-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ii24kG56pj5x4pfiTVTdBQ7/3K6FsPUVqRW44sIR9DDqXUgu3DzqDH5fTo0tZr+w RIujU0fhrW691od+Vt7UCQ== 0001239124-05-000011.txt : 20050303 0001239124-05-000011.hdr.sgml : 20050303 20050303170740 ACCESSION NUMBER: 0001239124-05-000011 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040501 FILED AS OF DATE: 20050303 DATE AS OF CHANGE: 20050303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEP BOYS MANNY MOE & JACK CENTRAL INDEX KEY: 0000077449 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 230962915 STATE OF INCORPORATION: PA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-03381 FILM NUMBER: 05658682 BUSINESS ADDRESS: STREET 1: 3111 W ALLEGHENY AVE CITY: PHILADELPHIA STATE: PA ZIP: 19132 BUSINESS PHONE: 2152299000 10-Q/A 1 r1qa04.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-Q/A (Amendment No. 1) (Mark One) (x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended May 1, 2004 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ----------- ---------- Commission File No. 1-3381 ------ The Pep Boys - Manny, Moe & Jack ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-0962915 ------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer ID number) incorporation or organization) 3111 W. Allegheny Ave. Philadelphia, PA 19132 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) 215-430-9000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ( x ) No ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ( x ) No ( ) As of May 29, 2004, there were 57,836,136 shares of the registrant's Common Stock outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTE As previously disclosed, on January 30, 2005, our Board of Directors, including our Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. These non-cash adjustments, which are similar to those recently announced by several restaurant and retail companies, will not have any impact on our previously reported cash flows, sales, comparable sales or our compliance with any financial covenant under our revolving credit facility or other debt instruments. This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to our Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2004, initially filed with the Securities and Exchange Commission (the "SEC") on June 10, 2004 (the "Original Filing"), is being filed to reflect restatements of (i) the Company's consolidated balance sheets at May 1, 2004 and January 31, 2004 and (ii) the Company's consolidated statements of operations, stockholders' equity and cash flows for the quarters ended May 1, 2004 and May 3, 2003, and the notes related thereto. For a more detailed description of these restatements, see Note 2, "Restatement of Financial Statements," to the accompanying consolidated financial statements and the section entitled "Restatement" in Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q/A. For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety. However, this Form 10-Q/A only amends and restates Items 1,2 and 4 of Part I and Exhibit 12 of Item 6 of Part II of the Original Filing, in each case, solely as a result of, and to reflect, the Restatement, and no other information in the original filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as exhibits 31.1, 31.2, 32.1 and 32.2 respectively. Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. Other events occurring after the filing of the Original Filing or other disclosures necessary to reflect subsequent events have been or will be addressed in our amended Quarterly Report on Form 10-Q/A for the quarterly periods ended July 31, 2004 and October 31, 2004 which are being filed concurrently with the filing of this Form 10-Q/A and any reports filed with the SEC subsequent to the date of this filing. We have not amended and do not intend to amend our previously-filed Annual Reports on Form 10-k or our Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended prior to January 31, 2004. For this reason, the consolidated financial statements, auditors' reports and related financial information for the affected periods contained in such reports should no longer be relied upon. 1 - ------------------------------------------------------------------- Index Page - ------------------------------------------------------------------- PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets (As restated) - May 1, 2004 and January 31, 2004 3 Consolidated Statements of Operations (As Restated) - Thirteen weeks ended May 1, 2004 and May 3, 2003 4 Consolidated Statements of Cash Flows (As Restated) - Thirteen weeks ended May 1, 2004 and May 3, 2003 5 Notes to Condensed Consolidated Financial Statements 6-21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22-29 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Item 4. Controls and Procedures 30 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32 Item 3. Defaults Upon Senior Securities 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 SIGNATURES 33 INDEX TO EXHIBITS 34 2
PART I - FINANCIAL INFORMATION - ------------------------------ Item 1. Condensed Consolidated Financial Statements (Unaudited) THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - (As Restated, See Note 2) (dollar amounts in thousands, except per share amounts) UNAUDITED May 1, 2004 Jan.31, 2004* - ----------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 98,766 $ 60,984 Accounts receivable, net 33,989 30,562 Merchandise inventories 601,415 553,562 Prepaid expenses 38,277 39,480 Deferred income taxes 11,175 20,826 Other 79,950 81,096 Assets held for disposal 10,350 16,929 - ----------------------------------------------------------------------------------------------------- Total Current Assets 873,922 803,439 - ----------------------------------------------------------------------------------------------------- Property and Equipment-at cost: Land 263,199 263,907 Buildings and improvements 900,159 899,114 Furniture, fixtures and equipment 592,218 586,607 Construction in progress 11,641 12,800 - ----------------------------------------------------------------------------------------------------- 1,767,217 1,762,428 Less accumulated depreciation and amortization 856,994 839,219 - ----------------------------------------------------------------------------------------------------- Property and Equipment - Net 910,223 923,209 - ----------------------------------------------------------------------------------------------------- Other 52,286 51,398 - ----------------------------------------------------------------------------------------------------- Total Assets $1,836,431 $1,778,046 - ----------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 366,360 $ 342,584 Accrued expenses 244,549 267,565 Short-term borrowings 4,505 - Current maturities of long-term debt and obligations under capital leases 51,023 117,063 - ----------------------------------------------------------------------------------------------------- Total Current Liabilities 666,437 727,212 - ----------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 244,552 258,016 Convertible long-term debt 150,000 150,000 Other long-term liabilities 38,851 39,201 Deferred income taxes 35,309 29,976 Deferred gain on sale leaseback 3,805 3,907 Commitments and Contingencies Stockholders' Equity: Common Stock, par value $1 per share: Authorized 500,000,000 shares; Issued 68,557,041 shares and 63,910,577 shares 68,557 63,911 Additional paid-in capital 283,912 177,317 Retained earnings 541,203 531,933 Accumulated other comprehensive income (loss) 1,045 (15) - ----------------------------------------------------------------------------------------------------- 894,717 773,146 Less cost of shares in treasury - 8,545,885 shares and 8,928,159 shares 137,976 144,148 Less cost of shares in benefits trust - 2,195,270 shares 59,264 59,264 - ----------------------------------------------------------------------------------------------------- Total Stockholders' Equity 697,477 569,734 - ----------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $1,836,431 $1,778,046 - ---------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements. * Taken from restated audited financial statements as of January 31, 2004 as filed on Form 10-K/A
3
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - (As Restated, See Note 2) (dollar amounts in thousands, except per share amounts) UNAUDITED Thirteen weeks ended ------------------------------------------------ May 1, 2004 May 3, 2003 ------------------- ------------------- - --------------------------------------------------------------------------------------------------------- Merchandise Sales $ 460,881 $ 411,132 Service Revenue 105,252 99,778 - --------------------------------------------------------------------------------------------------------- Total Revenues 566,133 510,910 - --------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 325,374 291,575 Costs of Service Revenue 78,551 75,204 - --------------------------------------------------------------------------------------------------------- Total Costs of Revenues 403,925 366,779 - --------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 135,507 119,557 Gross Profit from Service Revenue 26,701 24,574 - --------------------------------------------------------------------------------------------------------- Total Gross Profit 162,208 144,131 - --------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 129,562 147,777 - --------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 32,646 (3,646) Non-operating Income 592 1,050 Interest Expense 9,298 10,701 - --------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle 23,940 (13,297) Income Tax Expense (Benefit) 8,858 (4,929) - --------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 15,082 (8,368) (Loss) Earnings from Discontinued Operations, Net of Tax (531) 538 Cumulative Effect of Change in Accounting Principle, Net of Tax - (2,484) - --------------------------------------------------------------------------------------------------------- Net Earnings (Loss) 14,551 (10,314) Retained Earnings, beginning of period 531,933 586,735 Cash Dividends (3,898) (3,487) Effect of Stock Options (1,383) (71) Dividend Reinvestment Plan - (274) - --------------------------------------------------------------------------------------------------------- Retained Earnings, end of period $ 541,203 $ 572,589 - --------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share: Net Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle $ 0.27 $ (0.16) (Loss) Earnings From Discontinued Operations, Net of Tax (0.01) .01 Cumulative Effect of Change in Accounting Principle, Net of Tax - (0.05) - --------------------------------------------------------------------------------------------------------- Basic Earnings (Loss) Per Share $ 0.26 $ (0.20) - --------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share: Net Earnings (Loss) From Continuing Operations Before Cumulative Effect of Change in Accounting Principle $ 0.25 $ (0.16) (Loss) Earnings From Discontinued Operations, Net of Tax (0.01) 0.01 Cumulative Effect of Change in Accounting Principle, Net of Tax - (0.05) - --------------------------------------------------------------------------------------------------------- Diluted Earnings (Loss) Per Share $ 0.24 $ (0.20) - --------------------------------------------------------------------------------------------------------- Cash Dividends Per Share $ .0675 $ .0675 - --------------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements.
4
THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (As Restated, See Note 2) (dollar amounts in thousands) UNAUDITED Thirteen Weeks Ended May 1, 2004 May 3, 2003 - --------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net earnings (loss) $ 14,551 $ (10,314) Net (loss) earnings from discontinued operations (531) 538 - --------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) from continuing operations 15,082 (10,852) Adjustments to Reconcile Net Earnings (Loss) From Continuing Operations to Net Cash Provided by Continuing Operations: Depreciation and amortization 18,796 19,802 Cumulative effect of change in accounting principle, net of tax - 2,484 Accretion of asset disposal obligation 35 49 Stock compensation expense 698 - Deferred income taxes 13,848 (3,167) Deferred gain on sale leaseback (102) (3) Loss from sale of assets 391 19 Changes in Operating Assets and Liabilities: Decrease in accounts receivable, prepaid expenses and other 2,126 5,538 Increase in merchandise inventories (47,853) (33,075) Increase in accounts payable 30,689 44,791 (Decrease) increase in accrued expenses (23,347) 21,547 (Decrease) increase in other long-term liabilities (350) (39) - --------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 10,013 47,094 Net cash (used in) provided by discontinued operations (776) 1,109 - --------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 9,237 48,203 - --------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (7,683) (8,565) Proceeds from sales of assets 1,411 745 Proceeds from sales of assets held for disposal 6,879 1,146 - --------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities 607 (6,674) - --------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net (payments) borrowings under line of credit agreements (40) 10,631 Repayments of short-term borrowings (2,408) - Payments on capital lease obligations (41) (112) Reduction of long-term debt (79,423) (10,503) Dividends paid (3,898) (3,487) Net proceeds from sale of common stock 108,909 - Proceeds from exercise of stock options 4,561 39 Proceeds from dividend reinvestment plan 278 322 - --------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 27,938 (3,110) - --------------------------------------------------------------------------------------------------------------- Net Increase in Cash 37,782 38,419 Cash and Cash Equivalents at Beginning of Period 60,984 42,770 - --------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 98,766 $ 81,189 - --------------------------------------------------------------------------------------------------------------- See notes to condensed consolidated financial statements.
5 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (As Restated, See Note 2) NOTE 1. Condensed Consolidated Financial Statements The consolidated balance sheets as of May 1, 2004, the consolidated statements of operations and the consolidated statements of cash flows for the thirteen week periods ended May 1, 2004 and May 3, 2003 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at May 1, 2004 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's restated Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. The results of operations for the thirteen week period ended May 1, 2004 are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year's presentation. NOTE 2. Restatement of Financial Statements Subsequent to the issuance of the Company's fiscal 2003 financial statements, the Company's management reviewed its lease-related accounting policies and determined to correct its computation of depreciation, straight-line rent expense and the related deferred rent liability. As a result, on January 30, 2005, the Company's Board of Directors, including the Company's Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. The primary effect of the corrections is to accelerate the depreciation of leasehold improvements of leased properties where the initial lease term is shorter than the estimated useful economic life of those assets and rental expense on properties we occupied before payment of rents was required. The cumulative effect of the restatement through fiscal quarter ended May 1, 2004 is an increase in other current assets of $652,000, an increase in accumulated depreciation of $64,972,000, an increase in the deferred rent liability of $10,165,000 and a decrease in deferred income tax liability of $27,516,000. As a result, retained earnings at the end of fiscal quarter ended May 1, 2004 decreased by $46,969,000. Depreciation expense from continuing operations increased by $2,021,000 and $2,065,000 and rent expense from continuing operations decreased by $235,000 and $310,000 for the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively. The Restatement increased reported diluted loss per share by $0.02,for the thirteen weeks ended May 1, 2004 and May 3, 2003. The cumulative effect of the Restatement for all years prior to fiscal 2001 was $34,812,000, which was recorded as an adjustment to opening stockholders' equity at February 2, 2002 in the Company's restated Annual Report as of January 31, 2004 on Form 10-K/A. The restatement did not have any impact on the Company's previously reported cash flows, sales or comparable sales or the Company's compliance with any covenant under the Company's line of credit facility or other debt instruments. The consolidated financial statements included in this Form 10-Q/A have been restated to reflect the adjustments described above. The restatement has been set forth, for the periods presented, in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004 which we are filing concurrently with this Form 10-Q/A. 6 The following is a summary of the impact of the Restatement on (i) the Company's consolidated balance sheets at May 1, 2004 and January 31, 2004 and (ii) the Company's consolidated statements of operations for the fiscal quarters ended May 1, 2004 and May 3, 2003. We have not presented a summary of the impact of the Restatement on the consolidated statements of cash flows for any of the above-referenced fiscal periods because the net impact for each such fiscal period is zero.
