributed after measurement date		897				5
Net Amount Recognized at Year-End	$	2,592			$	385
Amounts Recognized on Consolidated Balance Sheets Consist of:
Prepaid benefit cost	$	8,411			$	9,438
Accrued benefit liability		(11,266	)			(13,318	)
Intangible asset		3,226				4,023
Accumulated other comprehensive income		2,221				242
Net Amount Recognized at Year End	$	2,592			$	385
Other comprehensive income attributable to change in additional minimum liability recognition	$	1,979			$	242
Accumulated Benefit Obligation at End of Year	$	44,112			$	44,153
Cash Flows
Employer contributions expected during fiscal 2004	$	1,055

 

55

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 10—PENSION AND SAVINGS PLANS (Continued)

The following table sets forth additional fiscal year-end information for the Company’s SERP for which the accumulated benefit obligation is in excess of plan assets:

Year ended	January 31, 2004		February 1, 2003
Projected benefit obligation	$	14,352		$	15,752
Accumulated benefit obligation		11,266			13,318
Fair value of plan assets		—			—

 

The following actuarial assumptions were used by the Company to determine pension expense and to present disclosure benefit obligations:

Year ended	January 31, 2004			February 1, 2003
Weighted-Average Assumptions as of December 31:
Discount rate		6.25	%			6.75	%
Rate of compensation expense1		N/A	1			N/A	2
Weighted-Average Assumptions for Net Periodic Benefit Cost Development:
Discount rate		6.75	%			7.25	%
Expected return on plan assets		6.75	%			8.50	%
Rate of compensation expense		N/A	1			N/A	2
Measurement Date	December 31				December 31

 

¹ Rate of compensation increase assumption is 4.0% for the executive supplemental plan (bonuses are assumed to be a fixed percentage of base pay depending upon officer level).

² Rate of compensation increase assumption is 4.0% for the executive supplemental plan.

To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of the 6.75% long-term rate of return on assets assumption.

Pension plan assets are stated at fair market value and are composed primarily of money market funds, stock index funds, fixed income investments with maturities of less than five years, and the Company’s common stock.

Weighted average asset allocation by asset category are as follows:

Plan Assets	As of 12/31/2003			As of 12/31/2002
Equity securities		53	%		44	%
Debt securities		0	%		0	%
Fixed income		47	%		56	%

 

Equity securities include Pep Boys common stock in the amounts of $1.3 million (3.6% of total plan assets) and $0.6 million (2.1% of total plan assets) at December 31, 2003 and December 31, 2002, respectively.

The Company has 401(k) savings plans which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant’s contributions or 3% of the participant’s compensation. The Company’s savings plans’ contribution expense was $4,073, $4,417, and $4,516 in fiscal 2003, 2002 and 2001, respectively.

56

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 11—NET EARNINGS PER SHARE

For fiscal years 2003, 2002 and 2001, basic earnings per share are based on net earnings divided by the weighted average number of shares outstanding during the period. Diluted earnings per share assumes conversion of convertible senior notes, zero coupon convertible subordinated notes and the dilutive effects of stock options. Adjustments for the zero coupon convertible subordinated notes were anti-dilutive in fiscal 2001, and therefore excluded from the computation of diluted EPS; the zero coupon convertible subordinated notes were retired as of the end of fiscal 2001 and will not effect future calculations. Adjustments for the convertible senior notes and stock options were anti-dilutive in fiscal 2003 and therefore excluded from the calculation due to the Company’s Net Loss for the year. Options to purchase 4,313,020, 4,588,670 and 3,940,587 shares of common stock were outstanding at January 31, 2004, February 1, 2003 and February 2, 2002, respectively, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market prices of the common shares on such dates.

The following schedule presents the calculation of basic and diluted earnings per share for net (loss) earnings from continuing operations:

Year ended	January 31, 2004			February 1, 2003			February 2, 2002
(Loss) Earnings from Continuing Operations:
Basic (loss) earnings from continuing operations available to common stockholders	$	(11,399	)		$	42,992		$	34,693
Adjustment for interest on convertible senior notes, net of tax		—				2,807			—
Diluted (loss) earnings from continuing operations available to common stockholders	$	(11,399	)		$	45,799		$	34,693
Shares:
Basic average number of common shares outstanding		52,185				51,517			51,348
Common shares assumed issued upon conversion of convertible senior notes		—				4,729			—
Common shares assumed issued upon exercise of dilutive stock options		—				953			687
Diluted average number of common shares outstanding assuming conversion		52,185				57,199			52,035
Per Share:
Basic (loss) earnings from continuing operations per share	$	(0.22	)		$	0.83		$	0.68
Diluted (loss) earnings from continuing operations per share	$	(0.22	)		$	0.80		$	0.67

 

On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share). Refer to NOTE 18—SUBSEQUENT EVENT for details on this transaction.

57

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 12—STOCK OPTION PLANS

Options to purchase the Company’s common stock have been granted to key employees and members of the Board of Directors. The option prices are at least 100% of the fair market value of the common stock on the grant date.

On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan, which authorized the issuance of restricted stock and/or options to purchase up to 1,000,000 shares of the Company’s common stock. Additional shares in the amounts of 2,000,000, 1,500,000 and 1,500,000 were authorized by stockholders on June 4, 1997, May 31, 1995 and June 1, 1993, respectively. In April 2001, the Board of Directors amended the 1990 Stock Incentive Plan to extend the expiration date for the grant of non-qualified stock options and restricted stock thereunder to directors, officers and employees until March 31, 2005. Under this plan, both incentive and non-qualified stock options may be granted to eligible participants. Incentive stock options are fully exercisable on the second or third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Non-qualified options are fully exercisable on the third anniversary of their grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of January 31, 2004, 321,312 remain available for grant.

On June 2, 1999 the stockholders approved the 1999 Stock Incentive Plan, which authorized the issuance of restricted stock and/or options to purchase up to 2,000,000 shares of the Company’s common stock. Additional shares in the amount of 2,500,000 were authorized by stockholders on May 29, 2002. Under this plan, both incentive and non-qualified stock options may be granted to eligible participants. The incentive stock options and non-qualified stock options are fully exercisable on the third anniversary of the grant date or become exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of January 31, 2004, there are 1,182,692 shares remaining available for grant.

On April 28, 2003, the Company adopted a stand alone inducement stock option plan, which authorized the issuance of options to purchase up to 174,540 shares of the Company’s common stock to the Chief Executive Officer in connection with his hire. The non-qualified stock options are exercisable over a four-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of January 31, 2004, there are no shares remaining available for grant.

	Equity compensation plans approved by shareholders		Equity compensation plans not approved by shareholders				Total
Number of securities to be issued upon exercise of outstanding options		6,736,070			174,540	1			6,910,610
Weighted average exercise price of outstanding options	$	16.51		$	8.70			$	16.31
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in top row)		1,504,004			—				1,504,004

 

¹ Inducement options granted to the current CEO in connection with his hire.

58

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 12—STOCK OPTION PLANS (Continued)

Stock option transactions for the Company’s stock option plans are summarized as follows:

		Fiscal 2003						Fiscal 2002						Fiscal 2001
	Shares			Weighted Average Exercise Price			Shares			Weighted Average Exercise Price			Shares			Weighted Average Exercise Price
Outstanding—beginning of year		6,898,170			$	16.57		6,316,787			$	16.48		5,039,772			$	19.63
Granted		1,624,790				10.38		1,213,300				16.27		1,757,000				6.75
Exercised		(1,048,200	)			7.52		(108,880	)			8.10		(19,400	)			8.77
Canceled		(564,150	)			18.79		(523,037	)			16.45		(460,585	)			14.26
Outstanding—end of year		6,910,610			$	16.31		6,898,170			$	16.57		6,316,787			$	16.48
Options exercisable at year end		4,210,678				19.55		4,148,570				20.54		3,422,187				22.29
Weighted average estimated fair value of options granted						4.17						7.20						2.85

 

The following table summarizes information about stock options outstanding at January 31, 2004:

		Options Outstanding							Options Exercisable
Range of Exercise Prices	Number Outstanding at Jan. 31, 2004		Weighted Average Remaining Contractual Life			Weighted Average Exercise Price			Number Exercisable at Jan. 31, 2004		Weighted Average Exercise Price
$4.49 to $13.00		2,384,190		8	years		$	7.63		788,258		$	7.12
$13.01 to $21.00		2,548,600		7	years			15.92		1,444,600			15.75
$21.01 to $29.00		1,042,117		3	years			23.37		1,042,117			23.37
$29.01 to $37.38		935,703		2	years			31.62		935,703			31.62
$4.49 to $37.38		6,910,610								4,210,678

 

59

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 13—ASSET RETIREMENT OBLIGATION

The Company has adopted the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations”, in the first quarter of fiscal 2003. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 143 also requires the capitalization of any retirement obligation costs as part of the carrying amount of the long-lived asset and the subsequent allocation of the total expense to future periods using a systematic and rational method. Upon adoption, the Company recorded a non-cash charge to earnings of $3,943 ($2,484 net of tax) for the cumulative effect of this accounting change. This charge was related to retirement obligations associated with certain equipment used in the Company’s service operation. In addition, the Company initially recognized an asset of $2,844, accumulated depreciation of $2,247 and a liability of $4,540 on its consolidated balance sheet.

