SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K - -------------------------------------------------------------------------------- (Mark One) (x) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended February 1, 1997 or ( ) Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (NO FEE REQUIRED) For the transition period from to . ----- ----- Commission file number 1-3381 The Pep Boys - Manny, Moe & Jack ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-0962915 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 3111 West Allegheny Avenue, Philadelphia, PA 19132 -------------------------------------------- ------------ (Address of principal executive office) (Zip code) Registrant's telephone number, including area code 215-229-9000 ------------ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ----------------------------- ----------------------------------------- Common Stock, $1.00 par value New York Stock Exchange 4% Convertible Subordinated Notes due September 1, 1999 New York Stock Exchange Liquid Yield Option Notes due September 20, 2011 New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ Index to Exhibits is on Page 42 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Yes ___ No X As of the close of business on April 11, 1997, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $1,636,141,244. As of April 11, 1997, there were 63,194,492 shares of the registrant's common stock outstanding. 2 This Annual Report on Form 10-K contains forward looking statements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward looking statements involve risks and uncertainties which could significantly affect expected results in the future from those expressed in any such forward looking statements made by, or on behalf of the Company. 3 DOCUMENTS INCORPORATED BY REFERENCE PART III Portions of the registrant's definitive proxy statement, which will be filed with the commission pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year, for the Company's Annual Meeting of Shareholders presently scheduled to be held on June 4, 1997. 4 This Annual Report on Form 10-K for the year ended February 1, 1997, at the time of filing with the Securities and Exchange Commission, modifies and supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities on or after the date of such filing, pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference this Annual Report. 5 PART I ITEM 1 BUSINESS GENERAL The Pep Boys - Manny, Moe & Jack and Subsidiaries (the "Company") is engaged principally in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts sold by it through its chain of 604 stores (as of February 1, 1997) which consists of 528 SUPERCENTERS, having an aggregate of 5,398 service bays, and 76 PARTS USA stores. The Company operates approximately 11,761,000 gross square feet of retail space, including the service bays. The SUPERCENTERS average approximately 20,800 square feet and the PARTS USA stores average approximately 10,300 square feet. 6 As of February 1, 1997, the Company operated its stores in 33 states, the District of Columbia and Puerto Rico. The following table indicates by state the number of stores of the Company in operation at the end of fiscal 1993, 1994, 1995 and 1996 and the number of stores opened and closed by the Company during each of the last three fiscal years: NUMBER OF STORES AT END OF FISCAL YEARS 1993 THROUGH 1996 1994 1995 1996 1993 ---------------------- ---------------------- --------------------- State Year End Opened Closed Year End Opened Closed Year End Opened Closed Year End - --------- -------- ------ ------ -------- ------ ------ -------- ------ ------ -------- Alabama 1 - - 1 - - 1 - - 1 Arizona 24 - - 24 - - 24 - 1 23 Arkansas 1 - - 1 - - 1 - - 1 California 93 11* 2 102 17 1 118 29 1 146 Colorado - 5 - 5 1 - 6 2 - 8 Connecticut - - - - 2 - 2 5 - 7 Delaware 5 - - 5 - - 5 - - 5 District of Columbia - - - - 2 - 2 1 - 3 Florida 33 1 - 34 4 - 38 4 - 42 Georgia 20 - - 20 2 - 22 3 - 25 Illinois 3 10 - 13 4 - 17 4 - 21 Indiana 1 - - 1 2 - 3 3 - 6 Kansas 1 1 - 2 - - 2 - - 2 Kentucky 1 2 - 3 1 - 4 - - 4 Louisiana 12 - - 12 - - 12 - - 12 Maryland 16 - - 16 3 1 18 2 - 20 Massachusetts 2 1 - 3 2 - 5 4 - 9 Michigan - 1 - 1 5 - 6 5 - 11 Missouri 1 - - 1 - - 1 - - 1 Nevada 8 - - 8 - - 8 - - 8 New Hampshire - 1 - 1 - - 1 1 - 2 New Jersey 14 2 1 15 3 - 18 8 - 26 New Mexico 8 - - 8 - - 8 - - 8 New York 9 2 - 11 3 - 14 13 - 27 North Carolina 11 - - 11 - - 11 - - 11 Ohio - 9 - 9 1 - 10 3 - 13 Oklahoma 6 - - 6 - - 6 - - 6 Pennsylvania 31 3 - 34 8 2 40 3 - 43 Puerto Rico - - - - 7 - 7 4 - 11 Rhode Island 1 - - 1 - - 1 2 - 3 South Carolina 6 - - 6 - - 6 - - 6 Tennessee 7 - - 7 - - 7 - - 7 Texas 52 3 - 55 8 - 63 2 - 65 Utah 6 - - 6 - - 6 - - 6 Virginia 13 - - 13 - - 13 2 - 15 --- --- --- --- --- --- --- --- --- --- Total 386 52 3 435 75 4 506 100 2 604 === === === === === === === === === === <FN> * Included in this number is the Company's Santa Monica store which was temporarily closed in fiscal 1993 and re-opened in fiscal 1994. 