(dollar amounts in thousands) As Previously May 1, 2004 Reported Adjustments As Restated - ------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheet Other $ 79,298 $ 652 $ 79,950 Total Current Assets 873,270 652 873,922 Accumulated depreciation and amortization 792,022 64,972 856,994 Property and equipment, net 975,195 (64,972) 910,223 Total Assets 1,900,751 (64,320) 1,836,431 Other long-term liabilities 28,686 10,165 38,851 Deferred income taxes 62,825 (27,516) 35,309 Retained earnings 588,172 (46,969) 541,203 Total Stockholders'Equity 744,446 (46,969) 697,477 Total Liabilities and Stockholders' Equity 1,900,751 (64,320) 1,836,431
As Previously January 31, 2004 Reported Adjustments As Restated - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheet Accumulated depreciation and amortization $ 776,242 $ 62,977 $ 839,219 Property and equipment, net 986,186 (62,977) 923,209 Total Assets 1,841,023 (62,977) 1,778,046 Other long-term liabilities 28,802 10,399 39,201 Deferred income taxes 57,492 (27,516) 29,976 Retained earnings 577,793 (45,860) 531,933 Total Stockholders'Equity 615,594 (45,860) 569,734 Total Liabilities and Stockholders' Equity 1,841,023 (62,977) 1,778,046
As Previously Thirteen weeks ended May 1, 2004 Reported Adjustments As Restated - -------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings Costs of Merchandise Sales $ 324,054 $ 1,320 $ 325,374 Costs of Service Revenue 78,111 440 78,551 Total Costs of revenue 402,165 1,760 403,925 Gross Profit from Merchandise Sales 136,827 (1,320) 135,507 Gross Profit from Service Revenue 27,141 (440) 26,701 Total Gross Profit 163,968 (1,760) 162,208 Operating Profit 34,406 (1,760) 32,646 Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle 25,700 (1,760) 23,940 Income Tax Expense 9,509 (651) 8,858 Earnings Before Cumulative Effect of Change in Accounting Principle 16,191 (1,109) 15,082 Net Earnings 15,660 (1,109) 14,551 Basic Earnings Per Share: Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 0.29 (0.02) 0.27 Basic Earnings Per Share 0.28 (0.02) 0.26 Diluted Earnings Per Share: Net Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 0.27 (0.02) 0.25 Diluted Earnings Per Share 0.26 (0.02) 0.24
As Previously Thirteen weeks ended May 3, 2003 Reported Adjustments As Restated - -------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Earnings Costs of Merchandise Sales $ 290,340 $ 1,235 $ 291,575 Costs of Service Revenue 74,772 432 75,204 Total Costs of revenue 365,112 1,667 366,779 Gross Profit from Merchandise Sales 120,792 (1,235) 119,557 Gross Profit from Service Revenue 25,006 (432) 24,574 Total Gross Profit 145,798 (1,667) 144,131 Operating Loss (1,979) (1,667) (3,646) Loss Before Income Taxes and Cumulative Effect of Change in Accounting Principle (11,630) (1,667) (13,297) Income Tax Benefit (4,303) (626) (4,929) Loss Before Cumulative Effect of Change in Accounting Principle (7,327) (1,041) (8,368) Discontinued Operations, Net of Tax 594 (56) 538 Cumulative Effect of Change in Net Loss (9,217) (1,097) (10,314) Basic Loss Per Share: Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (0.14) (0.02) (0.16) Basic Earnings Per Share (0.18) (0.02) (0.20) Diluted Loss Per Share: Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (0.14) (0.02) (0.16) Diluted Loss Per Share (0.18) (0.02) (0.20)
In addition, certain amounts in Notes 3,7,8,9,11,14 and 17 have been restated to reflect the Restatement adjustments described above. 7 NOTE 3. Accounting for Stock-Based Compensation The Company accounts for its stock-based employee compensation plans in accordance with the recognition and measurement principles of Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. For all stock option plans, no stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In the first quarter of 2004, the Company issued restricted stock unit awards to certain employees. The recorded expense for these awards under the intrinsic method was $698,000 ($439,000,net of tax) for the thirteen weeks ended May 1, 2004. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
(dollar amounts in thousands, except per share amounts) Thirteen weeks ended May 1, 2004 May 3, 2003 - ------------------------------------------------------------------------------- Net (loss) earnings: As reported $ 14,551 $ (10,314) Add: Stock compensation expense, net of tax 439 - Less: Total stock-based compensation expense determined under fair value-based method, net of tax (1,302) (811) - ------------------------------------------------------------------------------- Pro forma $ 13,688 $ (11,125) - ------------------------------------------------------------------------------- Net earnings (loss) per share: Basic: As reported $ .26 $ (.20) Pro forma $ .25 $ (.22) - ------------------------------------------------------------------------------- Diluted: As reported $ .24 $ (.20) Pro forma $ .23 $ (.22) - -------------------------------------------------------------------------------
8 The fair value of each option granted during the periods ending May 1, 2004 and May 3, 2003 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Thirteen weeks ended May 1, 2004 May 3, 2003 - ----------------------------------------------------------------- Dividend yield 1.67% 1.57% Expected volatility 41% 42% Risk-free interest rate range: high 4.07% 5.3% low 1.97% 2.0% Ranges of expected lives in years 4-8 4-8 - -----------------------------------------------------------------
NOTE 4. New Accounting Standards In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. We have adopted the disclosure requirements of this statement. In March 2004, the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB Statements No. 123 and 95." The proposed standard would require companies to expense share-based payments to employees, including stock options, based on the fair value of the award at the grant date. The proposed statement would eliminate the intrinsic value method of accounting for stock options permitted by APB (Accounting Principles Board) No. 25, "Accounting for Stock Issued to Employees," which we currently follow. We will continue to monitor the actions of the FASB and assess the impact, if any, on our consolidated financial statements. NOTE 5. Merchandise Inventories Merchandise inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management's estimates of expected fiscal year-end inventory levels and costs. Replacement cost, which approximates FIFO cost was $578,151,000 and $531,830,000 at May 1, 2004 and January 31, 2004, respectively. NOTE 6. Accrued Expenses The Company's accrued expenses for the periods ending May 1, 2004 and January 31, 2004 were as follows:
(dollar amounts in thousands) May 1, 2004 Jan. 31, 2004 - --------------------------------------------------------------------- Medical and casualty risk participation reserve $ 131,168 $ 136,599 Accrued compensation and related taxes 42,890 51,043 Legal Reserves 1,577 26,576 Other 68,914 53,347 - --------------------------------------------------------------------- Total $ 244,549 $ 267,565 - ---------------------------------------------------------------------
9 NOTE 7. Other Current Assets The Company's other current assets for the periods ending May 1, 2004 and January 31, 2004 were as follows:
(dollar amounts in thousands) May 1, 2004 Jan. 31, 2004 - --------------------------------------------------------------------- Reinsurance premiums receivable $ 64,626 $ 67,326 Income taxes receivable 15,135 13,517 Other 189 253 - --------------------------------------------------------------------- Total $ 79,950 $ 81,096 - ---------------------------------------------------------------------
NOTE 8. 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 $66,752,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Reserve Summary The following chart details the reserve balances through May 1, 2004. The reserve includes remaining rent on leases net of sublease income, other contractual obligations associated with leased properties and employee severance.
(dollar amounts Lease Contractual in thousands) Severance Expenses Obligations Total - ------------------------------------------------------------------------------- Reserve balance at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204 Provision for present value of liabilities - 41 47 88 Changes in assumptions about future sublease income, lease termination, contractual obligations and severance - - - - Cash payments (213) (253) (171) (637) - ------------------------------------------------------------------------------- Reserve Balance at May 1, 2004 $ 160 $ 2,156 $ 339 $ 2,655 - -------------------------------------------------------------------------------
10 NOTE 9. Discontinued operations In accordance with SFAS No. 144, the Company's discontinued operations reflect the operating results for the 33 stores closed on July 31, 2003 as part of the Company's corporate restructuring. The results for the thirteen weeks ended May 1, 2004 and May 3, 2003 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results: Thirteen weeks ended ---------------------------- May 1, 2004 May 3, 2003 ------------ ------------- (dollar amounts in thousands) Amount Amount - --------------------------------------------------------------------------------------------- Total Revenues $ 1 $ 18,306 Total Gross (Loss) Profit (804) 4,918 Selling, General and Administrative Expenses 40 4,065 (Loss) Earnings from Discontinued Operations Before Income Taxes (844) 854 Net (Loss) Earnings from Discontinued Operations, Net of Tax $ (531) $ 538 - ---------------------------------------------------------------------------------------------
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 May 1, 2004 and January 31, 2004, these reclassifications were as follows: (Dollar amounts in thousands) May 1, 2004 Jan. 31, 2004 - ------------------------------------------------------------------------------------------------ Land $ (4,425) $ (8,954) Building and improvements (5,925) (7,975) - ------------------------------------------------------------------------------------------------ Property and equipment $(10,350) $(16,929) - ------------------------------------------------------------------------------------------------ Assets held for disposal $ 10,350 $ 16,929 - ------------------------------------------------------------------------------------------------
During the first quarter of 2004, the Company sold assets held for disposal for proceeds of $6,879,000 resulting in a gain of $172,000 which was recorded in discontinued operations on the consolidated statement of operations. 11 NOTE 10. Pension and Savings Plan Pension expense includes the following: Thirteen weeks ended (dollar amounts in thousands) Pension Benefits - ----------------------------------------------------------------------- 5/1/2004 5/3/2003 - ----------------------------------------------------------------------- Service cost $ 108 $ 153 Interest Cost 706 764 Expected return on plan assets (575) (516) Amortization of transition obligation 41 69 Amortization of prior service cost 91 153 Amortization of net loss (gain) 444 430 FAS 88 settlement - 5,231 -------- -------- Net periodic benefit cost $ 815 $ 6,284 ======== ========
The Company previously disclosed in its financial statements for the fiscal year ended January 31, 2004 that it expected to contribute $1,055,000 to its pension plan in fiscal 2004. As of May 1, 2004, $276,000 of contributions have been made. The Company anticipates no change in expected total contributions for fiscal 2004. The Company has 401(k) savings plans which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant's contribution's or 3% of the participant's compensation. The Company's savings plans' contribution expense was $1,026,000 and $1,050,000 for the fiscal quarters ending May 1, 2004 and May 3, 2003 respectively. On January 31, 2004, the Company amended and restated its Executive Supplemental Retirement Plan (SERP). This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants. All vested participants will continue to accrue benefits according to the previous defined benefit formula. The Company's contribution expense for the defined contribution portion of the plan was $217,000 for the fiscal quarter ended May 1, 2004. 12
NOTE 11. Net Earnings Per Share THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (in thousands, except per share amounts) UNAUDITED Thirteen weeks ended ----------------------------------- May 1, 2004 May 3, 2003 -------------- --------------- (a) Net earnings (loss) from continuing operations before cumulative effect of change in accounting principle $ 15,082 $ (8,368) Adjustment for interest on convertible senior notes, net of income tax effect 1,001 - - ------------------------------------------------------------------------------------------- (b) Adjusted net earnings (loss) from continuing operations before cumulative effect of change in accounting principle $ 16,083 $ (8,368) - ------------------------------------------------------------------------------------------- (c) Average number of common shares outstanding during period 54,945 51,652 Common shares assumed issued upon conversion of convertible senior notes 6,697 - Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price 1,945 - - ------------------------------------------------------------------------------------------- (d) Average number of common shares assumed outstanding during period 63,587 51,652 - ------------------------------------------------------------------------------------------- Basic earnings (loss) per share: Continuing operations, before cumulative effect of change in accounting principle (a/c) $ 0.27 $ (0.16) (Loss) Earnings from discontinued operations, net of tax (0.01) 0.01 Cumulative effect of change in accounting principle - (0.05) - ------------------------------------------------------------------------------------------- Basic earnings (loss) per share $ 0.26 $ (0.20) - ------------------------------------------------------------------------------------------- Diluted earnings (loss) per share: Continuing operations, before cumulative effect of change in accounting principle (b/d) $ 0.25 $ (0.16) (Loss) earnings from discontinued operations, net of tax (0.01) 0.01 Cumulative effect of change in accounting principle - (0.05) - ------------------------------------------------------------------------------------------- Diluted earnings (loss) per share $ 0.24 $ (0.20) - -------------------------------------------------------------------------------------------
Adjustments for the convertible senior notes were anti-dilutive during the thirteen week period ended May 3, 2003 and therefore excluded from the computation of diluted EPS. Options to purchase 942,000 and 5,575,000 shares of common stock were outstanding at May 1, 2004 and May 3, 2003, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares on such dates. Restricted stock units of 124,000 equivalent shares were anti-dilutive and excluded from the calculation during the period ended May 1, 2004. 13 NOTE 12. Warranty Reserve The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by its vendors, with the Company covering any costs above the vendor's stipulated allowance. Service labor warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions. Components of the reserve for warranty costs for the thirteen week period ending May 1, 2004 are as follows:
(dollar amounts in thousands) - ------------------------------------------------------------------------ Beginning balance at January 31, 2004 $ 614 Additions related to current period sales 1,326 Warranty costs incurred in current period (1,326) Adjustments to accruals related to prior year sales - - ------------------------------------------------------------------------ Ending Balance at May 1, 2004 $ 614 - ------------------------------------------------------------------------
NOTE 13. Debt and Financing Arrangements In the first quarter of fiscal 2004, the Company prepaid $20,919,000 aggregate principal amount of its Senior Secured Credit Facility with a stated maturity date of July 1, 2006. In the first quarter of fiscal 2004, the Company retired $32,000,000 aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a stated maturity date of March 3, 2004. In the first quarter of 2004, the Company has entered into arrangements with certain of its vendors and banks to extend payment terms on certain merchandise purchases. Under this program, the bank makes payments to the vendor based upon a negotiated discount rate between the parties and the Company makes it payment of the full payable to the bank at the extended payment term. As of May 1, 2004, there was $4,505,000 outstanding under these arrangements, which was recorded in short-term borrowings on the consolidated balance sheets. 14 NOTE 14. Supplemental Guarantor Information - Convertible Senior Notes On May 21, 2002, the Company issued $150,000,000 aggregate principal amount of 4.25% Convertible Senior Notes. The notes are jointly and severally and fully and unconditionally guaranteed by the Company's wholly-owned direct and indirect operating subsidiaries ("subsidiary guarantors"), The Pep Boys Manny Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The following are consolidating balance sheets of the Company as of May 1, 2004 and January 31, 2004 and the related consolidating statements of operations and consolidating statements of cash flows for the thirteen weeks ended May 1, 2004 and May 3, 2003:
CONSOLIDATING BALANCE SHEET (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 78,575 $ 11,179 $ 9,012 $ - $ 98,766 Accounts receivable, net 17,668 16,321 - - 33,989 Merchandise inventories 204,603 396,812 - - 601,415 Prepaid expenses 23,775 14,285 14,015 (13,798) 38,277 Deferred income taxes 7,804 (1,297) 4,668 - 11,175 Other 19,552 7,928 52,470 - 79,950 Assets held for disposal 6,706 3,644 - 10,350 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 358,683 448,872 80,165 (13,798) 873,922 - ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 87,405 175,794 - - 263,199 Buildings and improvements 308,375 591,784 - - 900,159 Furniture, fixtures and equipment 288,173 304,045 - - 592,218 Construction in progress 11,626 15 - - 11,641 - ----------------------------------------------------------------------------------------------------------------------------- 695,579 1,071,638 - - 1,767,217 Less accumulated depreciation and amortization 370,336 486,658 - - 856,994 - ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - Net 325,243 584,980 - - 910,223 - ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,462,133 - 1,182,944 (2,645,077) - Intercompany receivable - 407,871 353,275 (761,146) - Other 49,073 3,213 - - 52,286 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,195,132 $ 1,444,936 $ 1,616,384 $ (3,420,021) $ 1,836,431 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 366,351 $ 9 $ - $ - $ 366,360 Accrued expenses 42,794 69,356 146,197 (13,798) 244,549 Short-term borrowings 4,505 - - - 4,505 Current maturities of long-term debt and obligations under capital leases 51,023 - - - 51,023 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 464,673 69,365 146,197 (13,798) 666,437 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 243,963 589 - - 244,552 Convertible long-term debt 150,000 - - - 150,000 Other long-term liabilities 11,965 26,886 - - 38,851 Intercompany liabilities 597,546 163,600 - (761,146) - Deferred income taxes 28,376 6,933 - - 35,309 Deferred gain on sale leaseback 1,132 2,673 - - 3,805 Stockholders' Equity: Common stock 68,557 1,501 101 (1,602) 68,557 Additional paid-in capital 283,912 240,359 200,398 (440,757) 283,912 Retained earnings 541,203 933,030 1,269,688 (2,202,718) 541,203 Accumulated other comprehensive loss 1,045 - - - 1,045 - ----------------------------------------------------------------------------------------------------------------------------- 894,717 1,174,890 1,470,187 (2,645,077) 894,717 Less: Cost of shares in treasury 137,976 - - - 137,976 Cost of shares in benefits trust 59,264 - - - 59,264 - ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 697,477 1,174,890 1,470,187 (2,645,077) 697,477 - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,195,132 $ 1,444,936 $ 1,616,384 $ (3,420,021) $ 1,836,431 - -----------------------------------------------------------------------------------------------------------------------------
15
CONSOLIDATING BALANCE SHEET (dollar amounts in thousands) Non- Subsidiary guarantor January 31, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 43,929 $ 9,070 $ 7,985 $ - $ 60,984 Accounts receivable, net 14,573 15,989 - - 30,562 Merchandise inventories 191,111 362,451 - - 553,562 Prepaid expenses 25,860 16,714 17,656 (20,750) 39,480 Deferred income taxes 7,224 8,354 5,248 - 20,826 Other 17,891 7,457 55,748 - 81,096 Assets held for disposal 8,083 8,846 - - 16,929 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Assets 308,671 428,881 86,637 (20,750) 803,439 - ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - at cost: Land 87,484 176,423 - - 263,907 Buildings and improvements 308,066 591,048 - - 899,114 Furniture, fixtures and equipment 286,472 300,135 - - 586,607 Construction in progress 12,800 - - - 12,800 - ----------------------------------------------------------------------------------------------------------------------------- 694,822 1,067,606 - - 1,762,428 Less accumulated depreciation and amortization 363,652 475,567 - - 839,219 - ----------------------------------------------------------------------------------------------------------------------------- Property and Equipment - Net 331,170 592,039 - - 923,209 - ----------------------------------------------------------------------------------------------------------------------------- Investment in subsidiaries 1,440,412 - 1,162,965 (2,603,377) - Intercompany receivable - 410,107 356,382 (766,489) - Other 48,240 3,158 - - 51,398 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 2,128,493 $ 1,434,185 $ 1,605,984 $ (3,390,616) $ 1,778,046 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 342,575 $ 9 $ - $ - $ 342,584 Accrued expenses 43,670 85,790 158,855 (20,750) 267,565 Current maturities of long-term debt and obligations under capital leases 117,063 - - - 117,063 - ----------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 503,308 85,799 158,855 (20,750) 727,212 - ----------------------------------------------------------------------------------------------------------------------------- Long-term debt and obligations under capital leases, less current maturities 257,983 33 - - 258,016 Convertible long-term debt 150,000 - - - 150,000 Other long-term liabilities 12,287 26,914 - - 39,201 Intercompany liabilities 607,168 159,321 - (766,489) - Deferred income taxes 26,856 3,120 - - 29,976 Deferred gain on sale leaseback 1,157 2,750 - - 3,907 Stockholders' Equity: Common stock 63,911 1,501 101 (1,602) 63,911 Additional paid-in capital 177,317 240,359 200,398 (440,757) 177,317 Retained earnings 531,933 914,388 1,246,630 (2,161,018) 531,933 Accumulated other comprehensive loss (15) - - - (15) - ----------------------------------------------------------------------------------------------------------------------------- 773,146 1,156,248 1,447,129 (2,603,377) 773,146 Less: Cost of shares in treasury 144,148 - - - 144,148 Cost of shares in benefits trust 59,264 - - - 59,264 - ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 569,734 1,156,248 1,447,129 (2,603,377) 569,734 - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 2,128,493 $ 1,434,185 $ 1,605,984 $ (3,390,616) $ 1,778,046 - -----------------------------------------------------------------------------------------------------------------------------
16
CONSOLIDATING STATEMENT OF OPERATIONS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 160,262 $ 300,619 $ - $ - $ 460,881 Service Revenue 36,918 68,334 - - 105,252 Other Revenue - - 7,070 (7,070) - - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 197,180 368,953 7,070 (7,070) 566,133 - ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 114,349 211,025 - - 325,374 Costs of Service Revenue 26,546 52,005 - - 78,551 Costs of Other Revenue - - 7,164 (7,164) - - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 140,895 263,030 7,164 (7,164) 403,925 - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 45,913 89,594 - - 135,507 Gross Profit from Service Revenue 10,372 16,329 - - 26,701 Gross Loss from Other Revenue - - (94) 94 - - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 56,285 105,923 (94) 94 162,208 - ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 46,942 82,416 110 94 129,562 - ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 9,343 23,507 (204) - 32,646 Equity in Earnings of Subsidiaries 21,722 - 19,979 (41,701) - Non-operating (Expense) Income (4,475) 12,312 5,090 (12,335) 592 Interest Expense 16,008 5,625 - (12,335) 9,298 - ----------------------------------------------------------------------------------------------------------------------------- Earnings From Continuing Operations Before Income Taxes 10,582 30,194 24,865 (41,701) 23,940 Income Tax (Benefit) Expense (4,122) 11,172 1,808 - 8,858 - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings From Continuing Operations 14,704 19,022 23,057 (41,701) 15,082 Loss from Discontinued Operations, Net of Tax (153) (378) - - (531) - ----------------------------------------------------------------------------------------------------------------------------- Net Earnings $ 14,551 $ 18,644 $ 23,057 $ (41,701) $ 14,551 - -----------------------------------------------------------------------------------------------------------------------------
17
CONSOLIDATING STATEMENT OF OPERATIONS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ----------------------------------------------------------------------------------------------------------------------------- Merchandise Sales $ 142,247 $ 268,885 $ - $ - $ 411,132 Service Revenue 35,175 64,603 - - 99,778 Other Revenue - - 6,675 (6,675) - - ----------------------------------------------------------------------------------------------------------------------------- Total Revenues 177,422 333,488 6,675 (6,675) 510,910 - ----------------------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales 101,205 190,370 - - 291,575 Costs of Service Revenue 25,956 49,248 - - 75,204 Costs of Other Revenue - - 7,205 (7,205) - - ----------------------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 127,161 239,618 7,205 (7,205) 366,779 - ----------------------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 41,042 78,515 - - 119,557 Gross Profit from Service Revenue 9,219 15,355 - - 24,574 Gross Loss from Other Revenue - - (530) 530 - - ----------------------------------------------------------------------------------------------------------------------------- Total Gross Profit (Loss) 50,261 93,870 (530) 530 144,131 - ----------------------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 43,758 103,411 78 530 147,777 - ----------------------------------------------------------------------------------------------------------------------------- Operating Profit (Loss) 6,503 (9,541) (608) - (3,646) Equity in Earnings of Subsidiaries (151) - 2,124 (1,973) - Non-operating (Expense) Income (4,096) 12,032 5,258 (12,144) 1,050 Interest Expense 17,978 4,867 - (12,144) 10,701 - ----------------------------------------------------------------------------------------------------------------------------- (Loss) Earnings From Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle (15,722) (2,376) 6,774 (1,973) (13,297) Income Tax (Benefit) Expense (5,765) (885) 1,721 - (4,929) - ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting Principle (9,957) (1,491) 5,053 (1,973) (8,368) Earnings from Discontinued Operations, Net of Tax 542 (4) 538 Cumulative Effect of Change in Accounting Principle (899) (1,585) - - (2,484) - ----------------------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings $ (10,314) $ (3,080) $ 5,053 $ (1,973) $ (10,314) - -----------------------------------------------------------------------------------------------------------------------------
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (dollar amounts in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 1, 2004 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net Earnings $ 14,551 $ 18,642 $ 23,057 $ (41,699) $ 14,551 Net loss from discontinued operations (153) (378) - - (531) - ------------------------------------------------------------------------------------------------------------------------------ Net Earnings from continuing operations 14,704 19,020 23,057 (41,699) 15,082 Adjustments to Reconcile Net Earnings from Continuing Operations to Net Cash Provided By Continuing Operations: Non-cash operating activities (13,622) 24,987 (19,398) 41,699 33,666 Change in operating assets and liabilities 15,937 (48,933) (5,739) - (38,735) - ------------------------------------------------------------------------------------------------------------------------------ Net Cash provided by (used in) continuing operations 17,019 (4,926) (2,080) - 10,013 Net Cash used in discontinued operations (123) (653) - - (776) - ------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by (Used in) Operating Activities 16,896 (5,579) (2,080) - 9,237 Cash Flows from Investing Activities: Net Cash (Used in) Provided by Investing Activities (1,175) 1,782 - - 607 Cash Flows from Financing Activities: Net Cash Provided by Financing Activities 18,925 5,906 3,107 - 27,938 - ------------------------------------------------------------------------------------------------------------------------------ Net Increase in Cash 34,646 2,109 1,027 - 37,782 Cash and Cash Equivalents at Beginning of Period 43,929 9,070 7,985 - 60,984 - ------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 78,575 $ 11,179 $ 9,012 $ - $ 98,766 - ------------------------------------------------------------------------------------------------------------------------------
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (dollar amount in thousands) (unaudited) Non- Subsidiary guarantor Thirteen weeks ended May 3, 2003 Pep Boys Guarantors Subsidiaries Elimination Consolidated - ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net loss $ (10,314) $ (3,079) $ 5,053 $ (1,974) $ (10,314) Net earnings from discontinued operations 536 2 - - 538 - ------------------------------------------------------------------------------------------------------------------------------- Net Loss from Continuing Operations (10,850) (3,081) 5,053 (1,974) (10,852) Adjustments to Reconcile Net Earnings from Continuing Operations to Net Cash Provided By Continuing Operations: Non-cash operating activities 8,422 11,749 (2,961) 1,974 19,184 Change in operating assets and liabilities 17,152 23,013 (1,403) - 38,762 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operations 14,724 31,681 689 - 47,094 Net Cash provided by discontinued operations 368 741 - - 1,109 - ------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 15,092 32,422 689 - 48,203 Cash Flows from Investing Activities: Net Cash (Used in) Provided by Investing Activities (6,758) 84 - - (6,674) Cash Flows from Financing Activities: Net Cash Provided by (Used in) Financing Activities 18,511 (32,118) 10,497 - (3,110) - ------------------------------------------------------------------------------------------------------------------------------- Net Increase in Cash 26,845 388 11,186 - 38,419 Cash and Cash Equivalents at Beginning of Period 32,654 9,714 402 - 42,770 - ------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 59,499 $ 10,102 $ 11,588 $ - $ 81,189 - -------------------------------------------------------------------------------------------------------------------------------
20 NOTE 15. Contingencies An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company's motion for summary judgment was granted and the case was dismissed. The plaintiff has appealed. The Company continues to believe that the claims are without merit and to vigorously defend this matter. The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. NOTE 16. Sale of Common Stock On March 24, 2004, the Company sold 4,646,464 shares of common stock (par value $1 per share) at a price of $24.75 per share for net proceeds of $108,909,000. NOTE 17. Comprehensive Income The following are the components of comprehensive income (loss): Thirteen weeks ended ------------------------------------- (dollar amounts in thousands) May 1, 2004 May 3, 2003 - -------------------------------------------------------------------------------------------------- Net earnings (loss) $ 14,551 $ (10,314) Other comprehensive income, net of tax: Derivative financial instrument adjustments 1,060 - - -------------------------------------------------------------------------------------------------- Comprehensive income (loss) $ 15,611 $ (10,314) - --------------------------------------------------------------------------------------------------
The components of accumulated other comprehensive income (loss) are: May 1, January 31, (dollar amounts in thousands) 2004 2004 - -------------------------------------------------------------------- Derivative financial instrument adjustment, net of tax $ 2,449 $ 1,389 Minimum pension liability adjustment, net of tax (1,404) (1,404) - -------------------------------------------------------------------- $ 1,045 $ (15) - -------------------------------------------------------------------- 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion and analysis below for the Company should be read in conjunction with (i) the financial statements and the notes to such financial statements included elsewhere in this Form 10-Q/A and (ii) the financial statements and the notes to such financial statements included in Item 8, "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. All applicable disclosures in the following discussion have been modified to reflect the Restatement as described below. Restatement - ----------- Following a review of our lease-related accounting policies, we have determined to correct our computation of depreciation, straight-line rent expense and the related deferred rent liability. As a result, on January 30, 2005, our Board of Directors, including our Audit Committee, concluded to restate the Company's financial statements for the three year period ended January 31, 2004 and for the first three quarters of fiscal 2004. Historically, when accounting for leases with renewal options, we depreciated our leasehold improvements on those leased properties over a period that included both the initial lease term and all option periods (or the useful lives of the assets, if shorter). We previously recorded rent expense on a straight-line basis over the initial lease term commencing when actual rent payments began. We, in consultation with our independent registered public accounting firm, Deloitte and Touche, LLP, have now determined to use a consistent lease period (generally, the initial lease term) when calculating depreciation of leasehold improvements on leased properties and straight-line rent expense. Straight-line rent expense will commence on the date when we become legally obligated under the lease. These non-cash adjustments, will not have any impact on our previously reported cash flows, sales, comparable sales or our compliance with any financial covenant under our revolving credit facility or other debt instruments. The primary effect of the corrections is to accelerate the depreciation of leasehold improvements of leased properties where the initial lease term is shorter than the estimated useful economic life of those assets and rental expense on properties we occupied before payment of rents was required. The cumulative effect of the restatement through fiscal quarter ended May 1, 2004 is an increase in other current assets of $652,000, an increase in accumulated depreciation of $64,972,000, an increase in the deferred rent liability of $10,165,000 and a decrease in deferred income tax liability of $27,516,000. As a result, retained earnings at the end of fiscal quarter ended May 1, 2004 decreased by $46,969,000. Depreciation expense from continuing operations increased by $2,021,000 and $2,065,000 and rent expense from continuing operations decreased by $235,000 and $310,000 for the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively. The Restatement increased reported diluted loss per share by $0.02,for the thirteen