At January 31, 2004, the Company has a liability pertaining to the asset retirement obligation in accrued expenses on its consolidated balance sheet. The following is a reconciliation of the beginning and ending carrying amount of the Company’s asset retirement obligation as of January 31, 2004:

Asset retirement obligation, February 1, 2003	$	—
Asset retirement obligation recognized upon adoption		4,540
Asset retirement obligation incurred during the period		246
Asset retirement obligation settled during the period		(89	)
Accretion expense		204
Asset retirement obligation, January 31, 2004	$	4,901

 

Had the Company adopted the provisions of SFAS No. 143 prior to February 2, 2003, the amount of the asset retirement obligations on a pro forma basis would have been as follows:

Asset retirement obligation, February 2, 2002	$	4,156
Asset retirement obligation, February 1, 2003	$	4,540

 

The following table summarizes the pro forma net earnings and earnings per share for the fiscal periods ended February 1, 2003 and February 2, 2002, had the Company adopted the provisions of SFAS No. 143 prior to February 2, 2003:

Year ended	February 1, 2003		February 2, 2002
Net Earnings:
As reported	$	43,800		$	35,335
Pro Forma	$	43,190		$	35,075
Net earnings per share:
Basic:
As reported	$	0.85		$	0.69
Pro Forma	$	0.84		$	0.68
Diluted:
As reported	$	0.82		$	0.68
Pro Forma	$	0.80		$	0.67

 

60

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 14—INCOME TAXES

The provision for income taxes includes the following:

Year ended	January 31, 2004			February 1, 2003				February 2, 2002
Current:
Federal	$	(8,109	)		$	24,502			$	11,985
State		1,856				1,903				236
Deferred:
Federal		1,809				(1,189	)			6,561
State		(2,164	)			35				731
	$	(6,608	)		$	25,251			$	19,513

 

A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows:

Year ended	January 31, 2004			February 1, 2003			February 2, 2002
Statutory tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefits		0.7			1.9			1.2
Job credits		0.5			(0.3	)		(0.3	)
Other, net		0.5			0.4			0.1
		36.7	%		37.0	%		36.0	%

 

Items that gave rise to significant portions of the deferred tax accounts are as follows:

	January 31, 2004			February 1, 2003
Deferred tax assets:
Inventories	$	5,380			$	4,456
Employee compensation		4,919				7,209
Store closing reserves		1,508				750
Legal		10,491				2,270
Real estate tax		(2,366	)			(2,188	)
Insurance		5,146				6,128
Benefit accruals		(5,418	)			(5,860	)
Carryforward credits		257				—
State tax credit		902				419
Valuation allowance		(902	)			(419	)
Other		909				958
	$	20,826			$	13,723
Deferred tax liabilities:
Depreciation	$	68,082			$	72,944
State taxes		(1,590	)			(3,046	)
Accrued leases		(8,771	)			(9,435	)
Other		(229	)			200
	$	57,492			$	60,663
Net deferred tax liability	$	36,666			$	46,940

 

61

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 15—CONTINGENCIES

An action entitled “Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys” was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company’s motion for summary judgment was granted and the case was dismissed. The plaintiff has until April 28, 2004 to appeal.

The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

NOTE 16—INTEREST RATE SWAP AGREEMENT

On June 3, 2003, the Company entered into an interest rate swap for a notional amount of $130,000. The Company has designated the swap as a cash flow hedge of the Company’s real estate operating lease payments. The interest rate swap converts the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1, 2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. As of January 31, 2004, the fair value of the interest rate swap was $2,195, ($1,389, net of tax) and this change in value was included in accumulated other comprehensive loss.

NOTE 17—FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the Company’s financial instruments are as follows:

	January 31, 2004						February 1, 2003
	Carrying Amount		Estimated Fair Value			Carrying Amount			Estimated Fair Value
Assets:
Cash and cash equivalents	$	60,984		$	60,984		$	42,770		$	42,770
Accounts receivable		30,562			30,562			17,916			17,916
Cash flow hedge derivative		2,195			2,195			—			—
Liabilities:
Accounts payable		342,584			342,584			200,053			200,053
Long-term debt including current maturities		375,079			383,723			477,459			462,609
Senior convertible notes		150,000			174,600			150,000			133,125

 

CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE

The carrying amounts approximate fair value because of the short maturity of these items.

CASH FLOW HEDGE DERIVATIVE

The fair value of the interest rate swap designated by the Company as a cash flow hedge is obtained from dealer quotes. This value represents the estimated amount the Company would receive or pay to terminate agreements, taking into consideration current interest rates and the creditworthiness of the counterparties.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

NOTE 17—FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

LONG-TERM DEBT INCLUDING CURRENT MATURITIES AND SENIOR CONVERTIBLE 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 31, 2004 and February 1, 2003. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from amounts presented herein.

NOTE 18—SUBSEQUENT EVENT

On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share) at a price of $24.75 per share for net proceeds (before expenses) of $109,250.

63

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 31, 2004, February 1, 2003 and February 2, 2002
(dollar amounts in thousands, except per share amounts)

QUARTERLY FINANCIAL DATA (UNAUDITED) The Pep Boys—Manny, Moe & Jack and Subsidiaries

Year Ended Jan. 31, 2004	Total Revenues		Gross Profit		Operating (Loss) Profit				Net (Loss) Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle				Net (Loss) Earnings				Net (Loss) Earnings Per Share From Continuing Operations Before Cumulative Effect of Change in Accounting Principle								Net (Loss) Earnings Per Share								Cash Dividends Per Share		Market Price Per Share
																	Basic				Diluted				Basic				Diluted							High		Low
1st Quarter	$	510,910	$	145,798		$	(1,979	)		$	(7,327	)		$	(9,217	)		$	(0.14	)		$	(0.14	)		$	(0.18	)		$	(0.18	)	$	0.0675		$	10.69	$	6.00
2nd Quarter		556,030		130,246			(12,803	)			(13,579	)			(36,381	)			(0.26	)			(0.26	)			(0.70	)			(0.70	)		0.0675			15.90		8.54
3rd Quarter		537,691		159,487			29,453				13,406				14,700				0.26				0.24				0.28				0.26			0.0675			19.94		14.05
4th Quarter		529,639		151,212			2,238				(3,899	)			(1,248	)			(0.07	)			(0.07	)			(0.02	)			(0.02	)		0.0675			23.99		18.53
Year Ended Feb. 1, 2003
1st Quarter	$	539,656	$	157,097		$	31,407			$	13,089			$	13,565			$	0.25			$	0.25			$	0.26			$	0.26		$	0.0675		$	19.38	$	13.55
2nd Quarter		565,631		166,574			37,526				16,110				16,554				0.31				0.29				0.32				0.30			0.0675			19.04		10.75
3rd Quarter		526,298		158,758			35,067				15,419				15,515				0.30				0.28				0.30				0.28			0.0675			15.23		8.75
4th Quarter		466,192		134,117			8,383				(1,626	)			(1,834	)			(0.03	)			(0.03	)			(0.04	)			(0.04	)		0.0675			12.64		10.06

 

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.

64

ITEM 9     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A     CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s chief executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Controls

No change in the Company’s internal control over financial reporting occurred during the Company’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

ITEM 10     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The material contained in the registrant’s definitive proxy statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the Company’s fiscal year (the “Proxy Statement”), under the captions “(ITEM 1) ELECTION OF DIRECTORS,” other than “—Report of the Audit Committee of the Board of Directors,” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” 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. The Company had adopted a Code of Ethics applicable to all of its associates including its executive officers. The Code of Ethics is posted on the Company’s website www.pepboys.com under the About Pep Boys—Corporate Governance section.

ITEM 11     EXECUTIVE COMPENSATION

The material in the Proxy Statement under the caption “EXECUTIVE COMPENSATION,” other than the material under “—Report of the Compensation Committee of the Board of Directors on Executive Compensation” and “—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 “SHARE OWNERSHIP” is hereby incorporated herein by reference.

ITEM 13     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The material in the Proxy Statement under the caption “EXECUTIVE COMPENSATION—Certain Relationships and Related Transactions” is hereby incorporated herein by reference.

65

ITEM 14     PRINCIPAL ACCOUNTING FEES AND SERVICES

The material in the Proxy Statement under the caption “(ITEM 1) ELECTION OF DIRECTORS— Independent Auditor’s Fees” is hereby incorporated herein by reference.

PART IV

ITEM 15    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)			Page
	1.	The following consolidated financial statements of The Pep Boys—Manny, Moe & Jack are included in Item 8.
		Independent Auditors’ Report		28
		Consolidated Balance Sheets—January 31, 2004 and February 1, 2003		29
		Consolidated Statements of Operations—Years ended January 31, 2004, February 1, 2003 and February 2, 2002		30
		Consolidated Statements of Stockholders’ Equity—Years ended January 31, 2004 February 1, 2003 and February 2, 2002		31
		Consolidated Statements of Cash Flows—Years ended January 31, 2004, February 1, 2003, and February 2, 2002		32
		Notes to Consolidated Financial Statements		33
	2.	The following consolidated financial statement schedule of The Pep Boys—Manny, Moe & Jack is included.
		Schedule II Valuation and Qualifying Accounts and Reserves		72
		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, as amended	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 30, 1988.
(3.2)	By-Laws, as amended	Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-39225).
(3.3)	Amendment to By-Laws (Declassification of Board of Directors)	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 29, 2000.
(4.1)	Indenture, dated as of March 22, 1991 between the Company and Bank America Trust Company of New York as Trustee, including Form of Debt Security	Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-39225).
(4.2)	Indenture, dated as of June 12, 1995, between the Company and First Fidelity Bank, National Association as Trustee, including Form of Debenture	Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-59859).

66

(4.3)	Indenture, dated as of July 15, 1997, between the Company and PNC Bank, National Association, as Trustee, providing for the issuance of Senior Debt Securities, and form of security	Incorporated by reference from the Registration Statement on Form S-3 (File No. 333-30295).
(4.4)	Indenture, dated as of February 18, 1998 between the Company and PNC Bank, National Association, as Trustee, providing for the issuance of Senior Debt Securities, and form of security	Incorporated by reference from the  Registration Statement on Form S-3/A (File No. 333-45793).
(4.5)	Indenture dated May 21, 2002, by and among The Pep Boys—Manny, Moe and Jack, as issuer, The Pep Boys—Manny, Moe, and Jack of California, Pep Boys—Manny, Moe and Jack of Delaware, Inc., and Pep Boys—Manny, Moe & Jack of Puerto Rico, Inc. as Guarantors, and Wachovia Bank, National Association, as Trustee.	Incorporated by reference from the  Registration Statement on Form S-3 (File No. 333-98255).
(10.1)*	Medical Reimbursement Plan of the Company	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 31, 1982.
(10.2)	Rights Agreement dated as of December 5, 1997 between the Company and First Union National Bank	Incorporated by reference from the Company’s Form 8-K dated December 8, 1997.
(10.3)*	Directors’ Deferred Compensation Plan, as amended	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended January 30, 1988.
(10.4)	Dividend Reinvestment and Stock Purchase Plan dated January 4, 1990	Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-32857).
(10.5)	Flexible Employee Benefits Trust	Incorporated by reference from the Company’s Form 8-K dated May 6, 1994.
(10.6)*	Form of Employment Agreement dated as of June 1998 between the Company and certain officers of the Company.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended October 31, 1998.
(10.7)*	The Pep Boys—Manny, Moe and Jack 1999 Stock Incentive Plan—amended and restated as of August 31, 1999.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended October 30, 1999.
(10.8)	Participation Agreement between the Company and The State Street Bank and Trust (Trustee) dated September 22, 2000.	Incorporated by reference from the Company’s Form 8-K filed October 18, 2000.
(10.9)*	The Pep Boys—Manny, Moe and Jack 1990 Stock Incentive Plan—Amended and Restated as of March 26, 2001.	Incorporated by reference from the Company’s Form 10-K for the year ended February 1, 2003.
(10.10)*	The Pep Boys—Manny, Moe & Jack Pension Plan—Amended and Restated as of September 10, 2001.	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended February 1, 2003