7 NEW STORES AND EXPANSION STRATEGY During fiscal 1996, the Company opened 56 SUPERCENTERS, all of which include service bays, and 44 PARTS USA stores. Two outmoded units were closed, one of which was replaced by a SUPERCENTER. The Company's typical SUPERCENTER is a free standing, "one-stop" shopping automotive warehouse that features approximately 12 state-of-the-art service bays. Each SUPERCENTER carries an average of approximately 27,000 stock-keeping units and serves the automotive aftermarket needs of the "do-it-yourself", the "do-it-for-me" and the "buy-for-resale" customer segments. Late in 1996, a new SUPERCENTER prototype was introduced that averages approximately 18,200 square feet. The Company intends to continue to utilize this new prototype in 1997. While the overall size of the SUPERCENTER will be reduced, the number of stock-keeping units offered will not decrease. PARTS USA stores operate in locations that the Company believes will be better served by stores with an extensive selection of parts and accessories (an average of approximately 26,000 stock-keeping units per store) but without tires or service bays. These stores are generally located in certain urban areas and areas located between SUPERCENTERS. PARTS USA stores primairly serve the automotive aftermarket needs of the "do-it-yourself" and the "buy-for- resale" customer segments. New PARTS USA stores will average approximately 8,100 square feet. The Company believes the utilization of this supplemental format will enable it to grow at a faster rate and achieve greater economies of scale by providing more retail outlets as well as increase its market penetration and share over time. The Company expects to open approximately 120 new stores in 1997, most of which are expected to be in existing markets. If all 120 stores are opened, the Company anticipates spending approximately $188,000,000 in addition to the $14,194,000 it has already spent as of February 1, 1997 in connection with certain of these locations. Funds required to finance this expansion are expected to come primarily from operating activities with the remainder provided by unused lines of credit or from accessing traditional lending sources which may include the public capital markets. The Company is positioning certain SUPERCENTERS and PARTS USA stores to deliver high quality parts to the professional installer. This will strengthen the Company's position in the "buy-for-resale" category by allowing the Company to further penetrate its markets while providing a valuable service to the professional mechanic. As of the end of 1996, the Company operated the Auto Parts Delivery program in 57 of its stores. The most important factors considered by the Company when deciding to open new stores are vehicle and population demographics, competitive positioning and site development costs. The most important factors considered by the Company when deciding whether to close a store are profitability and whether the store is outmoded by virtue of store size, location and surroundings, number of service bays, number of other stores within the same market area and the cost/benefit of establishing a replacement store rather than expanding or otherwise upgrading an older store. The Company's ability to meet its expansion goals will depend, in large measure, upon the availability of suitable sites, prevailing economic conditions, its success in completing negotiations to purchase or lease properties, and its ability to obtain governmental approvals and meet construction deadlines. 8 MERCHANDISING Each Pep Boys' SUPERCENTER and PARTS USA store carries the same basic product line, with variations based on the number and type of cars registered in the different markets. A full complement of a SUPERCENTER and a PARTS USA stores' inventory currently includes an average of approximately 27,000 and 26,000 items, respectively. The Company's automotive product line includes: tires (not included in PARTS USA stores); batteries; new and rebuilt parts for domestic and imported cars, including suspension parts, ignition parts, mufflers, engines and engine parts, oil and air filters, belts, hoses, air conditioning parts, and brake parts; chemicals, including oil, antifreeze, polishes, additives, cleansers and paints; mobile electronics, including sound systems and alarms; car accessories, including seat covers, floor mats, gauges, mirrors and booster cables; and a large selection