weeks ended May 1, 2004 and May 3, 2003. The cumulative effect of the Restatement for all years prior to fiscal 2001 was $34,812,000, which was recorded as an adjustment to opening stockholders' equity at February 2, 2002 in the Company's restated Annual Report as of January 31, 2004 on Form 10-K/A. The Restatement did not have any impact on the Company's previously reported cash flows, sales or comparable sales or the Company's compliance with any covenant under the Company's line of credit facility or other debt instruments. Management's Discussion and Analysis of Financial Condition and results of Operations has been revised for the effects of the Restatement. See note 2 to the consolidated financial statements. OVERVIEW - -------- The Pep Boys - Manny, Moe & Jack is a leader in the automotive aftermarket with 595 stores located throughout 36 states and Puerto Rico. All of our stores feature the nationally-recognized Pep Boys brand name, established through more than 80 years of providing high-quality automotive merchandise and services, and are company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, accessories, tires and parts under one roof, positioning us to achieve our goal of becoming the category dominant one-stop shop for automotive maintenance and accessories. For the thirteen weeks ended May 1, 2004, our comparative sales increased by 11.0% compared to (5.4)% for the thirteen weeks ended May 3, 2003. This increase in comparable sales is due primarily to new product offerings and increased overall foot traffic at our stores. On March 24, 2004, we successfully completed a common stock offering for net proceeds of $108,909,000. We have used the proceeds from this stock sale to repay the outstanding balance under our revolving credit facility, which was used along with cash to repay the $57,000,000 aggregate principal amount of medium term notes that matured on March 3,2004 and March 10,2003 and prepay $20,919,000 aggregate principal amount outstanding under our senior secured (equipment and real estate) credit facility. The remaining balance will be applied to store redesigns. During the first quarter of fiscal 2004, we have begun to reinvest in our existing stores to completely redesign their interiors and enhance their exterior appeal. Our new interior design will feature four distinct merchandising worlds: accessories (fashion, electronic and performance merchandise), maintenance (hard parts and chemicals), garage (repair shop and travel) and service (including tire, wheel and accessory installation). We believe that this layout will provide customers with a clear and concise way of finding what they need and will promote cross-selling. The most important of these changes will be to move all of our service desks and waiting areas inside the retail stores adjacent to our tire offering displays. We also are planning modifications to the exterior of our stores that are designed to increase customer traffic. The following discussion explains the material changes in our results of operations for the thirteen weeks ended May 1, 2004 and May 3, 2003 and the significant developments affecting our financial condition since January 31, 2004. We strongly recommend that you read our audited financial statements and footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our restated Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004. 22 LIQUIDITY AND CAPITAL RESOURCES - May 1, 2004 - ------------------------------------------------ For the thirteen weeks ended May 1, 2004, we increased our cash and cash equivalents by $37,782,000 from the balance at January 31, 2004. This increase was due primarily to net proceeds from our March 24, 2004 common stock offering and an increase in accounts payable offset, in part, by the increase in merchandise inventories, the reduction of long-term debt and the payment of a legal settlement. We have used the $108,909,000 net proceeds from the common stock offering to repay the outstanding balance under our revolving credit facility, which was used along with cash to repay the $57,000,000 aggregate principal amount of medium term notes that matured on March 3,2004 and March 10, 2004 and prepay $20,919,000 aggregate principal amount outstanding under our senior secured (equipment and real estate) credit facility. The remaining balance will be applied to store redesigns. Our cash requirements arise principally from the capital expenditures related to existing stores, offices and warehouses and to purchase inventory. The primary capital expenditures for the thirteen weeks ended May 1, 2004 were attributed to capital maintenance of our existing stores and offices. We invested $7,683,000 in property and equipment, which is a 10% decrease compared to the same period in the previous fiscal year. Management estimates that capital expenditures related to existing stores, warehouses and offices during the remainder of fiscal 2004 will be approximately $72,695,000, related primarily to the redesign of our existing stores. We anticipate that our net cash provided by operating activities, the net proceeds from our common stock offering and our existing line of credit will exceed our principal cash requirements for capital expenditures and inventory purchases in fiscal 2004. Working Capital increased from $76,227,000 at January 31, 2004 to $207,485,000 at May 1, 2004. At May 1, 2004, we had stockholders' equity of $697,477,000 and long-term debt, net of current maturities, of $394,552,000. Our long-term debt was 36% of our total capitalization at May 1, 2004 and 42% at January 31, 2004. As of May 1, 2004, we had an available line of credit totaling $179,136,000. In the first quarter of fiscal 2004, we prepaid $20,919,000 aggregate principal amount of our Senior Secured Credit Facility with a stated maturity date of July 1, 2006. This prepayment was funded out of cash from operations and our existing revolving credit facility. In the first quarter of fiscal 2004, we retired $32,000,000 aggregate principal amount of 6.75% Medium-Term Notes with a stated maturity date of March 10, 2004 and $25,000,000 aggregate principal amount of 6.65% Medium-Term Notes with a stated maturity date of March 3, 2004. These notes were retired with cash from operations and our existing revolving credit facility. In the first quarter of 2004, we entered into arrangements with certain of our vendors and banks to extend payment terms on certain merchandise purchases. Under this program, the bank makes payments to the vendor based upon a negotiated discount rate between the parties and we make a payment of the full payable to the bank at the extended payment term. As of May 1, 2004, there was $4,505,000 outstanding under these arrangements, which was recorded in short- term borrowings on the consolidated balance sheets. In the third quarter of 2003, 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 from cash from operations and its existing line of credit. OFF-BALANCE SHEET ARRANGEMENTS - ------------------------------ There have been no material changes to off-balance sheet arrangements as reflected in the Management's Discussion and Analysis in the Company's 2003 annual report on Form 10-K. 23 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 $66,752,000. The Company is accounting for these initiatives in accordance with the provisions of SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" and Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". Reserve Summary The following chart details the reserve balances through May 1, 2004. The reserve includes remaining rent on leases net of subleases income, other contractual obligations associated with leased properties and employee severance.
(dollar amounts Lease Contractual in thousands) Severance Expenses Obligations Total - ------------------------------------------------------------------------------- Reserve balance at Jan. 31, 2004 $ 373 $ 2,368 $ 463 $ 3,204 Provision for present value of liabilities - 41 47 88 Changes in assumptions about future sublease income, lease termination, contractual obligations and severance - - - - Cash payments (213) (253) (171) (637) - ------------------------------------------------------------------------------- Reserve Balance at May 1, 2004 $ 160 $ 2,156 $ 339 $ 2,655 - -------------------------------------------------------------------------------
24 In accordance with SFAS 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 thirteen weeks ended May 1, 2004 and May 3, 2003 have been reclassified to show the results of operations for the 33 closed stores as discontinued operations. Below is a summary of these results: Thirteen weeks ended ---------------------------- May 1, 2004 May 3, 2003 ------------ ------------- (dollar amounts in thousands) Amount Amount - --------------------------------------------------------------------------------------------- Total Revenues $ 1 $ 18,306 Total Gross (Loss) Profit (804) 4,918 Selling, General and Administrative Expenses 40 4,065 (Loss) Earnings from Discontinued Operations Before Income Taxes (844) 854 Net (Loss) Earnings from Discontinued Operations, Net of Tax $ (531) $ 538 - ---------------------------------------------------------------------------------------------
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 May 1, 2004 and January 31, 2004, these reclassifications were as follows: (Dollar amounts in thousands) May 1, 2004 Jan. 31, 2004 - ------------------------------------------------------------------------------------------------ Land $ (4,425) $ (8,954) Building and improvements (5,925) (7,975) - ------------------------------------------------------------------------------------------------ Property and equipment $(10,350) $(16,929) - ------------------------------------------------------------------------------------------------ Assets held for disposal $ 10,350 $ 16,929 - ------------------------------------------------------------------------------------------------
During the first quarter of 2004, the Company sold assets held for disposal for proceeds of $6,879,000, resulting in a gain of $172,000 which was recorded in discontinued operations on the consolidated statement of operations. 25 Results of Operations - The following table presents for the periods indicated certain items in the consolidated statements of operations as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period.
Percentage of Total Revenues Percentage Change - ---------------------------------------------------------------------------------------------------------------- May 1, 2004 May 3, 2003 Fiscal 2004 vs. Thirteen weeks ended (Fiscal 2004) (Fiscal 2003) Fiscal 2003 - ---------------------------------------------------------------------------------------------------------------- Merchandise Sales 81.4% 80.5% 12.1% Service Revenue (1) 18.6 19.5 5.5 - ---------------------------------------------------------------------------------------------------------------- Total Revenues 100.0 100.0 10.8 - ---------------------------------------------------------------------------------------------------------------- Costs of Merchandise Sales (2) 70.6 (3) 70.9 (3) 11.6 Costs of Service Revenue (2) 74.6 (3) 75.4 (3) 4.5 - ---------------------------------------------------------------------------------------------------------------- Total Costs of Revenues 71.3 71.8 10.1 - ---------------------------------------------------------------------------------------------------------------- Gross Profit from Merchandise Sales 29.4 (3) 29.1 (3) 13.3 Gross Profit from Service Revenue 25.4 (3) 24.6 (3) 8.7 - ---------------------------------------------------------------------------------------------------------------- Total Gross Profit 28.7 28.2 (12.5) - ---------------------------------------------------------------------------------------------------------------- Selling, General and Administrative Expenses 23.0 28.9 (12.3) - ---------------------------------------------------------------------------------------------------------------- Operating (Loss) Profit 5.7 (0.7) 995.4 Non-operating Income 0.1 0.2 (43.6) Interest Expense 1.6 2.1 13.1 - ---------------------------------------------------------------------------------------------------------------- (Loss) Earnings from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle 4.2 (2.6) 280.0 Income Tax (Benefit) Expense 37.0 (4) 37.0 (4) 279.7 - ---------------------------------------------------------------------------------------------------------------- Earnings (Loss) from Continuing Operations Before Cumulative Effect of Change in Accounting Principle 2.7 (1.6) 280.2 (Loss) Earnings from Discontinued Operations, Net of Tax (0.1) 0.1 (198.7) Cumulative Effect of Change in Accounting Principle 0.0 (0.5) 100.0 - ---------------------------------------------------------------------------------------------------------------- Net Earnings (Loss) 2.6 (2.0) 241.1 - ---------------------------------------------------------------------------------------------------------------- (1) Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. (2) Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. (3) As a percentage of related sales or revenue, as applicable. (4) As a percentage of earnings before income taxes.
26 Thirteen Weeks Ended May 1, 2004 vs. Thirteen Weeks Ended May 3, 2003 - ------------------------------------------------------------------------ Total revenues for the first quarter of fiscal 2004 increased 10.8% from the first quarter of fiscal 2003. This increase was due primarily to an increase in comparable store revenues (revenues generated by stores in operation during the same period) of 11.0%. Comparable store merchandise sales increased 12.3%, while comparable store service revenue increased 5.6%. Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 29.4% in fiscal 2004 from 29.1% in fiscal 2003. This increase, as a percentage of merchandise sales, was due primarily to a decrease in store occupancy costs offset, in part, by an increase in warehousing costs and a decrease in merchandise margins, as a percentage of merchandise sales. The decrease in store occupancy costs, as a percentage of merchandise sales, was a result of lower rent and building maintenance expenses. The increase in warehousing costs, as a percentage of merchandise sales, was a result of increased hauling and rent expenses. The decrease in merchandise margins was a result of slightly lower POS margins due to the mix shift into newer transportation and garage categories. Selling, general and administrative expenses decreased, as a percentage of total revenues, to 23.0% in fiscal 2004 from 28.9% in fiscal 2003. This was a 12.3% or $18,215,000 decrease from the prior year's quarter. This decrease, as a percentage of total revenues, was due primarily to a decrease in general office and benefit costs offset, in part, by an increase in net media expenses. The decrease in general office costs and employee benefits was due primarily to the impact of a charge made in the first quarter of 2003 for $20,000,000 to legal reserves and $5,231,000 to benefits for a settlement of a retirement plan obligation, respectively. The increase in net media expense was due primarily to increased radio and circular advertising expense and a decrease in cooperative advertising. Interest expense decreased 13.1% due primarily to lower debt levels coupled with lower average interest rates. Results from discontinued operations for 2004 was a loss of $531,000 (net of tax) compared to income of $538,000 (net of tax) in 2003. The change was due primarily to the discontinued stores being in operation in the first quarter of 2003. The loss recorded in 2004 is primarily related to the costs for lease and maintenance of stores closed in the second quarter of 2003. Net earnings increased, as a percentage of total revenues, due primarily to a decrease in selling, general and administrative expenses, as a percentage of total revenues, the impact of a net charge for the cumulative effect of a change in accounting principle for the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" recorded in fiscal 2003, a decrease in interest expense and an increase in gross profit from merchandise sales, as a percentage of merchandise sales. 27 INDUSTRY COMPARISON - -------------------- The Company operates in the U.S. automotive aftermarket, which is split into two areas: the Do-It-For-Me ("DIFM") (service labor, installed merchandise and tires) market and the Do-It-Yourself ("DIY") (retail merchandise) market. Generally, the specialized automotive retailers focus on either the "DIY" or "DIFM" areas of the business. The Company believes that its operation in both the "DIY" and "DIFM" areas of the business positively differentiates it from most of its competitors. Although the Company manages its store performance at a store level in aggregation, management believes that the following presentation shows the comparison against competitors within the two areas. The Company competes in the "DIY" area of the business through its retail sales floor and commercial sales business (Retail Business). The Company considers its Service Business (labor and installed merchandise and tires) to compete in the DIFM area of the industry. The following table presents the revenues and gross profit for each area of the business. Thirteen weeks ended ---------------------------- May 1, 2004 May 3, 2003 ------------ ------------- (Dollar amounts in thousands) Amount Amount - --------------------------------------------------------------------------------------------- Retail Revenues $ 337,049 $ 286,353 Service Center Revenues 229,084 224,557 - --------------------------------------------------------------------------------------------- Total Revenues $ 566,133 $ 510,910 - --------------------------------------------------------------------------------------------- Gross Profit from Retail Revenues (1) $ 97,179 $ 76,075 Gross Profit from Service Center Revenues (1) 65,029 68,056 - --------------------------------------------------------------------------------------------- Total Gross Profit $ 162,208 $ 144,131 - --------------------------------------------------------------------------------------------- (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.