67

(10.11)*	Amendment and restatement as of September 3, 2002 of The Pep Boys Savings Plan.	Incorporated by reference from the Company’s Form 10-Q for the  quarter ended November 2, 2002.
(10.12)*	Amendment and restatement as of September 3, 2002 of The Pep Boys Savings Plan—Puerto Rico.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 2, 2002.
(10.13)	Amendment Number One to The Pep Boys—Manny, Moe & Jack 1999 Stock Incentive Plan.	Incorporated by reference from the Company’s Form 10-Q for the Quarter ended November 2, 2002.
(10.14)*	Long-Term Disability Salary Continuation Plan  amended and restated as of March 26, 2002.	Incorporated by reference from the Company’s Form 10-K for the  fiscal year ended February 1, 2003.
(10.15)*	Amendment to and restatement of the Executive Supplemental Pension Plan, effective as of March 26, 2002.	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended February 1, 2003.
(10.16)*	Employment agreement between George Babich and the Company dated as of February 28, 2003.	Incorporated by reference from the Company’s Form 10-K for the fiscal year ended February 1, 2003.
(10.17)*	Employment Agreement between Lawrence N. Stevenson and the Company dated as of April 28, 2003.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended May 3, 2003.
(10.18)	Amended and Restated Loan and Security Agreement, dated August 1, 2003, by and among the Company, Congress Financial Corporation, as Agent, The CIT Group/Business Credit, Inc. and General Electric Capital Corporation, as Co-Documentation Agents, and the Lenders from time to time party thereto.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003.
(10.19)	Participation Agreement, dated as of August 1, 2003, among the Company, Wachovia Development Corporation, as the Borrower and the Lessor, the Lenders and Wachovia Bank, National Association, as Agent for the Lenders and the Secured Parties.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003.
(10.20)	Amended and Restated Lease Agreement, dated as of August 1, 2003, between Wachovia Development Corporation, as Lessor, and the Company.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003.
(10.21)*	Amendment number Two to The Pep Boys— Manny, Moe & Jack 1999 Stock Incentive Plan.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended August 2, 2003.
(10.22)	Amendment No. 1, dated October 24, 2003, to the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as Agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 1, 2003.

68

(10.23)	Consent, dated October 24, 2003, of Wachovia Development Corporation to Amendment No. 1 To the Amended and Restated Loan and Security Agreement, by and among the Company, Congress Financial Corporation, as agent, and the other parties thereto.	Incorporated by reference from the Company’s Form 10-Q for the quarter ended November 1, 2003.
(10.24)*	Employment Agreement, dated June 1, 2003, between the Company and Harry Yanowitz.	Incorporated by reference from  The Company’s Form 10-Q for the quarter ended November 1, 2003.
(10.25)*	The Pep Boys Savings Plan Amendment 2004-1
(10.26)*	The Pep Boys Deferred Compensation Plan
(10.27)*	The Pep Boys Annual Incentive Bonus Plan (amended and restated as of December 9, 2003)
(12)	Computation of Ratio of Earnings to Fixed Charges
(21)	Subsidiaries of the Company
(23)	Independent Auditors’ Consent
(31.1)	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002
(31.2)	Certification of Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002
(32.1)	Chief Executive Officer Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2)	Chief Financial Officer Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)     None

* Management contract or compensatory plan or arrangement.

69

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 15, 2004	by: /s/ George Babich, Jr. George Babich, Jr., President and Chief Financial Officer

 

70

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/ Lawrence N. Stevenson Lawrence N. Stevenson	Chief Executive Officer (Principal Executive Officer)	April 15, 2004
/s/ George Babich, Jr. George Babich, Jr.	President and Chief Financial Officer (Principal Financial Officer)	April 15, 2004
/s/ Bernard K. McElroy Bernard K. McElroy	Chief Accounting Officer and Treasurer (Principal Accounting Officer)	April 15, 2004
/s/ Bernard J. Korman Bernard J. Korman	Chairman of the Board	April 15, 2004
/s/ Peter A. Bassi Peter A. Bassi	Director	April 15, 2004
/s/ J. Richard Leaman, Jr. J. Richard Leaman, Jr.	Director	April 15, 2004
/s/ William Leonard William Leonard	Director	April 15, 2004
/s/ Malcolmn D. Pryor Malcolmn D. Pryor	Director	April 15, 2004
/s/ Lester Rosenfeld Lester Rosenfeld	Director	April 15, 2004
/s/ Jane Scaccetti Jane Scaccetti	Director	April 15, 2004
/s/ Benjamin Strauss Benjamin Strauss	Director	April 15, 2004
/s/ John T. Sweetwood John T. Sweetwood	Director	April 15, 2004

 

71

FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K

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
Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses			Additions Charged to Other Accounts			Deductions*			Balance at End of Period
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended January 31, 2004	$	422		$	1,768		$	—		$	1,451		$	739
Year Ended February 1, 2003	$	725		$	1,643		$	—		$	1,946		$	422
Year Ended February 2, 2002	$	639		$	1,674		$	—		$	1,588		$	725

 

* Uncollectible accounts written off.

72

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	28
	Consolidated Balance Sheets—January 31, 2004 and February 1, 2003	29
	Consolidated Statements of Operations—Years ended January 31, 2004, February 1, 2003 and February 2, 2002	30
	Consolidated Statements of Stockholders’ Equity—Years ended January 31, 2004, February 1, 2003 and February 2, 2002	31
	Consolidated Statements of Cash Flows—Years ended January 31, 2004, February 1, 2003 and February 2, 2002	32
	Notes to Consolidated Financial Statements	33
2.	The following consolidated financial statement schedule of The Pep Boys—Manny, Moe & Jack is included.
	Schedule II Valuation and Qualifying Accounts and Reserves	72
	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
(10.25)	The Pep Boys Savings Plan Amendment 2004-1
(10.26)	The Pep Boys Deferred Compensation Plan
(10.27)	The Pep Boys Annual Incentive Bonus Plan (amended and restated as of December 9, 2003)
(12)	Computation of Ratio of Earnings to Fixed Charges
(21)	Subsidiaries of the Company
(23)	Independent Auditors’ Consent
(31.1)	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2)	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32.1)	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32.2)	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

73

EX-10.25

EXHIBIT 10.25 - THE PEP BOYS SAVINGS PLAN AMENDMENT 2004-1

THE PEP BOYS SAVINGS PLAN
AMENDMENT 2004-1

Pursuant to the authority reserved to it under Section 10.1 of The Pep Boys Savings Plan (the “Plan”), The Pep Boys - Manny, Moe & Jack (the “Company”) hereby amends the Plan as follows:

1.          Effective January 16, 2004, the first sentence of the definition of Annual Additions under Section 2.1 of the Plan immediately following the definition of Affiliate is hereby deleted in its entirety and the following language is hereby substituted therefor:

“Annual Additions means, with respect to each Limitation Year, the total of the Employer contributions and forfeitures allocated to a Participant’s Accounts pursuant to the provisions of the Plan (other than Pre-Tax Contributions made pursuant to Section 4.1(a)(ii) of the Plan), plus the total of any Participant contributions for such Limitation Year, plus amounts described in Sections 415(l)(1) and 419A(d)(2) of the Code, if any.”

2.          Effective January 16, 2004, the introductory clause of the third paragraph of the definition of Compensation under Section 2.1 of the Plan is hereby deleted in its entirety and the following language is hereby substituted therefore:

             “For purposes of Sections 4.5 and 4.7,”.

3.          Effective January 16, 2004, Section 4.1(a) is hereby deleted in its entirety and the following language is hereby substituted therefor:

“(a)

Pre-Tax Contributions

(i)     Subject to the limitations of Sections 4.5 and 5.4, each Participant shall have the option to authorize the Employer, in writing and in accordance with procedures established by the Committee, to contribute to the Plan for a Plan Year on his behalf, an amount equal to any one half of a percentage of his Compensation from one half of a percent (0.5%) up to twelve percent (12%) (as determined without regard to this Section 4.1(a)) for such Plan Year.  Effective October 1, 1998, the foregoing limitation of twelve percent (12%) is increased to fifteen percent (15%).  Effective January 1, 2003, the foregoing limitation of fifteen percent (15%) is increased to fifty percent (50%).  The Committee shall have the discretion to apply a lower limitation to Highly Compensated Employees.  Such authorization shall be in the form of an election by the Participant to have his Compensation reduced by payroll withholding. Payroll deduction shall commence as soon as practicable following the Entry Date on which an Eligible Employee becomes a Participant or the date the Participant

elects to make Pre-Tax Contributions to the Plan. Such withheld amounts are to be transmitted by the Employer to the Trustee as of the earliest date on which such amounts can reasonably be segregated from the Employer’s general assets. Effective February 3, 1997, such withheld amounts are to be transmitted by the Employer to the Trustee no later than the date required by DOL Reg. Section 2510.3-102(b). The amount of such contributions, together with contributions under Sections 4.1(c) and (d), shall not exceed the maximum amount allowable as a deduction under the Code for the Plan Year.

           (ii)     Effective January 16, 2004, in addition to the amount of Pre-Tax Contributions made pursuant to subsection (a)(i), the Employer shall make a Pre-Tax Contribution for the Plan Year to the Pre-Tax Contribution Account of each Participant who attains age 50 prior to the end of a Plan Year who, with respect to that Plan Year, has executed a salary reduction agreement between the Participant and the Employer that provides for an additional reduction in the amount of Compensation otherwise payable to the Participant in an amount not to exceed the dollar maximum in effect under section 414(v) of the Code, as in effect for the Plan Year (reduced by, to the extent required by the Code and applicable Treasury regulations, any other elective deferrals contributed on the Participant’s behalf pursuant to section 414(v) of the Code for the Plan Year); provided, however, that Pre-Tax Contributions shall be treated for all Plan purposes as contributed under subsection (a)(i) above in lieu of this subsection, unless the Participant is unable to make additional Pre-Tax Contributions under subsection (a)(i) above for the Plan Year due to limitations imposed by the Plan or applicable federal law.  Pre-Tax Contributions made pursuant to this subsection (a)(ii) shall not be taken into account for purposes of Sections 4.5 and 4.7 and the applicable limits under Section 402(g) of the Code.

           (iii)    Notwithstanding the foregoing, the Participant shall be prohibited from authorizing any Pre-Tax Contributions to be made on his behalf under this Plan and elective contributions under any other plan, in excess of the applicable limit under Section 402(g) of the Code in effect for the Plan Year to which such Pre-Tax Contributions relate. In the event a Participant has made excess deferrals under the Plan (or, if not, has determined that excess deferrals will be considered to exist under this Plan), then not later than the first day of April following the close of the Participant’s taxable year, the Participant may notify the Plan of the amount of the excess deferrals hereunder. The Participant shall be deemed to have notified the Plan of excess deferrals to the extent he has excess deferrals for the taxable year calculated by taking into account only elective deferrals under the Plan and other plans of the Employer or Affiliate. The Employer may notify the Plan on behalf of the Participant under these circumstances.