of truck and van accessories. In addition to offering a wide variety of high quality, branded products, the Company sells an array of high quality products under the Pep Boys and various other private label names. The Company sells oil, transmission fluid and chemicals under the Pep Boys name. The Company also sells oil treatments and lubricants under the name PROLINE(tm) and paints under the name VARSITY (R). The Company sells starters and alternators under the name PROSTART(R), water pumps under the name PROCOOL(R) and batteries under the names PRO-START(R), MASTER START(tm) and RIGHT START(tm). Brakes are sold under the names SHUR GRIP(R), PROSTOP(R) and ELITE (tm) and tires under the names CORNELL(R) and FUTURA(R). The Company also sells shock absorbers under the name PRO RYDER(R), and trunk and hatchback lift supports under the name PROLIFT(R). All products sold by the Company under the Pep Boys and various other private label names accounted for approximately 25% of the Company's merchandise sales in fiscal 1996. The remaining merchandise is sold under the brand names of others. Except for revenues from maintaining or repairing automobiles and installing products, which accounted for approximately 15.0%, 15.0% and 13.9% of the Company's total revenues in fiscal years 1996, 1995 and 1994, respectively, no class of products or services accounted for as much as 10% of the Company's total revenues. The Company has a point-of-sale system in all of its stores which gathers sales and gross profit data by stock-keeping-unit from each store on a daily basis. This information is then used by the Company to help formulate its pricing, marketing and merchandising strategies. The Company has an electronic work order system in all of its service centers. This system creates a service history for each vehicle, provides customers with a comprehensive, professional sales document and has enabled the Company to establish a service customer database. The Company uses an "Everyday Low Price" (EDLP) strategy in establishing its selling prices. Management believes that EDLP provides better value to its customers on a day-to-day basis, helps level customer demand and allows more efficient management of inventories. The Company uses various forms of advertising to promote its category dominant product offering, its state-of-the-art automotive service and repair capabilities and its commitment to customer service and satisfaction. The Company's advertising vehicles include, but are not limited to, multipage catalogs, television and radio commercials and in-store promotions. Most of the gross cost of the advertising directed by the Company is customarily borne by the suppliers of the products advertised. 9 In fiscal 1996, approximately 66% of the Company's total revenues were cash transactions (including personal checks), and the remainder were credit and charge card sales. The Company does not experience significant seasonal fluctuation in the generation of its revenues. STORE OPERATIONS AND MANAGEMENT All Pep Boys' stores are open seven days a week. Each SUPERCENTER has a manager, a service manager, a parts manager and two or more assistant managers. Each PARTS USA store has a manager, a parts manager and two or more assistant managers. A store manager's average length of service with the Company is approximately six years. The Company has service bays in 528 of its 604 locations. Each service department can perform a variety of services which include: engine diagnosis and tune-ups, wheel alignments, state inspections, air conditioning service, coolant system service; the repair and installation of parts and accessories including brake parts, suspension parts, exhaust systems, front end parts, ignition parts, belts, hoses, clutches, filters, radios, alarms, sun roofs, cruise controls, and various other merchandise sold in Pep Boys' stores; installation and balancing of tires, and oil and lubrication services. The Company coordinates the operation and merchandising of each store through a network of district and regional managers. The regional managers report to one of three divisional Vice Presidents - Store Operations and one Vice President - Service Operations, who report to the Company's Senior Vice President - Store Operations who reports to the Company's Executive Vice President and Chief Operating Officer. Supervision and control over the individual stores are facilitated by means of the Company's computer system, operational handbooks and regular visits to the individual stores by the district operations managers and loss prevention personnel. All of the Company's advertising, accounting, management information systems, purchasing and most administrative functions are