28 NEW ACCOUNTING STANDARDS - ------------------------ In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. We have adopted the disclosure requirements of this statement. In March 2004, the FASB issued a proposed SFAS - "Share-based Payment: an Amendment of FASB Statements No. 123 and 95." The proposed standard would require companies to expense share-based payments to employees, including stock options, based on the fair value of the award at the grant date. The proposed statement would eliminate the intrinsic value method of accounting for stock options permitted by APB (Accounting Principles Board) No. 25, "Accounting for Stock Issued to Employees," which we currently follow. We will continue to monitor the actions of the FASB and assess the impact, if any, on our consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to "-Critical Accounting Policies and Estimates" as reported in the Company's Form 10-K/A for the year ended January 31, 2004, which disclosures are hereby incorporated by reference. FORWARD-LOOKING STATEMENTS - -------------------------- Certain statements contained herein constitute "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. The words "guidance," "expect," "anticipate," "estimates," "forecasts" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include management's expectations regarding future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. The Company's actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond the control of the Company, including the strength of the national and regional economies, retail and commercial consumers' ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of the Company's stores, competitive pricing, the location and number of competitors' stores, product and labor costs and the additional factors described in the Company's filings with the Securities and Exchange Commission (SEC). The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement, changes in the London Interbank Offered Rate (LIBOR) could affect the rates at which the Company could borrow funds thereunder. At May 1, 2004, the Company had outstanding borrowings of $10,000 under this facility. Additionally, we have $132,000,000 of real estate operating leases which vary based on changes in LIBOR. We have entered into an interest rate swap, which was designated as a cash flow hedge to convert the variable LIBOR portion of these lease payments to a fixed rate of 2.90% and terminates on July 1,2008. If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. As of May 1, 2004, the fair value of the interest rate swap was $3,877,000 ($2,449,000 net of tax) and this change in value was included in accumulated other comprehensive income on the consolidated balance sheet. Item 4. Controls and Procedures EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's management, with the participation of the Company's 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. In connection with the restatement and the filing of this Form 10-Q/A, the Company's management, with the participation of the Company's chief executive officer and principal financial officer, re-evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective as of the end of the period covered by this report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING No change in the Company's internal control over financial reporting occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 30 PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings An action entitled "Tomas Diaz Rodriguez; Energy Tech Corporation v. Pep Boys Corporation; Manny, Moe & Jack Corp. Puerto Rico, Inc. d/b/a Pep Boys" was previously instituted against the Company in the Court of First Instance of Puerto Rico, Bayamon Superior Division on March 15, 2002. The action was subsequently removed to, and is currently pending in, the United States District Court for the District of Puerto Rico. Plaintiffs are distributors of a product that claims to improve gas mileage. The plaintiffs alleged that the Company entered into an agreement with them to act as the exclusive retailer of the product in Puerto Rico that was breached when the Company determined to stop selling the product. On March 29, 2004, the Company's motion for summary judgment was granted and the case was dismissed. The plaintiff has appealed. The Company continues to believe that the claims are without merit and to vigorously defend this matter. The Company is also party to various other actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with the foregoing matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10.1)* Amendment to and Restatement of the Executive Supplemental Retirement Plan. (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) Reports on Form 8-K. The Company filed a Form 8-K dated March 19, 2004 announcing an Underwriting Agreement it had entered into related to the sale of its common stock. * Management contract or compensatory plan or arrangement. ** Filed herewith. 32 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE PEP BOYS - MANNY, MOE & JACK -------------------------------- (Registrant) Date: March 2, 2005 by: /s/ Harry F. Yanowitz ----------------------- -------------------------- Harry F. Yanowitz Senior Vice President and Chief Financial Officer 33 INDEX TO EXHIBITS - ----------------- (10.1)* Amendment to and Restatement of the Executive Supplemental Retirement Plan. (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 ** - Filed herewith 34 EX-10 3 exh101.txt EXECUTION COPY THE PEP BOYS - MANNY, MOE & JACK AMENDMENT TO AND RESTATEMENT OF EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN WHEREAS, The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation (the "Company"), established an Executive Supplemental Pension Plan (hereinafter referred to as the "Plan") effective January 1, 1982; WHEREAS, the Company previously amended and completely restated the Plan effective January 1, 1988, and further amended and restated the Plan effective on February 13, 1992, March 31, 1995 and March 26, 2002; and WHEREAS, Section 9.1 of the Plan authorizes the Board of Directors of the Company to amend the Plan; and WHEREAS, pursuant to resolutions adopted March 3, 2004, the Board has taken such actions as are necessary to change the name of the Plan to the "Executive Supplemental Retirement Plan" and to further amend and restate the Plan with respect to certain of those individuals who are Eligible Employees of the Company on such date, to alter the method of delivering benefits for certain specified Participants and to give others an election as to the manner in which they are credited with a benefit. NOW, THEREFORE, the Plan is hereby amended and restated, effective as of January 31, 2004, as follows: ARTICLE I Definitions 1.1. "Actuarial Equivalent Benefit" shall mean a benefit payable in an Optional Form of Benefit which is of equal value to an Eligible Employee's benefit payable in the Normal Benefit Form determined under actuarial factors specified in the Pension Plan. Notwithstanding the foregoing, with respect to any lump sum distribution under Section 7.2(d), the "Actuarial Equivalent Benefit" shall mean a benefit of equivalent current value to the benefit that would otherwise have been provided commencing on the Designated Benefit Commencement Date using the GATT 2003 mortality table set forth in IRS Revenue Ruling 2001-62 (or such other table as hereafter may be proscribed by the Internal Revenue Service to replace the same), and the Present Value Interest Rate. 1.2. "Administrator" or "Plan Administrator" shall mean a committee composed of three or more persons designated from time to time by the Board. 1.3. "Average Monthly Compensation" shall mean one-twelfth of the average of an Eligible Employee's Compensation for the five Plan Years which yields the highest average; provided, however, that for the Chief Executive Officer of the Company "Average Monthly Compensation" shall mean one-twelfth of the average of his Compensation for the three Plan Years which yields the highest average. 1.4. "Benefit Election Form" shall mean a written election, on a form prescribed by the Administrator, filed by a Participant with the Administrator to receive an Early Retirement Benefit and/or an Optional Form of Benefit under Article VII or to choose the form of the distribution of the Plan Account under Article IV. 1.5. "Board" shall mean the Board of Directors of the Company. 1.6. "Change of Control" shall mean the occurrence of any of the following events: (a) individuals who, as of the Amendment Effective Date, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; (b) any "Person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13 (d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Voting Securities"); provided, however, that the event described in this Section 1.6(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, (iv) pursuant to a Non-Qualifying Transaction (as defined in Section 1.6(c) hereof), or (v) with respect to a particular Eligible Employee, pursuant to any acquisition by such Eligible Employees or a group of persons including such Eligible Employees (or any entity controlled by such Eligible Employee or any group of persons including such Eligible Employee); (c) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (i) more than 50% of the total voting power of (A) the company resulting from such Business Combination (the "Surviving Company"), or (B) if applicable, the ultimate parent company that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Company (the "Parent Company"), is represented by the Company's Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which the Company's Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of the Company's Voting Securities among the holders thereof immediately prior to the Business Combination, (ii) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Company or the Parent Company), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Company (or, if there is no Parent Company, the Surviving Company) and (iii) at least a majority of the members of the board of directors of the Parent Company (or, if there is no Parent Company, the Surviving Company) following the consummation of the Business Combination were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (i), (ii) and (iii) above shall be deemed to be a "Non-Qualifying Transaction"); (d) a sale of all or substantially all of the Company's assets; (e) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company; or (f) such other events as the Board may designate. Notwithstanding the foregoing, a Change 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 by more than 1% of the Company's outstanding Voting Securities, a Change of Control of the Company shall then occur. 1.7. "Company" shall mean The Pep Boys - Manny, Moe & Jack, a Pennsylvania corporation. 1.8. "Compensation" shall mean 100% of an Eligible Employee's cash remuneration for services paid by the Company or a subsidiary in a Plan Year including amounts which an Eligible Employee elects to forego to provide benefits under a plan which satisfies the provisions of Section 401(k) or Section 125 of the Internal Revenue Code or to provide benefits under the Company's Deferred Compensation Plan; provided, however, that prior to March 31, 1995 Compensation shall exclude amounts paid under any written executive bonus plan, and on and after March 31, 1995 Compensation shall include such amounts; provided, further, that for benefits paid or to be paid hereunder on or after March 26, 2002 any bonus that was earned under the Company's Annual Incentive Bonus Plan, or any other bonus plan that replaces or is in addition to such plan, prior to the date Compensation hereunder is determined but which is unpaid for any reason as of the calculation date shall be included as Compensation for purposes hereof. 1.9. "Converted Benefit Amount" shall mean an amount equal to the present value (determined using the Present Value Interest Rate) of fifty percent (50%) of the lump sum Actuarial Equivalent Benefit of the Eligible Employee's Monthly Base Benefit Amount, determined as of the Amendment Effective Date, that would otherwise have become payable on such individual's Early Retirement Date; provided, however, that for Eligible Employees over the age of 45 with at least five Years of Service as of the Amendment Effective Date, such term shall mean an amount equal to the present value (determined using the Present Value Interest Rate) of 100% of the lump sum Actuarial Equivalent Benefit of such individual's Monthly Base Benefit Amount, determined as of the Amendment Effective Date, that would otherwise have become payable on such individual's Early Retirement Date. For purposes of determining a Converted Participant's Converted Benefit Amount, the Converted Participant shall be considered a Vested Participant regardless of the number of Years of Service since his designation as an Eligible Employee. 1.10. "Conversion Election" shall mean an agreement (in such form as is prescribed by the Plan Administrator) in which a Participant, who is an Eligible Employee on the Amendment Effective Date, waives his right to receive any benefits accrued under this Plan prior to the effective date of such agreement in exchange for the Converted Benefit Amount and the right to receive Retirement Contributions under Article IV. 1.11. "Converted Participant" shall mean a Participant, other than a Legacy Plan Participant, who is an Eligible Employee on the Amendment Effective Date and provides the Company with a valid and enforceable Conversion Election no later than April 2, 2004. 1.12. "Designated Benefit Commencement Date" shall mean (a) if an Legacy Plan Participant terminates his employment with the Company for any reason, other than death or on account of a Disability, prior to his Early Retirement Date, such date between the Early Retirement Date and the Normal Retirement Date as is selected by the Legacy Plan Participant or, if no date is selected, the Normal Retirement Date; (b) if an Legacy Plan Participant terminates his employment with the Company for any reason, other than death or on account of a Disability on or after his Early Retirement Date but prior to his Normal Retirement Date, such date between the Legacy Plan Participant's retirement date and his Normal Retirement Date as is selected by the Legacy Plan Participant or, if no date is selected, the Normal Retirement Date; (c) if a Legacy Plan Participant retires on his Normal Retirement Date, his Normal Retirement Date; or (d) if a Legacy Plan Participant retires after his Normal Retirement Date, his Late Retirement Date; provided, however, that the Administrator, at its sole discretion, may postpone the Designated Benefit Commencement Date for a period of up to 90 days if the Legacy Plan Participant or Vested Participant fails to notify the Administrator in writing of the upcoming Designated Benefit Commencement Date at least 90 days prior to such Designated Benefit Commencement Date. 1.13. "Disability" shall mean that an Eligible Employee ceases employment with the Company when he is entitled to receive benefits under the Long Term Disability Salary Continuation Plan sponsored by the Company or a subsidiary. 1.14. "Early Retirement Benefit" shall mean a benefit payable pursuant to Section 5.3. 1.15. "Early Retirement Date" shall mean the first day of the calendar month next following the month in which a Legacy Plan Participant's 55th birthday occurs. 1.16. "Eligible Employee" shall mean an employee of the Company or any of its subsidiaries who is a key employee, including officers and directors who are key employees, and who is designated by the Board to participate in this Plan. 1.17. "Effective Date" shall mean January 1, 1982. "Amendment Effective Date" shall mean January 31,2004. 1.18. "Late Retirement Date" shall mean the first day of the calendar month next following the month in which a Legacy Plan Participant terminates employment with the Company and its subsidiaries after his Normal Retirement Date. 1.19. "Legacy Plan Participant" shall mean any Vested Participant or Eligible Employee who, as of the Amendment Effective Date, is: (a) a Vested Participant. (b) an Eligible Employee at least 54 years of age or older. (c) an Eligible Employee who has completed at least four Years of Service between the date of his designation as an Eligible Employee and the Amendment Effective Date. (d) both a Participant (other than a Legacy Plan Participant described in (a), (b) and/or (c) above) and an Eligible Employee but who does not provide the Company with a valid and enforceable Conversion Election no later than April 2, 2004. 1.20. "Monthly Base Benefit Amount" for any Legacy Plan Participant shall mean the amount determined by subtracting (d) (if applicable) from the product of [(a) x (b) x (c)] where: (a) = 2%; (b) = The Legacy Plan Participant's completed full Years of Service as of the earlier of (i) his termination of employment with the Company and its subsidiaries or (ii) in the case of a Legacy Plan Participant who becomes a Legacy Plan Participant by reason of Section 1.19(d), the Amendment Effective Date; provided that a Legacy Plan Participant's completed full Years of Service shall not exceed 25; (c) = The Legacy Plan Participant's Average Monthly Compensation as of the date of his termination of employment with the Company and its subsidiaries; and (d) = The Legacy Plan Participant's accrued monthly normal retirement pension benefit under the Company's Pension Plan assuming the same were paid in the form of the Normal Benefit Form under this Plan commencing at the Legacy Plan Participant's actual retirement date under the Company's Pension Plan. For all other Participants, "Monthly Base Benefit Amount" shall mean zero; provided, however, that for a Converted Participant the determination of the Converted Benefit Amount shall be based on the Monthly Base Benefit Amount that was determinable for such Converted Participant on the Amendment Effective Date, before the Participant became a Converted Participant. 