                    In the event the dollar limit described in the preceding paragraph is exceeded for a Participant, the Committee shall direct the Trustee (1) to the extent the Participant is eligible to make Pre-Tax Contributions pursuant to Section 4.1(a)(ii) for the Plan Year (subject to the dollar maximum applicable to such

2

section), recharacterize the excess contributions as made pursuant to Section 4.1(a)(ii), and (2) to the extent the excess cannot be recharacterized in accordance with clause (1), distribute the amount designated above including any Income allocated thereto to the Participant by the April 15 following the end of the calendar year with respect to which the excess occurred.  The Income attributable to a Participant’s excess deferral pursuant to this Section 4.1(a)(iii) for the Plan Year during which such excess deferral arose shall be determined in accordance with Treas. Reg. §1.402(g)-1(e)(5)(ii). Unless provided for by the Committee, any Income attributable to a Participant’s excess deferrals for the period between the end of the Plan Year and the date of distribution shall be disregarded. Excess deferrals to be distributed for a Plan Year shall be reduced by Excess Contributions previously distributed for the Plan Year beginning in such taxable year as set forth in Section 4.5. Matching Contributions allocated by reason of any excess deferral distributed pursuant to this Section, together with any income allocated thereto for the calendar year to which the excess deferral relates, shall be forfeited at the time such distribution is made. For this purpose, however, the excess deferrals that are returned to the Participant shall be deemed to be first those Pre-Tax Contributions for which no Matching Contribution was made and second those Pre-Tax Contributions for which a Matching Contribution was made. Accordingly, if the Pre-Tax Contributions that are returned to the Participant as excess deferrals were not matched, no Matching Contributions will be forfeited.

                    A Participant who has excess deferrals for a taxable year may receive a corrective distribution of excess deferrals during the same year. This corrective distribution shall be made only if:

                              (A)     The Participant designates the distribution as an excess deferral. The Participant shall be deemed to have designated the distribution to the extent the Participant has excess deferrals for the taxable year calculated by taking into account only elective deferrals under the Plan and other plans of the Employer and Affiliate. The Employer may make the designation on behalf of the individual under these circumstances.

                              (B)     The correcting distribution is made after the date on which the Plan received the excess deferral.

                              (C)     The Plan designates the distribution as a distribution of excess deferrals.

                    The term “excess deferrals” means the excess of an individual’s elective deferrals for any taxable year, as defined in Treas. Reg. §1.402(g)-1(b), over the applicable limit under Section 402(g)(1) for the taxable year.

                    Notwithstanding the foregoing, the Committee may further limit a Participant’s right to make Pre-Tax Contributions to the Plan if in the sole

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judgment and discretion of the Committee, such limits are necessary to ensure the Plan’s compliance with the requirements of Sections 401(k) and (m) of the Code.

          (iv)     No Participant shall be permitted to have Pre-Tax Contributions made under this Plan, or any other qualified plan maintained by the Employer during any taxable year, in excess of the dollar limitation contained in Section 402(g) of the Code in effect for such taxable year, except to the extent permitted under Section 414(v) of the Code, if applicable.”

4.         Effective January 16, 2004, the following sentence is hereby added to the third paragraph of Section 4.1(c):

“Matching Contributions shall not be made with respect to Pre-Tax Contributions made pursuant to Section 4.1(a)(ii).”

5.          Effective January 16, 2004, the first sentence of the next to last paragraph of Section 5.4 of the Plan is hereby deleted in its entirety and the following language is hereby substituted therefor:

“If the total Annual Additions on behalf of a Participant for a Limitation Year would exceed the limitations described herein as a result of a reasonable error in determining the amount of Pre-Tax Contributions that a Participant may make to comply with this Section 5.4, as a result of the allocation of forfeitures or as a result of a reasonable error in estimating a Participant’s Compensation for purposes of this Section, such excess Pre-Tax Contributions shall be recharacterized as a Pre-Tax Contribution under Section 4.1(a)(ii) to the extent permitted under Section 414(v) of the Code and Treasury regulations issued thereunder.  If there is an excess after the foregoing recharacterization, such excess Pre-Tax Contribution may be distributed to the Participant to the extent that such distribution would reduce the excess Annual Additions as permitted under Section 415 of the Code.”

             IN WITNESS WHEREOF, and as evidence of the adoption of the amendment set forth herein, the Company has caused this instrument to be executed this 16^th day of January, 2004.

Attest:	THE PEP BOYS - MANNY, MOE & JACK
/s/Brian d. Zuckerman	/s/ Lawrence N. Stevenson
	Chief Executive Officer

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EX-10.26

EXHIBIT 10.26 - THE PEP BOYS DEFERRED COMPENSATION PLAN

THE PEP BOYS
DEFERRED COMPENSATION PLAN

Effective March 19, 2004

ARTICLE 1
PURPOSE

          In recognition of the services provided by certain key employees, the Board of Directors of THE PEP BOYS – MANNY, MOE & JACK wishes to adopt a deferred compensation plan (the “Plan”) to make additional retirement benefits and increased financial security, on a tax-favored basis, available to those individuals effective March 19, 2004.  The Plan reads as follows:

ARTICLE 2
DEFINITIONS

          2.1          Definitions.  The following words and phrases, when used in this Plan, shall have the following meanings:

                         Affiliate means any firm, partnership, or corporation that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company.  “Affiliate” also includes any other organization related to the Company that is designated as such by the Board.

                         Associate means any individual employed by the Company on a regular, full-time basis at the manager level or above (determined in accordance with the personnel policies and practices of the Company) as designated by the Company, including citizens of the United States employed outside of their home country and resident aliens employed in the United States; provided, however, that to qualify as an “Associate” for purposes of the Plan, the individual must be a member of a group of “key management or other highly compensated employees” within the meaning of Sections 201, 301 and 401 of ERISA whose Compensation is within the top 5% of all Associates of the Company ranked by Compensation.

                         Base Salary means the amount of base salary paid to each Associate before any reduction for amounts deferred by the Participant pursuant to any Code section 401(k) plan or Code section 125 plan, or pursuant to this Plan or any other non-qualified plan that permits deferrals of compensation.

                         Base Salary Deferral means that portion of Base Salary as to which a Participant has made an annual irrevocable election to defer receipt until the date specified under the In-Service Distribution Option or the Retirement Distribution Option.

                         Beneficiary means the person or persons (natural or otherwise) designated by the Participant in accordance with Section 11.3.

                         Board means the Board of Directors of the Company.

                         Bonus means the amount earned by an Associate under any annual incentive plan maintained by the Company.

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                         Cause means (i) the continued failure of the Associate to perform substantially his duties with the Company (other than such failure resulting from an Associate’s Disability), (ii) any act by the Associate of illegality, dishonesty or fraud in connection with the Associate’s employment, (iii) the willful engaging by the Associate in gross misconduct which is demonstrably and materially injurious to the Company or its affiliates, (iv) the Associate’s conviction of or pleading guilty or no contest to a felony, or (v) a violation of the Associate’s employment agreement or non-competition agreement with the Company.

                         Change of Control means:

                         (a)          individuals who, on the Effective Date, constitute the Board of Directors (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board of Directors, provided that any person becoming a director subsequent to the date hereof, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board of Directors (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board of Directors shall be deemed to be an Incumbent Director;

                         (b)          any “Person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”) and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board of Directors (the “Voting Securities”); provided, however, that the event described in this paragraph (b) shall not be deemed to be a Change of Control by virtue of any of the following acquisitions:  (i) by the Company or any subsidiary of the Company in which the Company owns more than 50% of the combined voting power of such entity (a “Subsidiary”), (ii) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (iii) by any underwriter temporarily holding the Company’s Voting Securities pursuant to an offering of such Voting Securities, or (iv) pursuant to a Non-Qualifying Transaction (as defined in paragraph (c));

                         (c)          a merger, consolidation, statutory share exchange or similar form of corporate transaction is consummated involving the Company or any of its Subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination:  (i) more than 50% of the total voting power of (A) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (B) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by the Company’s Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which the Company’s Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the

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voting power of the Company’s Voting Securities among the holders thereof immediately prior to the Business Combination, (ii) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (iii) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board of Directors’ approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (i), (ii) and (iii) above shall be deemed to be a “Non-Qualifying Transaction”);

                         (d)          a sale of all or substantially all of the Company’s assets is consummated;

                         (e)          the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company; or

                         (f)          there occur such other events as the Board of Directors may designate.

               Notwithstanding the foregoing, a Change of Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 20% of the Company’s Voting Securities as a result of the acquisition of the Company’s Voting Securities by the Company which reduces the number of the Company’s Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change of Control of the Company shall then occur.

                         Code means the Internal Revenue Code of 1986, as amended from time to time and includes any regulations issued thereunder.

                         Company means The Pep Boys – Manny, Moe & Jack.

                         Company Stock Fund means the Deemed Investment Option under the Plan for which the rate of return credited to a Participant’s Distribution Accounts shall be based on the actual performance of the common stock of the Company.

                         Compensation means the sum of Base Salary and Bonus paid to an Associate.

                         Deemed Investment Options means the deemed investment options selected by the Participant from time to time pursuant to which deemed earnings are credited to the Participant’s Distribution Accounts.

                         Disability or “Disabled” means a medically determinable physical or mental impairment of a permanent nature which prevents a Participant from performing his customary employment duties without endangering his health and which would qualify the Participant for

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Social Security disability benefits or a benefit under the Pep Boys – Manny, Moe & Jack Long Term Disability Salary Continuation Plan.

                         Distribution Option means the two distribution options which are available under the Plan, consisting of the Retirement Distribution Option and the In-Service Distribution Option.

                         Distribution Account or “Accounts” means, with respect to a Participant, the Retirement Distribution Account and/or the In-Service Distribution Account established on the books of the Employer, pursuant to Section 5.1, which is used solely to calculate the amount payable to each Participant as well as the “Accounts” to which are credited the Mandatory Bonus Deferrals and the Matching Contributions under Sections 4.2 and 4.4(a), respectively.

                         Distribution Option Period.  “Distribution Option Period”  means a period of Plan Years for which an Eligible Associate elects, in the Enrollment Agreement, the time and manner of payment of amounts credited to the Eligible Associate’s In-Service Distribution Option Account for such Plan Years.  As required by Section 6.3, the Distribution Option Period must end at least two Plan Years prior to the Plan Year selected for the initial distribution for that Distribution Option Period.

                         Effective Date means the effective date of the Plan, which is March 19, 2004.

                         Eligible Associate means any Associate who is designated by the Board as eligible to participate in the Plan.