conducted at its corporate headquarters in Philadelphia, Pennsylvania. Certain administrative functions for the Company's western, southwestern, southeastern, midwest and Puerto Rico operations are performed at various regional offices of the Company. See "Properties." INVENTORY CONTROL AND DISTRIBUTION Almost all of the Company's merchandise is distributed to its stores from its warehouses by Company-owned or leased trucks. Target levels of inventory for each product have been established for each of the Company's warehouses and stores and are based upon prior shipment history, sales trends and seasonal demand. Inventory on hand is compared to the target levels on a weekly basis at each warehouse. If the inventory on hand at a warehouse is below the target levels, the Company's buyers order merchandise from its suppliers. 10 Each Pep Boys store has an automatic inventory replenishment system that automatically orders additional inventory when a store's inventory on hand falls below the target level. In addition, the Company's centralized buying system, coupled with continued advancement in its warehouse and distribution systems has greatly enhanced the Company's ability to control its inventory. SUPPLIERS During fiscal 1996, the Company's ten largest suppliers accounted for approximately 38% of the merchandise purchased by the Company. No single supplier accounted for more than 10% of the Company's purchases. The Company has no long-term contracts for the purchase of merchandise. Management believes that the relationships the Company has established with its suppliers are generally good. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist, at substantially similar cost, for virtually all types of merchandise sold in its stores. COMPETITION The business of the Company is generally highly competitive. The Company encounters competition from nationwide and regional chains and from local independent merchants. Some of the Company's competitors are general, full range, discount or traditional department stores which carry automotive parts and accessories and/or have automotive service centers, and others, similar to the Company, are specialized automotive service retailers. Certain of its competitors are larger in terms of sales volume, store size, and/or number of stores, have access to greater capital and management resources and have been operating longer in particular geographic areas than the Company. Although the Company's competition varies by geographical area, the Company believes that it generally has a favorable competitive position in terms of depth and breadth of product line, price, quality of personnel and customer service. In addition, the Company believes that its operation of service bays in its SUPERCENTERS positively differentiates it from most of its competitors by providing its customers with the ability to purchase parts and have them installed at the same location. The Company believes that the warranty policies in connection with the higher priced items it sells, such as tires, batteries, brake linings and other major automotive parts and accessories, are comparable or superior to those of its competitors. 11 EMPLOYEES At February 1, 1997, the Company employed 20,489 persons as follows: Full-time Part-time Total Description Numbers % Numbers % Numbers % - ------------------------------------------------------------------------------- Store Sales 6,793 43.8 3,664 73.5 10,457 51.0 Store Service 6,412 41.4 1,100 22.1 7,512 36.7 ------ ----- ----- ----- ------ ----- STORE TOTAL 13,205 85.2 4,764 95.6 17,969 87.7 Warehouses 1,077 6.9 200 4.0 1,277 6.2 Offices 1,220 7.9 23 .4 1,243 6.1 ------ ----- ----- ----- ------ ----- TOTAL EMPLOYEES 15,502 100.0 4,987 100.0 20,489 100.0 ====== ===== ===== ===== ====== ===== Of the 1,277 full-time and part-time warehouse employees referred to above, 340 employees at the Company's New Jersey warehouse facilities are members of a union. The Company believes employee relations are generally good. At the end of fiscal 1995, the Company employed approximately 13,186 full-time and 4,405 part-time employees and at the end of fiscal 1994, the Company employed approximately 11,804 full-time and 4,070 part-time employees. 