1.21. "Normal Benefit Form" shall mean a monthly payment for a Legacy Plan Participant's remaining life, with a survivor benefit to the spouse of the Legacy Plan Participant to whom he was married on the Designated Benefit Commencement Date equal to 50% of the benefit amount payable during the Legacy Plan Participant's remaining life, commencing with the month in which benefits first become payable and terminating with the month in which the later of the Legacy Plan Participant's or the Legacy Plan Participant's eligible spouse's death occurs. If the Legacy Plan Participant is not married on the Designated Benefit Commencement Date, Normal Benefit Form shall mean a monthly payment for the Legacy Plan Participant's remaining life, with a minimum of 120 monthly payments guaranteed, commencing with the month in which benefits first become payable and terminating on the later of the month in which the Legacy Plan Participant's death occurs or the month in which the 120th monthly payment occurs. 1.22. "Normal Retirement Date" shall mean the first day of the calendar month next following the month in which an Eligible Employee's 65th birthday occurs. 1.23. "Optional Form of Benefit" shall mean an optional form of benefit settlement described in Section 7.2. 1.24. "Participant" shall mean a current or former Eligible Employee who retains a Plan Account or who has accrued or is accruing a Monthly Base Benefit Amount that has not been completely distributed. 1.25. "Pension Plan" shall mean the funded defined benefit pension plan of the Company titled The Pep Boys - Manny, Moe & Jack Pension Plan, as in effect on any date of determination. 1.26. "Plan" shall mean The Pep Boys - Manny, Moe & Jack Executive Supplemental Retirement Plan (Amended and Restated Effective January 1, 1988 and further amended and restated effective February 13, 1992, March 31, 1995, March 26, 2002 and the Amendment Effective Date) as set forth herein and the same as may be further amended from time to time. 1.27. "Plan Account" shall mean the individual account maintained on the books of the Company for each Eligible Employee to record the crediting of all Retirement Contributions and Converted Benefit Amounts (if any), and all earnings related to such Retirement Contributions and Converted Benefit Amounts (if any) and the debiting of all distributions to the Eligible Employee or to his beneficiary. 1.28. "Plan Year" shall mean the calendar year. 1.29. "Present Value Interest Rate" shall mean an interest rate used to determine the value of a lump sum distribution under Section 7.2(d) that is cost neutral to the Company based on the Company's long-term debt rate derived from one or more appropriate national and/or industry long-term bond rate indices that reflect the yields of corporate bonds having a duration equivalent to the average post-retirement life expectancy (based on the GATT 2003 mortality table set forth in IRS Revenue Ruling 2001-62 or such other table as hereafter may be prescribed by the Internal Revenue Service to replace the same) of the retirees expected to elect a lump sum distribution and a risk factor rating equivalent to the Company's risk factor, as determined by the Administrator in its sole discretion; provided, however, that the Present Value Interest Rate for lump sum distributions in 2003 shall be 5.25%, based on the after tax (37% tax rate) value (rounded up to the nearest 5 basis points) of the average of (i) the 20 year + bond yields from Moody's Corporate Seasoned Bond Index (7.11%) and (ii) the Bloomberg Fair Market Sector Curve rates for Composite US BB bonds (9.58%). Except as set forth in the previous sentence for the calendar year 2003, the Present Value Interest Rate for lump sum distributions in any calendar year shall be determined by the Administrator and communicated to all Eligible Employees and Legacy Plan Participants by September 15 of the prior calendar year. 1.30. "Retirement Contribution" shall mean a credit to a Participant's Plan Account pursuant to Section 4.1. 1.31. "Vested Participant" shall mean an Eligible Employee who terminates employment with the Company and its subsidiaries on or after his Early Retirement Date or an Eligible Employee who terminates employment with the Company and its subsidiaries before his Early Retirement Date with four Years of Service following his designation as an Eligible Employee. 1.32. "Year of Service" with respect to an Eligible Employee shall mean a consecutive twelve-month period during which he is employed by the Company or a subsidiary for the entire period. For purposes of this Plan, any partial Years of Service shall not be included in the calculation of benefits or for any other purpose hereunder. If a terminated employee who was not previously designated an Eligible Employee is rehired and is designated an Eligible Employee, his Years of Service shall not include his pre-termination employment. ARTICLE II Participation On and after the Amendment Effective Date, Sections 2.3 - 2.5 of this Article II shall apply only with respect to Legacy Plan Participants. 2.1. Commencement. An individual's participation in the Plan shall commence on the date he is designated an Eligible Employee by the Board; however, such individual's Years of Service prior to such date, if any, shall be credited under the Plan if the Participant is a Legacy Plan Participant. 2.2. Termination. An Eligible Employee's active participation in the Plan shall terminate on the earliest of the date (a) his designation as an Eligible Employee is terminated by the Board, (b) his employment with the Company or any of its subsidiaries terminates for any reason other than an event giving rise to benefits hereunder, or (c) the Plan is terminated. 2.3. Early Retirement Elections. (a) Early Retirement Election for Employees. A Legacy Plan Participant may elect to receive an Early Retirement Benefit hereunder by filing a Benefit Election Form with the Administrator no later than December 31 in the year prior to the year in which he terminates employment with the Company and at least 90 days prior to his Designated Benefit Commencement Date. (b) Early Retirement Election for Former Employees. A Legacy Plan Participant whose employment with the Company and its subsidiaries terminated prior to his Early Retirement Date may elect to receive an Early Retirement Benefit hereunder by filing a Benefit Election Form with the Administrator no later than December 31 in the year prior to the year in which his Early Retirement Date occurs and at least 90 days prior to his Early Retirement Date. The deadlines for electing an Early Retirement Benefit as set forth in Sections 2.3(a) and (b) are hereafter referred to as the "Latest Early Retirement Election Dates". 2.4. Form of Benefit Elections. Legacy Plan Participants may elect to receive their retirement benefit hereunder in an Optional Form of Benefit by filing a Benefit Election Form with the Administrator indicating the Optional Form of Benefit chosen no later than December 31 in the year prior to the year in which his Designated Benefit Commencement Date occurs and at least 90 days prior to his Designated Benefit Commencement Date (the "Latest Optional Form of Benefit Election Date"). 2.5. Changes to Benefit Elections - Late Elections. Legacy Plan Participants may change their Designated Benefit Commencement Date and/or form of retirement benefit at any time prior to the deadlines set forth in Sections 2.3 and 2.4 above. (a) Late or Accelerated Early Retirement Elections. Subject to the 10% penalty described below, aLegacy Plan Participant may elect after his Latest Early Retirement Election Date but before his Normal Retirement Date to receive an Early Retirement Benefit or may elect after his Latest Early Retirement Election Date but prior to his previously elected Designated Benefit Commencement Date to accelerate the receipt of a previously elected Early Retirement Benefit to a date on or after his Early Retirement Date but prior to such previously elected Designated Benefit Commencement Date upon advance written notice to the Administrator (in either case, a "Late Benefit Commencement Election"). (b) Late or Modified Form of Benefit Elections. Subject to the 10% penalty described below, a Legacy Plan Participant may elect an Optional Form of Benefit after his Latest Optional Form of Benefit Election Date but prior to his Designated Benefit Commencement Date or choose an alternative Optional Form of Benefit to a previously chosen Optional Form of Benefit after his Latest Optional Form of Benefit Election Date but prior to his Designated Benefit Commencement Date upon advance written notice to the Administrator (in either case, a "Late Benefit Form Election"). (c) Penalty for Untimely Benefit Elections. To the extent that a Legacy Plan Participant files a Late Benefit Commencement Election or a Late Benefit Form Election with the Administrator, his retirement benefit hereunder shall be reduced by 10% and the Administrator may postpone the commencement of benefits hereunder by up to 90 days to accommodate such late request. The election deadlines and penalties set forth above are intended to prevent a Legacy Plan Participant from constructively receiving his retirement benefit prior to the date of actual receipt for tax purposes and for administrative convenience. The Administrator may impose additional penalties in individual cases in order to prevent constructive receipt by a Legacy Plan Participant and may waive penalties in certain cases which would not impose constructive receipt on a Legacy Plan Participant. In addition, the Administrator may postpone the commencement of a retirement benefit hereunder if, in its sole discretion, it determines that it would be an unreasonable or impracticable administrative burden to commence the retirement benefit as elected by a Legacy Plan Participant, provided that the postponed retirement benefit must commence as soon as reasonably practicable. ARTICLE III Plan Accounts 3.1. Establishment of Accounts. The Plan Administrator shall establish a Plan Account on behalf of each individual who is credited with a Converted Benefit Amount or one or more Retirement Contributions. 3.2. Investment Funds. Amounts credited to a Participant's Plan Account shall be credited with earnings, at periodic intervals determined by the Plan Administrator, at a rate equal to the actual rate of return for such period of an investment fund or funds or index or indices selected by that Participant from a range of investment vehicles authorized by the Plan Administrator. The rate of return on investment vehicles shall be tracked solely for the purpose of computing the amount of benefits payable to Participants under the Plan. The Company shall not be obligated to make any actual investment. It is intended that, unless otherwise determined by the Plan Administrator, the applicable investment funds shall be the same as those offered under The Pep Boys Deferred Compensation Plan. 3.3. Bookkeeping Entries. The maintenance of an individual Plan Account on behalf of each Participant is for bookkeeping purposes only. The Company and its subsidiaries shall not be obligated to acquire or set aside any particular assets for the discharge of their obligations under the Plan, nor is any Participant to have any property rights in any particular assets that may be held by the Company or its subsidiaries with respect to the Plan. 3.4. Statements. Statements shall be sent to each Participant who is not a Legacy Plan Participant no less frequently than quarterly setting forth the value of the Participant's Plan Accounts. ARTICLE IV Retirement Contributions The provisions of this Article IV shall apply only with respect to Converted Participants and individuals who are designated as Eligible Employees on or after the Amendment Effective Date. 4.1. Amount. The Plan Account of each Participant (other than a Legacy Plan Participant) shall be credited with a Retirement Contribution based on a percentage of his or her Compensation for a Plan Year provided that the Participant is an Eligible Employee on the last day of such Plan Year. The applicable percentage for any Plan Year shall be determined in accordance with the following schedule:
If the Participant is.... RetirementContribution Percentage - ------------------------- --------------------------------- At least 55 years of age 19% At least 45 years of age but not more than 54 years of age 16% At least 40 years of age but not more than 44 years of age 13% Not more than 39 years of age 10%
For purposes of this Section 4.1, a Participant's age shall be determined at the end of each Plan Year. Notwithstanding anything herein to the contrary, (i) for the first four Plan Years that a Participant is an Eligible Employee, if hired on after the Amendment Effective Date, the Retirement Contribution shall be limited to 10% irrespective of the Participant's age, and (ii) in the case of a Participant who ceases to be an Eligible Employee during a Plan Year by reason of death or a Disability, a pro rata portion of the Retirement Contribution shall be credited based on the number of months during the Plan Year in which the Eligible Employee was employed by the Company prior to death or the Disability. 4.2. Converted Benefit Amount. The Plan Account of each Converted Participant shall also be credited with an amount equal to such individual's Converted Benefit Amount. 4.3. Crediting. Retirement Contributions shall be credited to an Eligible Employees' Plan Account as soon as practicable following the completion of each Plan Year or such earlier date as is designated by the Company provided that such credit shall be tentative until the end of the Plan Year in order that the requirements of Section 4.1 be determined to be satisfied. Any credit attributable to a Converted Benefit Amount shall be credited as soon as practicable following the Company's receipt of a valid and binding Conversion Election. 4.4. Vesting. Each Participant will vest in the portion of his or her Plan Account attributable to any Retirement Contributions, and the related earnings thereon (if any), upon such individual's completion of four Years of Service as an Eligible Employee under the Plan. The Plan Administrator, in its sole discretion, shall determine the date an individual becomes a key employee and shall communicate that date to the Eligible Employee in writing at the time he or she becomes eligible to receive Retirement Contributions. 4.5. Distribution of Benefits. (a) Distribution of Benefits on or after Early Retirement Date. In the case of a Participant whose employment with the Employer terminates on or after Early Retirement Date and whose Plan Account balance exceeds $25,000, the Participant's Plan Account shall be distributed in one of the following methods, on the first day of the thirteenth month following the Participant's termination of employment, as elected by the Participant on a Benefit Election Form completed prior to the date of the Participant's termination of employment: (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 payment shall be equal to (i) the value of such Plan 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. 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 Plan 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 Plan Account at any time prior to the Participant's termination of employment. (b) Distribution of Benefits Upon Termination of Employment. In the case of a Participant who incurs a termination of employment prior to an Early Retirement Date, or whose Plan Account balance does not exceed $25,000, the Participant's Plan Account shall be distributed in a lump sum payment as soon as administratively practicable following the Participant's termination notwithstanding any other election by the Participant. 4.6. Death. (a) In the event of a Participant's death prior to the commencement of benefits in accordance with this Article IV, distribution of the Participant's Plan Account shall be made to the Participant's Beneficiary in a lump sum 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 Plan Account 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, the Beneficiary of a Participant who dies after Early Retirement Date may elect, in the form and manner, and at the time specified by, the Plan Administrator, any form of payment allowed under Section 4.5 that the Participant would have been able to elect had the Participant retired on the day before death. (b) In the event a Participant dies after annual installment benefits payable under Section 4.5 have commenced, but before the entire balance of the Plan 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. 4.7. Beneficiary Designation. Each Participant shall have the right to designate one or more beneficiaries and contingent beneficiaries to receive any vested amount in such individual's Plan Account at the time of his death by filing a written designation with the Plan Administrator on the form prescribed by it for such purpose. Participants may thereafter designate different beneficiaries at any time by filing a new written designation. The consent of the beneficiary is not required for any revocation or change of election of beneficiary. Any written designation shall become effective only upon its receipt by the Plan Administrator. If all of the designated beneficiaries should die on or before the commencement of distribution of death benefits and the Participant fails to make a new designation, his beneficiary shall be determined pursuant to Section 4.9. If the beneficiary (or last contingent beneficiary) determined pursuant to this Section 4.8 or the initial beneficiary determined pursuant to Section 4.9 dies before all payments are made, then the balance of the payments shall be made to such beneficiary's estate unless such beneficiary (or last contingent beneficiary) designates a second-level beneficiary by filing a written designation with the Company on the form prescribed by it for such purpose, in which case such second-level beneficiary shall be treated as a beneficiary hereunder. 