                         Employer means the Company and any Affiliate which is authorized by the Company to adopt the Plan and cover its Eligible Associates and whose designation as such has become effective upon acceptance of such status by the Affiliate.  An Affiliate may revoke its acceptance of such designation at any time, but until such acceptance has been revoked, all the provisions of the Plan and amendments thereto shall apply to the Eligible Associates of the Affiliate.  In the event the designation is revoked by an Affiliate, the Plan shall be deemed terminated only with respect to such Affiliate.

                         Enrollment Agreement means the authorization form which an Eligible Associate files with the Plan Administrator to participate in the Plan.

                         ERISA means the Employee Retirement Income Security Act of 1974, as amended.

                         In-Service Distribution Account means the Account maintained for a Participant for each Distribution Option Period to which Base Salary Deferrals and Voluntary Bonus Deferrals are credited pursuant to the In-Service Distribution Option.

                         In-Service Distribution Option means the Distribution Option pursuant to which benefits are payable in accordance with Section 6.3.

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                         Mandatory Bonus Deferral means the portion of the Tier I Participant’s Bonus which is in excess of 150% of the Tier I Participant’s target bonus. 

                         Matching Contributions are those credits made to the Participant’s Retirement Distribution Account by the Employer pursuant to Section 4.4.

                         Normal Retirement Age means age 62.

                         Participant means an Eligible Associate who has filed a completed and executed Enrollment Agreement with the Plan Administrator or its designee and is participating in the Plan in accordance with the provisions of Article 4 or an Eligible Associate who is employed as an officer of the Company and is eligible to receive a Bonus in any Plan Year in excess of 150% of the Eligible Associate’s target bonus.  In the event of the death or incompetency of a Participant, the term shall mean the Participant’s personal representative or guardian.  An individual shall remain a Participant until that individual has received full distribution of any amount credited to the Participant’s Distribution Account(s).

                         Plan means this plan, called The Pep Boys Deferred Compensation Plan, as amended from time to time.

                         Plan Administrator means the committee appointed by the Board to act as the administrator of the Plan.

                         Plan Year means the 12 month period beginning on each January 1 and ending on the following December 31.

                         Retirement means the termination of the Participant’s Service with the Employer (for reasons other than death) at or after age 55.

                         Retirement Distribution Account means the Account maintained for a Participant to which Base Salary Deferrals, Voluntary Bonus Deferrals and Matching Contributions are credited pursuant to the Retirement Distribution Option.

                         Retirement Distribution Option means the Distribution Option pursuant to which benefits are payable in accordance with Section 6.1.

                         Service means the period of time during which an employment relationship exists between an Associate and the Employer, including any period during which the Associate is on an approved leave of absence, whether paid or unpaid.  “Service” also includes employment with a non-participating Affiliate if an Associate transfers directly between the Employer and the Affiliate.

                         Tier I Participant means a Participant who is employed as an officer of the Company.

                         Tier II Participant means a Participant other than a Tier I Participant.

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                         Termination Date means the date of termination of a Participant’s Service with the Employer and its Affiliates, including termination resulting from a Participant’s Disability, and shall be determined without reference to any compensation continuation arrangement or severance benefit arrangement that may be applicable.

                         Voluntary Bonus Deferral means the portion of the Participant’s Bonus earned in a Plan Year, which in the case of a Tier I Participant, is equal to or less than 150% of the Tier I Participant’s target bonus, as to which a Participant has made an annual irrevocable election to defer receipt until the date specified under the In-Service Distribution Option or the Retirement Distribution Option.

          2.2          Construction. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary.

ARTICLE 3
ADMINISTRATION OF THE PLAN AND DISCRETION

          3.1          The Plan Administrator shall have full power and authority to interpret the Plan, to prescribe, amend and rescind any rules, forms and procedures as it deems necessary or appropriate for the proper administration of the Plan and to make any other determinations and to take any other such actions as it deems necessary or advisable in carrying out its duties under the Plan.  All action taken by the Plan Administrator arising out of, or in connection with, the administration of the Plan or any rules adopted thereunder, shall, in each case, lie within its sole discretion, and shall be final, conclusive and binding upon the Employer, the Board, all Employees, all Beneficiaries of Employees and all persons and entities having an interest therein and the Enrollment Agreement of each Participant shall constitute that Participant’s acknowledgement and acceptance of the Plan Administrator’s authority and discretion.

          3.2          The Plan Administrator shall serve without compensation for their services unless otherwise determined by the Board.  All expenses of administering the Plan shall be paid by the Company.

          3.3          The Company shall indemnify, defend and hold the Plan Administrator harmless from any and all claims, losses, damages, expenses (including counsel fees) and liability (including any amounts paid in settlement of any claim or any other matter with the consent of the Board) arising from any act or omission of such member, except when the same is due to gross negligence or willful misconduct.

          3.4          Any decisions, actions or interpretations to be made under the Plan by the Company, the Employer, the Board or Plan Administrator shall be made in its respective sole discretion, not as a fiduciary and need not be uniformly applied to similarly situated individuals and shall be final, binding and conclusive on all persons interested in the Plan.

ARTICLE 4
PARTICIPATION

          4.1          Election to Participate.  Annually, all Eligible Associates will be offered the opportunity to make a Base Salary Deferral and a Voluntary Bonus Deferral with respect to Base

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Salary and Bonus to be earned in the following Plan Year.  Any Eligible Associate may enroll in the Plan effective as of the first day of a Plan Year by filing a completed and fully executed Enrollment Agreement with the Plan Administrator by a date set by the Plan Administrator but in any event prior to the last day of the preceding Plan Year.  Pursuant to said Enrollment Agreement, the Eligible Associate shall irrevocably elect, except as provided below, (a) the percentages, in whole percentages, by which (as a result of payroll reduction) an amount equal to any whole percentage of the Participant’s Base Salary or Bonus to be earned during that Plan Year, in each case after required nondeferrable payroll tax and other authorized or required deductions, will be deferred, (b) the Distribution Accounts to which such amounts will be credited and (c) the time and manner of distribution from the Retirement Distribution Account and shall provide such other information as the Plan Administrator shall require.  The first Enrollment Agreement filed by an Eligible Associate during any Distribution Option Period must also set forth the Participant’s election as to the time and manner of distribution of amounts credited to the Participant’s In-Service Distribution Account, and earnings credited to such amounts, during such Distribution Option Period.   The Company may establish minimum or maximum amounts of Base Salary Deferrals and Voluntary Bonus Deferrals that may be elected under this Section and may change such standards from time to time.  Any such limits shall be communicated by the Company to the Plan Administrator and by the Plan Administrator to the Participants prior to the commencement of a Plan Year.  Notwithstanding anything herein to the contrary, a Participant may elect to cease the Base Salary Deferrals or Voluntary Bonus Deferrals, being made in the current Plan Year on the Participant’s behalf by giving the Plan Administrator at least 30 days’ advance written notice of such election and agreeing not to make any further Base Salary Deferrals and Voluntary Bonus Deferrals under the Plan for the balance of the current Plan Year and all of the next Plan Year.

          4.2          Mandatory Participation.  Each Tier I Participant who is eligible to receive a Bonus in any Plan Year in excess of 150% of the Tier I Participant’s target bonus will automatically be enrolled in the Plan with such sum credited to an Account for the Tier I Participant. The Deemed Investment Option for a Mandatory Bonus Deferral shall be a money market fund selected by the Company.  The Mandatory Bonus Deferral shall vest according to the following schedule provided that the Participant does not have a Termination Date prior thereto:

Plan Years following Year Earned	Vested Percentage
One year, but less than two	33.33%
Two years, but less then three	66.66%
Three or more years	100%

Notwithstanding the foregoing, if the Tier I Participant dies or becomes Disabled while employed by the Employer, or terminates employment on or after attaining Normal Retirement Age, the Mandatory Bonus Deferral shall vest immediately on the Termination Date.

          4.3          New Eligible Associates.  The Plan Administrator, acting on behalf of the Employer, may, in its discretion, permit employees who first become Eligible Associates after the beginning of a Plan Year to enroll in the Plan for that Plan Year by filing a completed and fully executed Enrollment Agreement, in accordance with Section 4.1, as soon as practicable following the date the Associate becomes an Eligible Associate but, in any event, within 30 days

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after such date.  Notwithstanding the foregoing, however, any election by an Eligible Associate, pursuant to this section, to make a Base Salary Deferral or Voluntary Bonus Deferral shall apply only to such amounts as are earned by the Eligible Associate after the date on which such Enrollment Agreement is filed.

          4.4          Matching Contributions. 

          (a)           If a Tier I Participant elects to direct a portion of his Voluntary Bonus Deferral to the Company Stock Fund, the Employer shall credit to such Tier I Participant’s Account a Matching Contribution equal to 100% of the Voluntary Bonus Deferral which the Tier I Participant elected to direct to the Company Stock Fund, up to 20% of the Tier I Participant’s Bonus.  The Deemed Investment Option for the Matching Contribution shall be the Company Stock Fund until such time as the Matching Contribution is vested and distributed.  After such Matching Contribution is fully vested it shall be paid as soon as practicable in shares of Company common stock unless the Participant has elected, at the time and in the form specified by the Plan Administrator, to credit the then value of such Matching Contribution to the Participant’s In-Service or Retirement Account.  The Matching Contribution under this Section 4.4(a) shall vest according to the following schedule provided that the Participant does not have a Termination Date prior thereto:

Plan Years following Credit	Vested Percentage
One year, but less than two	33.33%
Two years, but less then three	66.66%
Three or more years	100%

If the Tier I Participant dies or becomes Disabled while employed by the Employer, or terminates employment on or after attaining Normal Retirement Age, the Matching Contribution shall vest immediately on the Termination Date.

          (b)           The Company may credit an additional Matching Contribution to a Tier I Participant’s and/or a Tier II Participant’s Distribution Account for any Plan Year, as determined by the Company.  Any such Matching Contribution shall be communicated by the Company to the Plan Administrator and by the Plan Administrator to the Participants.  The Company shall also specify at the time of the credit whether such additional Matching Contribution shall be distributed at the same time as the underlying Participant contributions or earlier.

          (c)           Notwithstanding the foregoing, if a Participant is terminated for Cause, the Plan Administrator, acting on behalf of the Company, shall have the discretion to forfeit the vested portion of the Matching Contribution credited to such Participant’s Retirement Distribution Account. 

          (d)           Matching Contributions will be credited as frequently as determined by the Plan Administrator, acting on behalf of the Employer, but in any event at least annually.