12 EXECUTIVE OFFICERS OF THE COMPANY The following table indicates the names, ages, years with the Company and positions (together with the year of election to such positions) of the executive officers of the Company: Years with Position with the Company and Name Age Company Date of Election to Position - --------------------- --- ---------- ----------------------------- Mitchell G. Leibovitz 51 18 Chairman of the Board since March 1994; Chief Executive Officer since March 1990; President since 1986 Wendel H. Province 49 7 Executive Vice President since November 1994; Chief Operating Officer since March 1993 Michael J. Holden 45 17 Executive Vice President since March 1996; Senior Vice President & Chief Financial Officer since March 1987 Frederick A. Stampone 41 14 Senior Vice President since March 1987; Chief Administrative Officer since March 1993; Secretary since December 1988 Mark L. Page 40 21 Senior Vice President - Store Operations since March 1993 Messrs. Leibovitz, Province, Holden and Stampone have been executive officers of the Company for more than the past five years. Mr. Page has been an executive officer of the Company for less than the past five years. Mr. Page was a regional manager for the Company from February 1987 until February 1991 when he was elected Vice President - Western Store Operations. On March 14, 1993, Mr. Page became Senior Vice President - Store Operations. Each of the officers serves at the pleasure of the Board of Directors of the Company. There are no arrangements or understandings pursuant to which any officer was elected to office. 13 ITEM 2 PROPERTIES The Company's headquarters in Philadelphia, Pennsylvania, which also serves as an administrative regional office for its eastern operations, occupies a five-story structure owned by the Company with approximately 300,000 square feet of floor space. The Company occupies approximately 30,000 square feet of a 60,000 square foot, three-story structure which the Company owns located in Los Angeles, California which serves as an administrative regional office for its western operations. The Company leases approximately 4,000 square feet of office space in each of Decatur, Georgia; Richardson, Texas; and owns approximately 4,000 square feet of office space in each of Melrose Park, Chicago; and Bayamon, Puerto Rico, all of which serve as administrative regional offices. Of the 604 store locations operated by the Company at February 1, 1997, 346 are owned and 258 are leased. Of the 258 leased store locations, 114 are fully leased and 144 are ground leases only. 14 The following table sets forth certain information regarding the owned and leased warehouse space utilized by the Company for its 604 store locations at February 1, 1997. Warehouse Products Square Owned or Stores States Location Warehoused Footage Leased Serviced Serviced - --------------------------------------------------------------------------- Los Angeles, CA All except 216,000 Owned 149 AZ, CA, NV tires Los Angeles, CA Tires 73,000 Leased 124 AZ, CA, NV Los Angeles, CA All except 137,000 Leased 149 AZ, CA, NV tires Phoenix, AZ All except 108,000 Owned 57 AZ, CO, NM, tires and NV, TX, UT chemicals Phoenix, AZ Tires and 56,000 Leased 57 AZ, CO, NM, chemicals NV, TX, UT Bridgeport, NJ All except 195,000 Owned 171 CT, DE, DC, tires MA, MD, MI, NH, NJ, NY, OH, PA, PR, RI, VA Bridgeport, NJ Tires and 273,000 Leased 171 CT, DE, DC, chemicals MA, MD, MI, NH, NJ, NY, OH, PA, PR, RI, VA Atlanta, GA All 392,000 Owned 147 AL, FL, GA, IL, IN, KY, NC, OH, PR, SC, TN, VA Mesquite, TX All 244,000 Owned 80 AR, KS, LA, MO, OK, TX --------- Total 1,694,000 ========= To meet its current expansion requirements the Company plans to open a 400,000 square foot, leased warehouse facility in Plainfield, Indiana in June 1997. Additionally, the Company plans to open a 240,000 square foot, leased warehouse facility in Northern California in late 1997. The Company anticipates that its existing and planned warehouse space will accommodate inventory necessary to support store expansion and any increase in stock-keeping units through the end of fiscal 1997. The Company is subject to federal, state and local provisions relating to the protection of the environment, including provisions with respect to the disposal of oil at its store locations. Estimated capital expenditures relating to compliance with such environmental provisions are not deemed material. 15 ITEM 3 LEGAL PROCEEDINGS The Company is a defendant in a purported class action entitled "Brian Lee, Anthony Baxton, and Harry Schlein v. The Pep Boys - Manny, Moe & Jack," United States District Court for the Southern District of Alabama, Southern Division. The action was originally filed on or about May 21, 1996 in the Circuit Court of Mobile County, Alabama. The Company has since removed the case to Federal Court, and the plaintiffs have filed a motion to remand the case back to Alabama State Court. The Company has also moved to dismiss the case for failure to state a claim. The plaintiffs' motion to remand and the Company's motion to dismiss are pending before the Federal District Court. In their complaint, the plaintiffs allege that the Company sold old or used automotive batteries to consumers as if those batteries were new. The complaint purports to state causes of action for fraud and deceit, negligent misrepresentation, breach of contract and violation of state consumer protection statutes. The plaintiffs are seeking compensatory and punitive damages, as well as injunctive and equitable relief. The Company believes the claims are without merit and intends to vigorously defend this action. The Company is also party to various other lawsuits and claims arising in the normal course of business. In the opinion of management, these lawsuits and claims, including the case above, are not singularly or in the aggregate, material to the Company's financial position or results of operations. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended February 1, 1997. 16 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of The Pep Boys - Manny, Moe & Jack is listed on the New York Stock Exchange under the symbol "PBY". There were 4,336 registered shareholders as of February 1, 1997. The following table sets forth for the periods listed, the high and low sale prices and the cash dividends paid on the Company's common stock. MARKET PRICE PER SHARE Market Price Per Share Cash Dividends Fiscal year ended February 1, 1997 High Low Per Share - ----------------------------------------------------------------------------- First Quarter 34 7/8 27 7/8 $.0525 Second Quarter 35 1/2 28 .0525 Third Quarter 38 1/4 29 1/8 .0525 Fourth Quarter 38 27 7/8 .0525 Fiscal year ended February 3, 1996 - ----------------------------------------------------------------------------- First Quarter 34 3/4 24 3/8 $.0475 Second Quarter 32 1/4 25 1/8 .0475 Third Quarter 29 1/8 22 1/2 .0475 Fourth Quarter 29 1/2 21 7/8 .0475 It is the present intention of the Company's Board of Directors to continue to pay regular quarterly cash dividends; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company and other factors which the Board of Directors deems relevant. 17 ITEM 6 SELECTED FINANCIAL DATA The following table sets forth the selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein. SELECTED FINANCIAL DATA (UNAUDITED) (dollar amounts in thousands, except per share amounts) Year ended Feb. 1, 1997 Feb. 3, 1996 Jan. 28, 1995 Jan. 29,1994 Jan. 30, 1993 STATEMENT OF EARNINGS DATA Merchandise sales $1,554,757 $1,355,008 $1,211,536 $1,076,543 $1,008,191 Service revenue 273,782 239,332 195,449 164,590 147,403 Total revenues 1,828,539 1,594,340 1,406,985 1,241,133 1,155,594 Gross profit from merchandise sales 484,494 411,133 364,378 307,861 272,412 Gross profit from service revenue 53,025 44,390 32,417 27,457 24,528 Total gross profit 537,519 455,523 396,795 335,318 296,940 Selling, general and administrative expenses 350,419 296,089 247,872 214,710 194,160 Operating profit 187,100 159,434 148,923 120,608 102,780 Nonoperating income 2,435 2,090 3,490 3,601 3,015 Interest expense 30,306 32,072 25,931 19,701 20,180 Earnings before income taxes and cumulative effect of change in accounting principle 159,229 129,452 126,482 104,508 85,615 Earnings before cumulative effect of change in accounting principle 100,824 81,494 80,008 65,512 54,579 Cumulative effect of change in accounting principle - - (4,300) - - Net earnings 100,824 81,494 75,708 65,512 54,579 BALANCE SHEET DATA Working capital $ 70,691 $ 39,868 $ 121,858 $ 92,518 $ 104,622 Current ratio 1.13 to 1 1.09 to 1 1.42 to 1 1.37 to 1 1.47 to 1 Merchandise inventories $ 520,082 $ 417,852 $ 366,843 $ 305,872 $ 295,179 Property and equipment-net 1,189,734 1,014,052 861,910 723,452 628,918 Total assets 1,818,365 1,500,008 1,291,019 1,078,518 967,813 Long-term debt (excludes convertible debt) 217,178 280,793 294,537 253,000 209,347 Convertible debt 238,487 86,250 86,250 - - Stockholders' equity 778,091 665,460 586,253 547,759 509,763 DATA PER COMMON SHARE Earnings before cumulative effect of change in accounting principle $ 1.62 $ 1.34 $ 1.32 $ 1.06 $ .90 Cumulative effect of change in accounting principle - - (.07) - - Net earnings 1.62 1.34 1.25 1.06 .90 Cash dividends .21 .19 .17 .15 .1375 Stockholders' equity 12.33 10.72 9.53 8.97 8.40 Common share price range: high-low 38 1/4-27 7/8 34 3/4-21 7/8 36 7/8-26 27 1/2-20 1/2 27 3/8-17 1/8 OTHER STATISTICS Return on average stockholders' equity 14.0% 13.0% 13.4% 12.4% 12.3% Common shares outstanding 63,119,491 62,084,021 61,501,679 61,060,055 60,669,102 Capital expenditures $ 245,246 $ 205,913 $ 185,072 $ 135,165 $ 78,025 Number of retail outlets 604 506 435 386 357 <FN> 18 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table presents for the periods indicated certain items in the consolidated statements of earnings as a percentage of total revenues (except as otherwise provided) and the percentage change in dollar amounts of such items compared to the indicated prior period. Percentage of Total Revenues Percentage Change ----------------------------------------- --------------------------------- Feb. 1, 1997 Feb. 3, 1996 Jan. 28, 1995 Fiscal 1996 vs. Fiscal 1995 vs. Year ended (Fiscal 1996) (Fiscal 1995) (Fiscal 1994) Fiscal 1995 Fiscal 1994 - ------------------------- ------------- ------------- ------------- --------------- --------------- Merchandise Sales............ 