4.8. Beneficiary List. If a Participant omits or fails to designate a beneficiary or if no designated beneficiary survives such individual, the vested amount in such individual's Plan Account at the time of his death shall be paid to the beneficiary determined from the following priority list; (a) surviving spouse, or if none, then (b) the Participant's estate. ARTICLE V Retirement Benefits On and after the Amendment Effective Date, the provisions of this Article V shall apply only with respect to Legacy Plan Participants. 5.1. Normal Retirement Benefit. A Legacy Plan Participant who terminates employment with the Company and its subsidiaries on his Normal Retirement Date shall receive a monthly retirement benefit equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.4 and subject to any applicable penalties under Section 2.5, commencing on his Designated Benefit Commencement Date. 5.2. Late Retirement Benefit. A Legacy Plan Participant who terminates employment with the Company and its subsidiaries after his Normal Retirement Date shall receive a monthly retirement benefit equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.4 and subject to any applicable penalties under Section 2.5, commencing on his Designated Benefit Commencement Date, except that for the purpose of calculating the Monthly Base Benefit Amount under Section 1.20, the reduction for the benefit payable under the Company's Pension Plan shall be the late retirement benefit thereunder assuming the same were paid in the Normal Benefit Form under this Plan. 5.3. Early Retirement Benefit. A Legacy Plan Participant who terminates employment with the Company and its subsidiaries on or after his Early Retirement Date but before his Normal Retirement Date shall be entitled to receive a monthly retirement benefit equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.4 and subject to any applicable penalties under Section 2.5, commencing on the Designated Benefit Commencement Date, except that for the purpose of calculating the Monthly Base Benefit Amount under Section 1.20 (a) the product of [(a) x (b) x (c)] in Section 1.20 shall be reduced by multiplying the difference between (i) 1 and (ii) the product of 0.00333 multiplied by the number of full months, not to exceed 84, by which the Designated Benefit Commencement Date precedes the first day of the calendar month next following the month in which the Legacy Plan Participant's 62nd birthday occurs, and (b) the reduction for the benefit payable under the Company's Pension Plan, if any, shall be the early retirement benefit thereunder assuming the same were paid in the Normal Benefit Form under this Plan. There shall be no reduction in the Monthly Base Benefit Amount under Section 1.20 if the Designated Benefit Commencement Date is on or after the first day of the calendar month following the calendar month in which the Legacy Plan Participant's 62nd birthday occurs. 5.4. Disability. A Legacy Plan Participant who terminates employment with the Company and its subsidiaries on account of a Disability and who receives benefits under the disability plan of the Company or a subsidiary until his Normal Retirement Date shall be deemed to have retired on his Normal Retirement Date under this Plan. For purposes of calculating such a Legacy Plan Participant's Monthly Base Benefit Amount under Section 1.20 (a), "Years of Service" shall include all periods during which the Legacy Plan Participant received disability benefits up to his Normal Retirement Date or the Amendment Effective Date, as applicable, and (b) "Compensation" for each Plan Year during the Disability shall mean the Legacy Plan Participant's Compensation for the last full Plan Year of his active employment. A Participant who incurs a Disability after Normal Retirement Date shall be deemed to have then elected a Late Retirement Date. 5.5. Other Terminations. If a Legacy Plan Participant's employment with the Company and its subsidiaries terminates for any reason, other than death or a Disability for which benefits are payable as provided in Section 5.4, before he has attained his Early Retirement Date, then he shall be entitled to receive a monthly retirement benefit equal to his Monthly Base Benefit Amount calculated as a Normal Benefit Form and payable under this Section 5.5. Such benefit will be paid in the Normal Benefit Form, or Optional Form of Benefit if properly elected pursuant to Section 2.3 and subject to any applicable penalties under Section 2.3, commencing on the Designated Benefit Commencement Date. The Monthly Base Benefit Amount shall be subject to the adjustments set forth in Section 5.3. 5.6. Change of Control Distribution. Notwithstanding any provisions herein to the contrary, in the event a Legacy Plan Participant's employment with the Company terminates for any reason (including, but not limited to, a voluntary termination by the Participant) in connection with, or within one year after any Change of Control of the Company (regardless of whether such change has been approved or opposed by the Company's then Board), he shall receive a lump sum retirement benefit (the "Distribution Amount") determined under this Section 5.6 and payable no later than 10 days following such termination of employment. The Distribution Amount for a Legacy Plan Participant whose employment with the Company terminated on or after his Early Retirement Date shall be equal to the lump sum Actuarial Equivalent Benefit of his Monthly Base Benefit Amount, calculated as a Normal Benefit Form, that would have been payable to the Legacy Plan Participant under this Plan as of his date of termination of employment using his Years of Service (as modified below) and Average Monthly Compensation as of his actual date of termination of employment in computing his Monthly Base Benefit Amount payable under Section 5.3. The Distribution Amount for each such other Legacy Plan Participant shall be equal to the present value of the lump sum Actuarial Equivalent Benefit of his Monthly Base Benefit Amount, calculated as a Normal Benefit Form, that would have been payable to such Legacy Plan Participant under this Plan as of his Early Retirement Date using his Years of Service (as modified below) and Average Monthly Compensation as of his actual date of termination of employment in computing his Monthly Base Benefit Amount payable under Section 5.3. The discount rate used to determine the present value of the lump sum shall be the interest rate provided under Section 1.1. For purposes of calculation of the Monthly Base Benefit Amount under this Section 5.6 for any Participant who was receiving credit for Years of Service after the Amendment Effective Date, Years of Service for a Legacy Plan Participant who is employed by the Company at the time of the Change of Control shall include any period for which severance benefits are guaranteed with respect to the Change of Control under a change of control or other employment agreement between the Legacy Plan Participant and the Company. For purposes of this Section 5.6, severance benefits are deemed to be guaranteed for a period of time if they are measured by reference to increments of salary (e.g. two times annual base salary or three months of salary) or where benefits are provided for a period of time beyond the termination of employment other than on account of the continuation health care coverage requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985 or any similar state or local statute. 5.7. Rehire. If a terminated Legacy Plan Participant is rehired and is again designated as an Eligible Employee, his Years of Service shall include his pre-termination employment (except to the extent that such Eligible Employee lost his right to benefits under Section 6.1) and his employment after rehire for any Participant who was receiving credit for Years of Service after the Amendment Effective Date However, such a Participant shall thereafter be eligible for Retirement Contributions and there shall be no further increase in such Participant's Monthly Base Benefit Amount. 5.8. Termination. If the Plan is terminated, each Eligible Employee will receive a benefit under Section 5.5 determined as if he had terminated employment on the date of Plan termination. If the designation of an Eligible Employee as such is terminated by the Board, such Eligible Employee will receive a benefit under Section 5.5 determined as if he had terminated employment on the date his designation as an Eligible Employee terminated. ARTICLE VI Loss of Benefits 6.1. Loss of Benefits. Notwithstanding any provision of Article IV or V, a person who is a Vested Participant shall cease to have any right to receive any payment hereunder and all obligations of the Company to make payments to or on account of a Vested Participant shall cease and terminate should the Administrator find, after full consideration of the facts presented on behalf of the Company and the Vested Participant, that (a) such Vested Participant during his employment with the Company or any of its subsidiaries or within one year after his termination of employment with the Company, or any of its subsidiaries, unless the Vested Participant is terminated by the Company without Cause, as defined in the Non-Competition Agreement between the Company and the Vested Participant, directly or indirectly, engages in (as a principal, partner, director, officer, agent, employee, consultant or otherwise) or becomes financially interested in any business operating within the United States of America, if (i) such business' primary business is the retail and/or commercial sale of automotive parts, accessories, tires and/or repair/maintenance services including, without limitation, the entities (including their franchisees and affiliates) listed on Schedule 6.1(a) hereto, or (ii) the retail and/or commercial sale of automotive parts, accessories, tires and/or repair/maintenance services is the primary focus of such engagement or financial interest. However, nothing contained in this Section 2b shall prevent the Officer from holding for investment up to two percent (2%) of any class or equity securities of a company whose securities are traded on a national or foreign securities exchange; (b) such Vested Participant, during his employment with the Company or any of its subsidiaries or for one year thereafter, directly or indirectly, induces or attempts to influence any employee of the Company to terminate his employment with the Company or hires or solicits for hire on behalf of another employer any person then employed or who had been employed by the Company during the immediately preceding six months; or (c) such Vested Participant's employment by the Company or any of its subsidiaries was terminated (other than in connection with or following a Change of Control) in connection with any act of disloyalty to the Company or any of its subsidiaries including, without limitation, fraud, embezzlement, theft, breach of the Company's Conflict of Interest or Ethics Policies, commission of a felony or proven dishonesty in the course of his employment or service or unauthorized disclosure of trade secrets or confidential information of the Company or any of its subsidiaries. ARTICLE VII Benefit Options On and after the Amendment Effective Date, the provisions of this Article VII shall apply only with respect to Legacy Plan Participants. 7.1. Normal Form. Benefits shall be paid in the Normal Benefit Form unless the Legacy Plan Participant, as applicable, elects an Optional Form of Benefit permitted under Section 7.2 in accordance with Sections 2.4 or 2.5. 7.2. Optional Forms of Benefit. A Legacy Plan Participant may elect that retirement benefits be paid as an Actuarial Equivalent Benefit in an optional form of settlement from the alternatives below: (a) A straight life annuity for the Legacy Plan Participant's life; (b) A joint and survivor annuity with the survivor benefit payable to the Legacy Plan Participant's spouse equal to 75% or 100% of the benefit amount payable during the Legacy Plan Participant's life; (c) Equal monthly installments over a period of not less than 10 years or more than 25 years; or (d) A lump sum payment. ARTICLE VIII Death Benefits On and after the Amendment Effective Date, the provisions of this Article VIII shall apply only with respect to Legacy Plan Participants. 8.1. Pre-Retirement Death Benefit - Active Legacy Plan Participants. The beneficiary of a Legacy Plan Participant who dies while in the employ of the Company or a subsidiary but prior to attaining his Normal Retirement Date, shall be entitled to an annual death benefit, payable in equal monthly installments, equal to 50% of the base salary rate of the Legacy Plan Participant in effect on the date of his death; provided, however, in the case of the CEO, the same shall be equal to 60% of his base salary rate in effect on the date of death. The payments shall commence with the month following the month in which the Legacy Plan Participant dies and shall end with the later to occur of the month in which (a) the 180th monthly payment is made or (b) the Legacy Plan Participant would have attained his Normal Retirement Date. 8.2. Death Benefit - Former Legacy Plan Participants. Subject to Section 6.1, the beneficiary of a Legacy Plan Participant who dies while not in the employ of the Company or a subsidiary but before he has attained his Normal Retirement Date, shall be entitled to a monthly death benefit with 120 monthly payments guaranteed commencing with the month following the month in which the Legacy Plan Participant dies equal to the Monthly Base Benefit Amount under Section 1.20. The beneficiary of a Legacy Plan Participant shall have the right to postpone the commencement of benefits under this Section 8.2 until a later month designated by the beneficiary, but not later than the calendar month next following the month in which the Legacy Plan Participant's 65th birthday would have occurred. If the beneficiary shall commence receiving benefits under this Section 8.2 prior to the month next following the month in which the Legacy Plan Participant's 65th birthday would have occurred, for the purpose of calculating the Monthly Base Benefit Amount payable to such Legacy Plan Participant's beneficiary, such amount shall be reduced by the factor(s) that would be applicable to such Legacy Plan Participant if he was not deceased and elected to receive benefits after his Early Retirement Date and prior to his Normal Retirement Date under this Plan (and which factor(s) are set forth in the version of Section 5.3 of this Plan that is applicable to such Legacy Plan Participant). In addition, if the beneficiary of a Legacy Plan Participant shall commence receiving benefits under this Section 8.2 prior to the month next following the month in which the Legacy Plan Participant's 55th birthday occurs, for the purpose of calculating the Monthly Base Benefit Amount the amount determined under the preceding sentence of this Section 8.2 shall be further reduced to be the Actuarial Equivalent Benefit of such amount calculated as of the date benefits actually commence. 8.3. Late Retirement Death Benefit. The beneficiary of a Legacy Plan Participant who dies while in the employ of the Company or a subsidiary after attaining his Normal Retirement Date shall be entitled to a monthly death benefit with 120 monthly payments guaranteed commencing with the month following the month in which the Legacy Plan Participant dies equal to the Monthly Base Benefit Amount; provided, however, that for the purpose of calculating the Monthly Base Benefit Amount under Section 1.20 the reduction for the benefit payable under the Company's Pension Plan shall be the benefit thereunder. 8.4. Death Benefit in Lieu of Retirement Benefit. If a Legacy Plan Participant dies after the commencement of his retirement benefits hereunder, no death benefit shall be payable under this Article VIII. Moreover, to the extent that a death benefit is payable under this Article VIII, no retirement benefit shall be payable under Article V. 8.5. Disability. The beneficiary of a Legacy Plan Participant who terminates employment with the Company and its subsidiaries under circumstances which entitled him to benefits under the Long Term Disability Salary Continuation Plan sponsored by the Company or a subsidiary and who is receiving such benefits on the date of his death shall be entitled to the benefit provided in Section 8.1 based on his base salary rate in effect when his active employment terminated. 8.6. Other Cases. Except as expressly provided by the terms of the Plan, no death benefits shall be payable under this Plan. 8.7. Beneficiary Designation. Each Eligible Employee and Vested Participant shall have the right to designate one or more beneficiaries and contingent beneficiaries to receive any death benefit payable with respect to such individual by filing a written designation with the Company on the form prescribed by it for such purpose. Eligible Employees and Vested Participants may thereafter designate different beneficiaries at any time by filing a new written designation. The consent of the beneficiary is not required for any revocation or change of election of beneficiary. Any written designation shall become effective only upon its receipt by the Company. If the designated beneficiaries should die on or before the commencement of distribution of death benefits and the Eligible Employee or Vested Participant fails to make a new designation, his beneficiary shall be determined pursuant to Section 8.8. If the beneficiary (or last contingent beneficiary) determined pursuant to this Section 8.7 or the initial beneficiary determined pursuant to Section 8.8 dies before all payments are made, then the balance of the payments shall be made to such beneficiary's estate unless such beneficiary (or last contingent beneficiary) designates a second-level beneficiary by filing a written designation with the Company on the form prescribed by it for such purpose, in which case such second-level beneficiary shall be treated as a beneficiary hereunder. 