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ARTICLE 5
DISTRIBUTION ACCOUNTS

          5.1          Distribution Accounts.  The Plan Administrator shall establish and maintain separate Distribution Accounts with respect to each Participant for each Distribution Option Period and for the Retirement Account.  A Participant’s Distribution Accounts shall consist of the Retirement Distribution Account and/or one or more In-Service Distribution Accounts.  The amount of Base Salary Deferrals, Voluntary Bonus Deferrals and Mandatory Bonus Deferrals pursuant to Section 4.1 and Section 4.2 shall be credited by the Employer to the Participant’s Distribution Option Accounts no later than the first day of the month following the month in which such Base Salary or Bonus would otherwise have been paid, in accordance with the Distribution Option irrevocably elected by the Participant in the Enrollment Agreement, or in the case of Mandatory Bonus Deferrals, to the Tier I Participant’s Account and distributed in accordance with Section 7.2(c).  Any amount once taken into account as Base Salary or Bonus for purposes of this Plan shall not be taken into account thereafter. The Participant’s Distribution Accounts shall be reduced by the amount of payments made by the Employer to the Participant or the Participant’s Beneficiary pursuant to this Plan.

          5.2          Returns on Distribution Option Accounts.  A Participant’s Distribution Accounts shall be credited with returns in accordance with the Deemed Investment Options elected by the Participant from time to time.  Unless otherwise provided under this Plan, Participants may allocate their Retirement Distribution Account and/or each of their In-Service Distribution Accounts among the Deemed Investment Options available under the Plan only in whole percentages of not less than five percent.  The rate of return, positive or negative, credited under each Deemed Investment Option is based upon the actual investment performance of the investment fund(s) designated by the Plan Administrator from time to time, and shall equal the total return of such investment fund net of asset based charges, including, without limitation, money management fees, fund expenses and mortality and expense risk insurance contract charges.  The Plan Administrator reserves the right, on a prospective basis, to add or delete Deemed Investment Options.

          5.3          Deemed Investment Options.  Except as otherwise provided pursuant to Section 5.2, the Deemed Investment Options available under the Plan shall consist of the Company Stock Fund and such other investments funds as the Plan Administrator designates.  Notwithstanding that the rates of return credited to Participants’ Distribution Accounts under the Deemed Investment Options are based upon the actual performance of the investment funds designated by the Plan Administrator, the Company shall not be obligated to invest any Base Salary Deferral by Participants under this Plan, or any other amounts, in such portfolios or in any other investment funds.  Investments in the Company Stock Fund are limited to elections under Section 4.4 only.

          5.4          Changes in Deemed Investment Options.  A Participant may change the Deemed Investment Options to which the Participant’s Distribution Accounts are deemed to be allocated with whatever frequency is determined by the Plan Administrator which shall not be less than four times per Plan Year; provided, however, a Tier I Participant who has elected to invest a portion of his Voluntary Bonus Deferral in the Company Stock Fund may not change such investment option (for such Voluntary Bonus Deferrals or for the related Matching Contributions).  Each such change may include (a) reallocation of the Participant’s existing Accounts in whole percentages of not less than five percent, and/or (b) change in investment

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allocation of amounts to be credited to the Participant’s Accounts in the future, as the Participant may elect. 

          5.5          Valuation of Accounts.  The value of a Participant’s Distribution Accounts as of any date shall equal the amounts theretofore credited to such Accounts, including any earnings (positive or negative) deemed to be earned on such Accounts in accordance with Section 5.2 through the day preceding such date, less the amounts theretofore deducted from such Accounts.

          5.6          Statement of Accounts.  The Plan Administrator shall provide to each Participant, not less frequently than quarterly, a statement in such form as the Plan Administrator deems desirable setting forth the balance standing to the credit of each Participant in each of his Distribution Accounts.

          5.7          Distributions from Accounts.  Any distribution made to or on behalf of a Participant from one or more of his Distribution Accounts in an amount which is less than the entire balance of any such Account shall be made pro rata from each of the Deemed Investment Options to which such Account is then allocated.

ARTICLE 6
DISTRIBUTION OPTIONS

          6.1          Election of Distribution Option.  In the Enrollment Agreement filed with the Plan Administrator for each Distribution Option Period and for the Retirement Account, the Participant shall allocate his or her deferrals between the Distribution Options in increments of ten percent and elect the time and manner of distributions from such Distribution Accounts.  A Participant’s execution of the Enrollment Agreement shall also constitute acknowledgment that all decisions, interpretations and determinations by the Plan Administrator shall be final and binding on the Company, the Employer, Participants, Beneficiaries and any other persons having or claiming an interest hereunder.

          6.2          Retirement Distribution Option.  Subject to Section 7.1, distribution of the Participant’s Retirement Distribution Account, if any, shall be made or commence on the first day of the 13th month immediately following the Participant’s Retirement.

          6.3          In-Service Distribution Option.  Subject to Section 7.2, the Participant’s In-Service Distribution Account for any Distribution Option Period shall be distributed commencing in, and no later than, January of the Plan Year elected by the Participant in the Enrollment Agreement pursuant to which such In-Service Distribution Account was established.  Notwithstanding the foregoing, a Participant shall not be entitled to allocate any Compensation deferrals to an In-Service Distribution Account for a Distribution Option Period for the two Plan Years preceding the Plan Year which includes the date on which such Account is to be distributed and any such deferrals shall instead be allocated to the Retirement Distribution Account or to a subsequent In-Service Distribution Account if selected. 

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ARTICLE 7
BENEFITS TO PARTICIPANTS

          7.1          Benefits Under the Retirement Distribution Option.  Benefits under the Retirement Distribution Option shall be paid to a Participant as follows:

                         (a)          Distribution of Benefits Upon Retirement.  In the case of a Participant whose Service with the Employer terminates on account of Retirement and whose Retirement Distribution Account balance exceeds $25,000, the Participant’s Retirement Distribution Account shall be distributed in one of the following methods, as elected by the Participant in writing either in the Enrollment Agreement or in a separate election made prior to the date of the Participant’s Retirement: (i) in a lump sum; (ii) in annual installments over a 5, 10, 15 or 20 year period or (iii) by any other formula that is mathematically derived and is acceptable to the Plan Administrator.  The first annual installment payments are equal to (i) the value of such Retirement Distribution Account as of the last business day of the Plan Year preceding the date of payment, divided by (ii) the number of annual installment payments elected by the Participant in the Enrollment Agreement pursuant to which such Retirement Distribution Account was established.  The remaining annual installments shall be paid not later than January 31 of each succeeding Plan Year in an amount equal to (i) the value of such Retirement Distribution Account as of the last business day of the immediately preceding Plan Year divided by (ii) the number of installments remaining.  A Participant may change the election regarding the manner of payment of the Participant’s Account, as described in Section 6.1, at any time prior to the Participant’s Retirement.

                         (b)          Distribution of Benefits Upon Termination of Employment.  In the case of a Participant whose Service with the Employer terminates prior to the earliest date on which the Participant is eligible for Retirement, or whose Retirement Distribution Account balance does not exceed $25,000, the Participant’s Retirement Distribution Account shall be distributed in a lump sum payment as soon as administratively practicable following the Participant’s Termination Date notwithstanding any other election by the Participant.

          7.2          Benefits Under the In-Service Distribution Option.  Benefits under the In-Service Distribution Option shall be paid to a Participant as follows:

                         (a)          In-Service Distributions.  Benefits under the In-Service Distribution Account shall be distributed to the Participant for any Distribution Option Period beginning on the date chosen by the Participant in the first Enrollment Agreement that designated all or a portion of the Base Salary or Bonus deferred to be allocated to the In-Service Distribution Account.  In no event shall the date selected be earlier than the first day of the third Plan Year following the Plan Year in which the initial filing of the Enrollment Agreement was made with respect to that In-Service Distribution Account.  The Participant may, subsequently amend the intended date of payment to a date later than that date initially chosen, by filing such amendment with the Plan Administrator no later than 12 months prior to the date of the first payment originally chosen.  The Participant may file this amendment to defer the receipt of benefits under this Section only twice, and each amendment must provide for a payout under this Section at a date later than the election in force immediately prior to a filing of such amendment.  The Participant’s In-Service Distribution Account shall be paid to the Participant in either: (i) a lump sum payment commencing no later than January 31 of the Plan Year elected by the Participant in

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the Enrollment Agreement pursuant to which such In-Service Distribution Account was established as it may have been amended in accordance with the preceding paragraph; or (ii) annual installments payable over a 2, 3, 4 or 5 year period.  Annual installment payments, if any, equal to (i) the value of such In-Service Distribution Account as of the last business day of the Plan Year preceding the date of payment, divided by (ii) the number of annual installment payments elected by the Participant in the Enrollment Agreement pursuant to which such In-Service Distribution Account was established.  The remaining annual installments shall be paid not later than January 31 of each succeeding year in an amount equal to (i) the value of such In-Service Distribution Account as of the last business day of the immediately preceding Plan Year divided by (ii) the number of installments remaining.

                         (b)          Benefits Upon Termination of Employment.  In the case of a Participant whose Service with the Employer terminates prior to the date on which the Participant’s In-Service Distribution Account would otherwise be distributed, such In-Service Distribution Account shall be paid in a lump sum as soon as administratively practicable following the Participant’s Termination Date.

                         (c)          Distribution of Mandatory Bonus Deferral.  Notwithstanding the foregoing, the vested portion of the Mandatory Bonus Deferral credited to a Tier I Participant’s Account, and related earnings, shall be distributed to the Tier I Participant in April of each of the three Plan Years following the Plan Year in which the Mandatory Bonus Deferral was credited to the Tier I Participant’s Account.  If the Tier I Participant terminates employment on or after attaining Normal Retirement Age, dies or becomes Disabled prior to the end of this three year period, the entire balance shall be distributed to the Tier I Participant or his Beneficiary in a lump sum payment as soon as administratively possible following the Termination Date.

          7.3          Distribution of Benefits Upon a Change of Control.  In the event of a Change of Control, within 30 days thereafter, a Participant may elect to receive the vested portion of the Participant’s Accounts.  If a Participant elects to be paid a benefit under this Section 7.3, the lump sum payment due to the Participant (or Beneficiary, in the event of the Participant’s death) under this Section shall be made on the first day of the 13th month immediately following the end of the election period.

ARTICLE 8
SURVIVOR BENEFITS

          8.1          Death of Participant Prior to the Commencement of Benefits.  In the event of a Participant’s death prior to the commencement of benefits in accordance with Article 7, distribution of the Participant’s Accounts shall be made to the Participant’s Beneficiary in a lump sum as soon as practicable on the first day of the seventh month following the Participant’s death.  The amount of any lump sum benefit payable in accordance with this Section shall equal the value of the Participant’s Accounts as of the last business day of the calendar month immediately preceding the date on which such benefit is paid.  In lieu of the lump sum, a Beneficiary may elect, in the form and manner, and at the time specified by, the Plan Administrator, any form of payment allowed under Section 7.1 or 7.2, as applicable, that the Participant would have been able to elect had the Participant retired on the day before death.

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          8.2          Death of Participant After Benefits Have Commenced.  In the event a Participant dies after annual installment benefits payable under Section 7.1 or 7.2 have commenced, but before the entire balance of the applicable Distribution Account has been paid, any remaining installments shall continue to be paid to the Participant’s Beneficiary at such times and in such amounts as they would have been paid to the Participant had the Participant survived.

ARTICLE 9
EMERGENCY BENEFIT

          In the event that the Plan Administrator, upon written request of a Participant, determines, in its sole discretion, that the Participant has suffered an unforeseeable financial emergency, the Employer shall pay to the Participant from the Participant’s Distribution Account(s), as soon as practicable following such determination, an amount necessary to meet the emergency, after deduction of any and all taxes as may be required pursuant to Section 11.9 (the “Emergency Benefit”).  For purposes of this Plan, an unforeseeable financial emergency is an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal, or other such unforeseeable occurrence.  Cash needs arising from foreseeable events such as the purchase of a house or education expenses for children shall not be considered to be the result of an unforeseeable financial emergency.  Emergency Benefits shall be paid first from the Participant’s In-Service Distribution Accounts, if any, to the extent the balance of one or more of such In-Service Distribution Accounts is sufficient to meet the emergency, in the order in which such Accounts would otherwise be distributed to the Participant.  If the distribution exhausts the In-Service Distribution Accounts, the Retirement Distribution Account may be accessed.  With respect to that portion of any Distribution Option Account which is distributed to a Participant as an Emergency Benefit, in accordance with this Article, no further benefit shall be payable to the Participant under this Plan.  Notwithstanding anything in this Plan to the contrary, a Participant who receives an Emergency Benefit in any Plan Year shall not be entitled to make any further deferrals for the remainder of such Plan Year.  It is intended that the Plan Administrator’s determination as to whether a Participant has suffered an “unforeseeable financial emergency” shall be made consistent with the requirements under section 457(d) of the Code.

ARTICLE 10
ACCELERATED DISTRIBUTION

          10.1        Availability of Withdrawal Prior to Retirement.  Upon the Participant’s written election, the Participant may elect to withdraw all or a portion (minimum of 25%) of the Participant’s Distribution Account(s) at any time prior to the time such Distribution Account otherwise becomes payable under the Plan, provided the conditions specified in Section 10.3, Section 10.4, and Section 10.5 are satisfied.

          10.2        Acceleration of Periodic Distributions.  Upon the Participant’s written election, the Participant or Participant’s Beneficiary who is receiving installment payments under the Plan may elect to have all or a percentage of the remaining installments distributed in the form of an immediately payable lump sum, provided the condition specified in Section 10.3 is satisfied.

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          10.3        Forfeiture Penalty.  In the event of a withdrawal pursuant to Section 10.1, or an accelerated distribution pursuant to Section 10.2, the Participant shall forfeit from his Distribution Account from which the withdrawal is made an amount equal to 10% of the amount of the withdrawal or accelerated distribution, as the case may be.  The forfeited amount shall be deducted from the applicable Distribution Account prior to giving effect to the requested withdrawal or acceleration.  The Participant and the Participant’s Beneficiary shall not have any right or claim to the forfeited amount, and the Employer shall have no obligation whatsoever to the Participant, the Participant’s Beneficiary or any other person with regard to the forfeited amount.

          10.4        Minimum Withdrawal.  In no event shall the amount withdrawn in accordance with Section 10.1 be less than 25% of the amount credited to the Participant’s Distribution Account immediately prior to the withdrawal.

          10.5        Suspension from Deferrals.  In the event of a withdrawal pursuant to Section 10.1, a Participant who is otherwise eligible to make deferrals under Article 4 shall be prohibited from making any deferrals with respect to the Plan Year immediately following the Plan Year during which the withdrawal was made, and any election previously made by the Participant with respect to deferrals for the Plan Year of the withdrawal shall be void and of no effect with respect to subsequent deferrals for such Plan Year.

ARTICLE 11
MISCELLANEOUS

          11.1        Amendment and Termination.  The Plan may be amended, suspended, discontinued or terminated at any time by the Plan Administrator, acting on behalf of the Company; provided, however, that no such amendment, suspension, discontinuance or termination shall reduce or in any manner adversely affect the rights of any Participant with respect to benefits that are payable or may become payable under the Plan based upon the balance of the Participant’s Accounts as of the effective date of such amendment, suspension, discontinuance or termination.  Following a termination of the Plan, the Plan Administrator, acting on behalf of the Company, shall determine when amounts shall be distributed from each Participant’s Distribution Accounts notwithstanding any terms of the Plan to the contrary.

          11.2        Claims Procedure. 

                         a.          Claim

                         A person who believes that he is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as a “Claimant”) may file a written request for such benefit with the Plan Administrator, setting forth the claim.

                         b.          Claim Decision

                         Upon receipt of a claim, the Plan Administrator shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within

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such period.  The Plan Administrator may, however, extend the reply period for an additional ninety (90) days for reasonable cause.

                         If the claim is denied in whole or in part, the Claimant shall be provided a written opinion, using language calculated to be understood by the Claimant, setting forth:

                         (a)         The specific reason or reasons for such denial;

                         (b)         The specific reference to relevant provisions of the Plan on which such denial is based;

                         (c)         A description of any additional material or information necessary for the Claimant to perfect the claim and an explanation why such material or such information is necessary;

                         (d)         Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review;

                         (e)         The time limits for requesting a review under subsection (c) and for review under subsection (d) hereof; and

                         (f)         The Participant’s right to bring an action for benefits under Section 502 of ERISA.

                         c.          Request for Review

                         Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Plan Administrator review its determination.  The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comment in writing for consideration by the Plan Administrator.  If the Claimant does not request a review of the initial determination within such sixty (60) day period, the Claimant shall be barred and estopped from challenging the determination.

                         d.          Review of Decision

                         Within sixty (60) days after the Plan Administrator’s receipt of a request for review, it will review the initial determination.  After considering all materials presented by the Claimant, the Plan Administrator will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the relevant provisions of this Agreement on which the decision is based and the Participant’s right to bring an action for benefits under Section 502 of ERISA.  If special circumstances require that the sixty (60) day time period be extended, the Plan Administrator will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review.

          11.3        Designation of Beneficiary.  Each Participant may designate a Beneficiary or Beneficiaries (which Beneficiary may be an entity other than a natural person) to receive any

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payments which may be made following the Participant’s death.  Such designation may be changed or canceled at any time without the consent of any such Beneficiary.  Any such designation, change or cancellation must be made in a form approved by the Plan Administrator and shall not be effective until received by the Plan Administrator, or its designee.  If no Beneficiary has been named, or the designated Beneficiary or Beneficiaries shall have predeceased the Participant, the Beneficiary shall be the Participant’s estate.  If a Participant designates more than one Beneficiary, the interests of such Beneficiaries shall be paid in equal shares, unless the Participant has specifically designated otherwise.

          11.4        Limitation of Participant’s Right.  Nothing in this Plan shall be construed as conferring upon any Participant any right to continue in the employment of the Company, nor shall it interfere with the rights of the Company to terminate the employment of any Participant and/or to take any personnel action affecting any Participant without regard to the effect which such action may have upon such Participant as a recipient or prospective recipient of benefits under the Plan.  Any amounts payable hereunder shall not be deemed salary or other compensation to a Participant for the purposes of computing benefits to which the Participant may be entitled under any other arrangement established by the Company for the benefit of its employees.

          11.5        No Limitation on Company Actions.  Nothing contained in the Plan shall be construed to prevent the Company from taking any action which is deemed by it to be appropriate or in its best interest.  No Participant, Beneficiary, or other person shall have any claim against the Company as a result of such action.

          11.6        Obligations to Company.  If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Company, then the Company may offset such amount owed to it against the amount of benefits otherwise distributable.  Such determination shall be made by the Plan Administrator.

          11.7        Nonalienation of Benefits.  Except as expressly provided herein, no Participant or Beneficiary shall have the power or right to transfer (otherwise than by will or the laws of descent and distribution), alienate, or otherwise encumber the Participant’s interest under the Plan.  The Company’s obligations under this Plan are not assignable or transferable except to (a) any corporation or partnership which acquires all or substantially all of the Company’s assets or (b) any corporation or partnership into which the Company may be merged or consolidated.  The provisions of the Plan shall inure to the benefit of each Participant and the Participant’s Beneficiaries, heirs, executors, administrators or successors in interest.

          11.8        Protective Provisions.  Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, taking such physical examinations as the Company may deem necessary and taking such other relevant action as may be requested by the Company.  If a Participant refuses to cooperate, the Company shall have no further obligation to the Participant under the Plan, other than payment to such Participant of the then current balance of the Participant’s Distribution Option Accounts in accordance with his prior elections.

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          11.9        Withholding Taxes.  The Company may make such provisions and take such action as it may deem necessary or appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether Federal, state or local, to withhold in connection with any benefits under the Plan, including, but not limited to, the withholding of appropriate sums from any amount otherwise payable to the Participant (or his Beneficiary).  Each Participant, however, shall be responsible for the payment of all individual tax liabilities relating to any such benefits.

          11.10      Unfunded Status of Plan.  The Plan is intended to constitute an “unfunded” plan of deferred compensation for Participants.  Benefits payable hereunder shall be payable out of the general assets of the Company, and no segregation of any assets whatsoever for such benefits shall be made.  Notwithstanding any segregation of assets or transfer to a grantor trust, with respect to any payments not yet made to a Participant, nothing contained herein shall give any such Participant any rights to assets that are greater than those of a general creditor of the Company.

          11.11      Severability.  If any provision of this Plan is held unenforceable, the remainder of the Plan shall continue in full force and effect without regard to such unenforceable provision and shall be applied as though the unenforceable provision were not contained in the Plan.

          11.12      Governing Law.  The Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania, without reference to the principles of conflict of laws.

          11.13      Headings.  Headings are inserted in this Plan for convenience of reference only and are to be ignored in the construction of the provisions of the Plan.

          11.14      Gender, Singular and Plural.  All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require.  As the context may require, the singular may read as the plural and the plural as the singular.

          11.15      Notice.  Any notice or filing required or permitted to be given to the Plan Administrator or the Plan Administrator under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the Human Resources Department, or to such other entity as the Plan Administrator or the Plan Administrator may designate from time to time.  Such notice shall be deemed given as to the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

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EX-10.27

EXHIBIT 10.27 - THE PEP BOYS ANNUAL INCENTIVE BONUS PLAN (AMENDED AND RESTATED AS OF   DECEMBER 9, 2003)

THE PEP BOYS - MANNY, MOE & JACK
ANNUAL INCENTIVE BONUS PLAN
(as amended and restated as of December 9, 2003)

          The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation (the “Company”), established, effective January 29, 1989, an Annual 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, March 31, 1995 and March 31, 1998, the Board of Directors of the Company (the “Board”) amended the plan in numerous respects.  By action of the Board on December 9, 2003, 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 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)          “Applicable Performance Measures” shall mean the Company Performance Measures and/or the Individual Performance Measures upon which a Participant’s right to receive a Bonus is based.