8.8. Beneficiary List. If an Eligible Employee or Vested Participant omits or fails to designate a beneficiary or if no designated beneficiary survives such individual, the death benefits shall be paid to the beneficiary determined from the following priority list; (a) surviving spouse, or if none, then (b) the Eligible Employee's or Vested Participant's estate. ARTICLE IX Termination and Amendments 9.1. Amendments. The Company may amend this Plan in whole or in part by appropriate resolution of the Board; provided, however, that no amendment shall (i) decrease or limit any benefits or rights accrued under the Plan prior to the date of the amendment, or (ii) modify any provision of this Article IX without the consent of a majority of the Eligible Employees and Vested Participants affected by such amendment. 9.2. Termination. The Company reserves the right to terminate this Plan in its entirety at any time by an appropriate resolution of the Board; provided, however, that any termination of the Plan shall not (i) terminate or diminish any benefits then payable under the Plan, (ii) terminate or diminish any benefits payable in the future under the Plan with respect to benefits accrued as of the date of termination of the Plan, or (iii) decrease or limit any benefits or rights accrued under the Plan prior to the date of termination without the consent of a majority of the Eligible Employees and Vested Participants affected by such termination. ARTICLE X Plan Administration 10.1. Named Fiduciary and Plan Administrator. The committee designated by the Board shall be the Administrator and Named Fiduciary (within the meaning of the Employee Retirement Income Security Act of 1974, as amended (hereinafter referred to as "ERISA")) of this Plan. The Administrator shall have the authority to control and manage the operation and administration of the Plan. The Administrator shall act by majority vote of the committee members. No Eligible Employee who is a member of the committee shall participate in committee decisions affecting him. 10.2. Delegation of Duties. The Administrator may (a) delegate all or a portion of the responsibilities of controlling and managing the operation and administration of the Plan to one or more persons; and (b) appoint such agents, advisors, counsel, or other representatives to render advice with regard to any of its responsibilities under the Plan. Wherever the term "Administrator" is used herein in connection with the operation or administration of the Plan, such term shall include all delegates appointed by the Administrator. 10.3. Powers and Duties. The authority and responsibility to control and manage the operation and administration of the Plan shall include, but shall not be limited to, the performance of the following acts: (a) The filing of all reports required of the Plan. (b) The distribution to Eligible Employees, Vested Participants and beneficiaries of all reports and other information required of the Plan. (c) The keeping of complete records of the administration of the Plan. (d) Developing rules and regulations for administration and interpretation of the Plan consistent with the terms and provisions of the Plan. (e) The interpretation of the Plan including the determination of any questions of fact arising under the Plan and the making of all decisions required by the Plan. The construction of the Plan and any actions and decision taken thereon in good faith by the Administrator shall be final and conclusive. The Administrator may correct any defect, or supply any omission, or reconcile any inconsistency in the Plan in such manner and to such extent as shall be expedient to carry the Plan into effect and shall be the sole judge of such expediency. The Administrator's determinations (including those made by any person or persons to whom the Administrator's power has been delegated hereunder) on all matters relating to the Plan shall be final, binding and conclusive for all purposes, upon all persons, including without limitation, the Company, all Eligible Employees, all Vested Participants and their respective beneficiaries and successors hereunder. Each Eligible Employee and Vested Participant, by accepting status as a Participant in the Plan agrees that (i) all benefits shall be paid strictly in Accordance with the terms of the Plan, and (ii) that the Administrator shall have the discretion and authority set forth in this Article X and in the Plan generally. 10.4. Payment of Expenses. All expenses of the Administrator shall be paid by the Company. 10.5. Indemnity of Plan Administrator. The Company shall indemnify the Plan Administrator or any individual who is a delegate against any and all claims, loss, damage, expense or liability arising from any action or failure to act, except when due to gross negligence or willful misconduct. 10.6. Agent for Service of Process. The Company shall be the agent for the Plan for service of legal process. ARTICLE XI Claims Procedure 11.1. Claim. An Eligible Employee or Vested Participant or his beneficiary or authorized representative (each one being hereinafter referred to as a "Claimant") who expects a benefit under the Plan which he has not received may file a formal claim for benefits under the Plan with the Administrator. The Administrator shall review the claim and render a determination relating to the claim based on this Plan document (including the Administrator's power and authority to interpret and construe the Plan and to make rules relating to the administration of the Plan) and consistent with prior determinations rendered with respect to similarly situated claims. The Administrator shall notify the Claimant within 90 days of the receipt of the claim of the Administrator's determination relating to the claim, unless the Administrator determines that special circumstances require an extension of time for processing a claim, in which case the Administrator shall notify the Claimant of the extension within 90 days of receipt of the claim, specifying the special circumstances requiring an extension and the date by which it expects to render a determination on the claim, which determination must be rendered and notice given to the Claimant no later than the 180th day following the receipt of the claim. If an extension is required because the Claimant failed to submit the information necessary to decide a claim, the time period for making a benefit determination set forth in the prior sentence shall be tolled from the date on which the notification of the extension is sent to the claimant until the date on which the Claimant responds to the request for additional information. The determination notice shall be in writing, sent by regular mail to the address specified by the Claimant or if none is specified to the Claimant's last known address, and must contain the following information: (a) The specific reasons for a determination adverse to the Claimant, if applicable; (b) The specific reference to the pertinent Plan provision(s) on which the determination is based; (c) If applicable, a description of any additional information or material necessary to perfect the claim, and an explanation of why such information or material is necessary; and (d) An explanation of the claims review procedure and the time limitations of the review procedure applicable thereto, including a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA following an appeal of any adverse benefit determination. For purposes of this Article XI, claims, notifications and determinations shall be deemed to be received when actually received and parties shall be deemed to be notified and a notification shall be deemed to be sent or submitted on the date that such notification is postmarked or actually delivered by courier if not mailed. 11.2. Appeal Procedure. A Claimant is entitled to request an appeal of any adverse determination of his claim by the Administrator. The request for appeal must be submitted in writing within 60 days of the receipt by the Claimant of the notification of an adverse claim determination. Absent a request for appeal within the 60-day period, the determination of the Administrator regarding the claim will be deemed to be final and conclusive. During the appeal process, the Claimant shall have a reasonable opportunity to submit written comments, documents, records and other information relating to the claim and shall be entitled, free of charge, to reasonable access to and copies of all documents, records and other information relevant to the claim. The Administrator shall review the appeal of the initial claim determination (including all comments, documents, records and other information submitted by the Claimant, regardless of whether such information was submitted with the original claim) and render a final determination. 11.3. Final Determination. Within 60 days following receipt by the Administrator of the Claimant's request for appeal, the Administrator shall render a final determination relating to the claim, unless the Administrator determines that special circumstances (such as the need to hold a hearing) require an extension of time for processing the appeal, in which case the Administrator shall notify the Claimant of such extension within 60 days following receipt by the Administrator of the request for appeal, specifying the special circumstances requiring an extension and the date by which it expects to render a final determination on the appeal, which determination must be rendered and notice given to the Claimant no later than the 120th day following the receipt by the Administrator of the request for appeal. If an extension is required because the Claimant failed to submit the information necessary to decide a claim, the time period for making a benefit determination set forth in the prior sentence shall be tolled from the date on which the extension notification is sent to the Claimant until the date on which the Claimant responds to the request for additional information. The final determination shall be made in writing to the Claimant. The final determination shall (i) recite the specific reasons for a determination adverse to the Claimant, if applicable, with specific reference to the pertinent Plan provision(s) on which the determination is based, (ii) state that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records and other information relevant to the claim and (iii) state that the Claimant has a right to bring an action under Section 502(a) of ERISA. ARTICLE XII Source of Benefits and Payments 12.1. Unfunded Plan. The Company shall pay the benefits provided hereunder out of its general assets in cash when due. The Company shall not be required to establish any segregated account, trust, escrow, reserve or other arrangement to discharge such benefits. 12.2. Non-Alienation. None of the payments, benefits or rights of any Eligible Employee, Vested Participant or beneficiary thereof shall be subject to any claim of any creditor of such person and, in particular, to the fullest extent permitted by law, shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such person. No Eligible Employee, Vested Participant or beneficiary thereof shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive, contingently or otherwise, under this Plan, except the right to designate a beneficiary or beneficiaries as hereinabove provided. 12.3. Incapacity. If the Company determines that a person entitled to receive any benefit payment is under a legal disability or is incapacitated in any way so as to be unable to manage his financial affairs, the Company may make payments to such person's legal representative or to a relative or other person for his benefit, or apply the payment for the benefit of such person in such manner as the Company considers advisable. Any payment of a benefit in accordance with the provisions of this Section 12.3 shall be a complete discharge of any liability to make such payment. ARTICLE XIII Miscellaneous 13.1. Employment Obligations. The establishment of this Plan shall not be construed as creating any contract of employment between the Company or any subsidiary and any Eligible Employee or Vested Participant. Nothing herein contained shall give any Eligible Employee or Vested Participant the right to inspect the books of the Company or to interfere with the right of the Company to discharge any Eligible Employee from employment at any time for any reason whatsoever, with or without cause. 13.2. Conflicts of Law. All matters respecting the validity, effect, interpretation and administration of this Plan shall be determined in accordance with the laws of the Commonwealth of Pennsylvania, except to the extent superseded by ERISA. 13.3. References. The masculine pronoun shall include the feminine and the singular form shall include the plural, as necessary for proper interpretation of this Plan. 13.4. Effective Date; Applicability to Vested Participants. The amendment and restatement of the Plan is effective as of the Amendment Effective Date and shall be applicable only to all individuals who are Eligible Employees of the Company on that date and to all future individuals who become Eligible Employees after the Amendment Effective Date, except as set forth below. In addition, except as specifically set forth below, none of the substantive amendments to the Plan incorporated into the March 26, 2002 amendment and restatement of the Plan shall be applicable to former Eligible Employees or individuals who were Vested Participants as of March 26, 2002. Except as specifically set forth below, the rights and benefits under the Plan, if any, of individuals who were Eligible Employees prior to, but not on the Amendment Effective Date shall be governed by the terms of the Plan in effect prior to the Amendment Effective Date. Notwithstanding the foregoing, the following provisions of the Plan, amended and restated as of March 26, 2002, shall apply to individuals who were Vested Participants as of March 26, 2002: (a) The revision to Section 1.9 (now 1.10) shall be effective and is intended to memorialize a prior decision of the Board of Directors with respect to the applicability of earned but unpaid bonuses; (b) The addition of Section 7.2 is effective and is intended to document an existing administrative interpretation of the Plan benefits for Eligible Employees who are described in such Section; (c) The revisions to Articles X and XI (now XII and XII) shall apply; (d) The deadline for electing an Early Retirement Benefit set forth in Section 2.3(b) shall apply; (e) To the extent needed to determine the benefit payable pursuant to Section 7.2, the definition of Monthly Base Benefit Amount set forth in Section 1.20 (and any other defined term used in Section 1.20) shall apply; and (f) To the extent that any provision of the March 26, 2002 amendment and restatement merely clarifies or amplifies a pre-existing right or benefit, as determined in the sole discretion of the Administrator, such provision shall apply. In no event shall any Optional Form of Benefit added by virtue of the March 26, 2002 amendment and restatement of the Plan be available to any individual who was not an Eligible Employee of the Company as of March 26, 2002 or does not become one after March 26, 2002. IN WITNESS WHEREOF, this Amendment and Restatement of the Executive Supplemental Retirement Plan is hereby executed effective as of the 31st day of January, 2004. THE PEP BOYS - MANNY, MOE & JACK By: /s/ Lawrence N. Stevenson EX-31 4 exh311.txt 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 quarterly report on Form 10-Q/A 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 based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent 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: March 2, 2005 /s/ Lawrence N. Stevenson -------------------- ------------------------- Lawrence N. Stevenson Chief Executive Officer EX-31 5 exh312.txt Exhibit 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION - ------------------------------------- Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Harry F. Yanowitz, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A 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 based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent 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: March 2, 2005 /s/ Harry F. Yanowitz -------------------- ------------------------- Harry F. Yanowitz Senior Vice President and Chief Financial Officer EX-32 6 exh321.txt 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 Quarterly Report of The Pep Boys - Manny, Moe & Jack (the "Company") on Form 10-Q/A for the quarterly period ending May 1, 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: (i) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 2, 2005 /s/ Lawrence N. Stevenson -------------------- -------------------------- Lawrence N. Stevenson Chief Executive Officer EX-32 7 exh322.txt 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 Quarterly Report of The Pep Boys - Manny, Moe & Jack (the "Company") on Form 10-Q/A for the quarterly period ending May 1, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Harry F. Yanowitz, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that: (i) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 2, 2005 /s/ Harry F. Yanowitz -------------------- --------------------------- Harry F. Yanowitz Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----