                       (b)          “Award Period” shall mean a measuring period of one Fiscal Year.

                       (c)          “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.

                       (d)          “Bonus Level” shall mean the level at which a Participant shall participate in the Plan as set forth in Paragraph 4(b) hereof.

                       (e)          “CEO” shall mean the person elected to the office of Chief Executive Officer of the Company by the Board of Directors.

                       (f)          “Code” shall mean the Internal Revenue Code of 1986, as amended.

                       (g)          “Compensation Committee” shall mean the Compensation Committee of the Board.  The Compensation Committee shall consist of two or more persons appointed by the Board, each of whom shall be an “outside director” as defined under Code section 162(m) and related Treasury regulations.

                       (h)          “Executive Officer” shall mean an executive officer (within the meaning of the Securities Exchange Act of 1934, as amended) who is among the top five most highly compensated employees of the Company at the beginning of any Award Period.

                       (i)          “Fiscal Year” shall mean the Fiscal Year of the Company which ends on the Saturday nearest January 31 in each year.

                       (j)          “Participant” shall have the meaning set forth in Paragraph 4 hereof.

                       (k)          “President” shall mean the person elected to the office of President, Chief Operating Officer or equivalent of the Company by the Board of Directors.

                       (l)          “Salary” shall mean the base salary of a Participant for a Fiscal Year.  For purposes of the foregoing, base salary shall include (i) amounts which the 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 and (ii) amounts which the Participant elects to defer under a deferred compensation plan or program, other than an equity-based deferred compensation plan, adopted by the Company.  Base salary shall not include any amount attributable to any

bonus paid or accrued (including any bonus deferred under a deferred compensation plan or program adopted by the Company), 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; provided, however, that the Compensation Committee shall not have the power to amend or modify any provision of the Plan without stockholder approval in a manner that would affect the terms of the Plan applicable to Executive Officers, if stockholder approval would be required under Code section 162(m).  The Compensation Committee’s authority to extend, amend or modify the Plan shall include, without limitation, the right 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 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 maintain compliance 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 11 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 11 hereof, and shall be eligible to receive an amount equal to the amount which 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 five Bonus Levels, as set forth below:

Bonus Level	Participant Group
Tier I	CEO
Tier II	President
Tier III	Executive Vice Presidents
Tier IV	Senior Vice Presidents
Tier V	Vice Presidents

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. 

                       (a)          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”):  (1) return on total stockholder equity; (2) earnings per share of Common Stock; (3) net income (before or after taxes); (4) earnings before interest, taxes, depreciation and amortization; (5) sales or revenue targets; (6) return on assets, capital or investment; (7) cash flow: (8) market share; (9) cost reduction goals; (10) budget comparisons; (11) implementation or completion of  projects or processes strategic or critical to the Corporation’s business operations; (12) measures of customer satisfaction; and (13) any combination of, or a specified increase in, any of the foregoing.  Such performance goals may be based upon the attainment of specified levels of the Corporation’s performance under one or more of the measures described above relative to the performance of other entities and may also be based on the performance of any of the Corporation’s business units or divisions or any parent or subsidiary.  In addition, the Compensation Committee will establish relative weightings for the respective Company Performance Measures being used. 

                       (b)          To the extent applicable, the Compensation Committee, in determining whether and to what extent a Company Performance Measure has been achieved, shall use the information set forth in the Company’s audited financial statements.

          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”); provided, however, that Individual Performance Measures shall not apply to a Bonus designated as “qualified performance-based compensation” under Code section 162(m).

          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.  The Compensation Committee shall set forth the decisions reached on each of the items in this Paragraph 7(a) in its minutes.

                       (b)          During the first ninety (90) days of each Award Period, the Company will prepare, and the Compensation Committee will review, approve and set forth in its minutes, the following information for the Award Period, 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); (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 Award Period; (v) the Company Performance Measures for the current Award Period; (vi) the relative weightings of each such Company Performance Measure; and (vii) the minimum, target and maximum performance levels for each such Company Performance Measure.

          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.

          9.          Special Rules for Executive Officers

                       (a)          The maximum Bonus payable to an Executive Officer for any Fiscal Year shall not exceed three million dollars ($3,000,000).

                       (b)          Notwithstanding anything to the contrary set forth in this Plan, the Compensation Committee shall establish the Applicable Performance Measures for Executive Officers no later than the earliest to occur of (i) the ninetieth (90th) day following the beginning of the Award Period or (ii) the date on which 25% of the Award Period has been completed, or (iii) such other date as may be required under applicable regulations under Code section 162(m).  Such Applicable Performance Measures shall be set forth in the minutes of the Compensation Committee.

                       (c)          Unless the Compensation Committee determines otherwise, any Bonus payable to an Executive Officer shall be based on Applicable Performance Measures that satisfy the requirements for “qualified performance-based compensation” under Code section 162(m), including the requirement that the achievement of the Applicable Performance Measures be substantially uncertain at the time they are established and that the Applicable Performance Measures be established in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the Applicable Performance Measures have been met.  To the extent that any Bonus is designated as “qualified performance-based compensation” under Code section 162(m), no such Bonus may be made as an alternative to any other award that is not designated as “qualified performance based compensation” but instead must be separate and apart from all other awards made.  To the extent a Bonus is designated as “qualified performance-based compensation,” the Compensation Committee is authorized to reduce such Bonus for any Award Period based upon its assessment of personal performance or other factors, but may not increase the Bonus that would otherwise be payable to the Participant.  In no event shall a reduction to one Participant’s Bonus result in an increase to a Bonus designated as “qualified performance based compensation” under Code section 162(m).

                       (d)          If a Bonus to which an Executive Officer may become entitled is designated as “qualified performance-based compensation” under Code section 162(m), the Compensation Committee shall certify in writing prior to payment of such Bonus that the Applicable Performance Measures were in fact achieved.  Any such certification by the Compensation Committee shall be set forth in its minutes.

          10.        Payment of Bonuses.   Bonuses shall be paid in cash or otherwise deferred by the Participant (as permitted by the Company) within ninety (90) days after the end of the Award Period to which such Bonus relates.

          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 11(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, within ninety (90) days after the end of the Award Period, 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.

                       (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)          Notwithstanding any provision of the Plan to the contrary, Bonuses to Executive Officers, if made, will be made contingent upon, and subject to, stockholder approval of the Plan at the 2004 Annual Stockholders’ Meeting.

                       (d)          It is the intent of the Company that the Plan and any Bonuses made under the Plan to Executive Officers comply with the applicable provisions of Code section 162(m).  To the extent that any legal requirement of Code section 162(m) as set forth in the Plan ceases to be required under Code section 162(m), that Plan provision shall cease to apply.

                       (e)          The paragraph headings in this Plan are for convenience only; they form no part of the Plan and shall not affect its interpretation.

                       (f)          This Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.

As adopted by the Board on	THE PEP BOYS - MANNY, MOE & JACK
December 9, 2003.
	By:	/s/ Lawrence N. Stevenson
		Chief Executive Officer

EX-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)
Fiscal year	January 31, 2004			February 1, 2003			February 2, 2002			February 3, 2001			January 29, 2000
Interest	$	38,255		$	47,237		$	53,709		$	59,718		$	51,557
Interest factor in rental expense		21,019			20,505			20,620			20,995			19,635
Capitalized interest		-			44			1			489			1,098
(a) Fixed charges, as defined	$	59,274		$	67,786		$	74,330		$	81,202		$	72,290
(Loss) Earnings from continuing operations      before income taxes and cumulative      effect of change in accounting principle	$	(18,007	)	$	68,243		$	54,206		$	(80,176	)	$	40,859
Fixed charges		59,274			67,786			74,330			81,202			72,290
Capitalized interest		-			(44	)		(1	)		(489	)		(1,098	)
(b) Earnings, as defined	$	41,267		$	135,985		$	128,535		$	537		$	112,051
(c) Ratio of earnings to fixed charges (b÷a)		-			2.0x			1.7x			-			1.6x

The ratio of earnings to fixed charges is completed by dividing earnings by fixed charges. “Earnings” consist of earnings before income taxes plus fixed charges (exclusive of capitalized interest costs) plus one-third of rental expense (which amount is considered representative of the interest factor in rental expense). Earnings, as defined, were not sufficient to cover fixed charges by approximately $18.0 and $80.7 million for fiscal years ended January 31, 2004 and February 3, 2001, respectively.

EX-21

Exhibit 21

SUBSIDIARIES OF THE COMPANY

NAME	WHERE INCORPORATED	% OF SHARES 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

Exhibit 23

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in Registration Statement Numbers 33-31765, 33-64248, 33-35592, 33-61429, 33-32857, 333-40363, 333-51585, 333-81351, 333-89280, 333-100224 and 333-113723 of The Pep Boys - Manny, Moe & Jack and subsidiaries on Form S-8 and Post-Effective Amendment No. 2 to Registration Statement No. 333-98255 and Registration Statement Number 333-109625 of The Pep Boys - Manny, Moe & Jack and subsidiaries on Form S-3 of our report dated April 9, 2004, appearing in this Annual Report on Form 10-K of The Pep Boys - Manny, Moe & Jack and subsidiaries for the year ended January 31, 2004.

/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
April 9, 2004

EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Lawrence N. Stevenson, certify that:
1)	I have reviewed this annual report on Form 10-K of The Pep Boys - Manny, Moe & Jack;
2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report; and
	c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 12, 2004	/s/ Lawrence N. Stevenson
	Lawrence N. Stevenson
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, George Babich, Jr., certify that:
1)     I have reviewed this annual report on Form 10-K of The Pep Boys - Manny, Moe & Jack;
2)     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
	a)     designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)     evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report; and
	c)     disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5)     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)     all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  April 12, 2004	/s/ George Babich, Jr.
		George Babich, Jr.
		President &
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of The Pep Boys - Manny, Moe & Jack (the “Company”) on Form 10-K for the year ended January 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),

I, Lawrence N. Stevenson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(i)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date:  April 12, 2004	/s/  Lawrence N. Stevenson
		Lawrence N. Stevenson
		Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of The Pep Boys - Manny, Moe & Jack (the “Company”) on Form 10-K for the year ended January 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),

I, George Babich, Jr., President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(i)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: April 12, 2004	/s/  George Babich, Jr.
		George Babich, Jr.
		President and
		Chief Financial Officer