85.0% 85.0% 86.1% 14.7% 11.8% Service Revenue(1)........... 15.0 15.0 13.9 14.4 22.5 ------------- ------------- ------------- --------------- --------------- Total Revenues 100.0 100.0 100.0 14.7 13.3 Costs of Merchandise Sales(2) 68.8(3) 69.7(3) 69.9(3) 13.4 11.4 Costs of Service Revenue(2).. 80.6(3) 81.5(3) 83.4(3) 13.2 19.6 ------------- ------------- ------------- --------------- --------------- Total Costs of Revenues...... 70.6 71.4 71.8 13.4 12.7 Gross Profit from Merchandise Sales 31.2(3) 30.3(3) 30.1(3) 17.8 12.8 Gross Profit from Service Revenue. 19.4(3) 18.5(3) 16.6(3) 19.5 36.9 ------------- ------------- ------------- --------------- --------------- Total Gross Profit........... 29.4 28.6 28.2 18.0 14.8 Selling, General and Administrative Expenses.... 19.2 18.6 17.6 18.3 19.5 ------------- ------------- ------------- --------------- --------------- Operating Profit............. 10.2 10.0 10.6 17.4 7.1 Nonoperating Income.......... .1 .1 .2 16.5 (40.1) Interest Expense............. 1.6 2.0 1.8 (5.5) 23.7 ------------- ------------- ------------- --------------- -------------- Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle....... 8.7 8.1 9.0 23.0 2.3 Income Taxes................. 36.7(4) 37.0(4) 36.7(4) 21.8 3.2 ------------- ------------- ------------- --------------- -------------- Earnings Before Cumulative Effect of Change in Accounting Principle 5.5 5.1 5.7 23.7 1.9 Cumulative Effect of Change in Accounting Principle....... - - (.3) - - ------------- ------------- -------------- -------------- ------------- Net Earnings 5.5 5.1 5.4 23.7 7.6 ============= ============= ============== ============== ============= <FN> (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 and cumulative effect of change in accounting principle. 19 FISCAL 1996 vs. FISCAL 1995 Total revenues for fiscal 1996, which included 52 weeks, increased 15% over fiscal 1995, which included 53 weeks, due to a higher store count (604 at February 1, 1997 compared with 506 at February 3, 1996) coupled with a 4% increase in comparable store revenues (revenues generated by stores in operation during the same months of each period). Comparable store merchandise sales increased 4% while comparable store service revenue increased 6%. The increase in gross profit from merchandise sales, as a percentage of merchandise sales, was due primarily to significantly higher merchandise margins and a decrease in warehousing costs, offset, in part, by an increase in store occupancy costs. The increase in gross profit from service revenue, as a percentage of service revenue, was due primarily to a decrease in service center employee benefits expense. The increase in selling, general and administrative expenses, as a percentage of total revenues, was due primarily to increases in store expenses and general office costs. Interest expense decreased, as a percentage of total revenues, due primarily to lower interest rates, partially offset by higher debt levels incurred to fund the Company's store expansion program. The 24% increase in net earnings in fiscal 1996, as compared with fiscal 1995, was due primarily to increases in total and comparable store revenues, a substantial increase in gross profit from merchandise sales, as a percentage of merchandise sales, an increase in gross profit from service revenue, as a percentage of service revenue and lower interest expense, as a percentage of total revenues, offset, in part, by higher selling, general and administrative expenses, as a percentage of total revenues. FISCAL 1995 vs. FISCAL 1994 Total revenues for fiscal 1995, which included 53 weeks, increased 13% over fiscal 1994 due to a higher store count (506 at February 3, 1996 compared with 435 at January 28, 1995). Comparable store revenues (revenues generated by stores in operation during the same months of each period) increased 1%. Comparable store merchandise sales decreased 1% while comparable store service revenue increased 7%. The increase in gross profit from merchandise sales, as a percentage of merchandise sales, was due primarily to higher merchandise margins, offset, in part, by increases in store occupancy and warehousing costs. The increase in gross profit from service revenue, as a percentage of service revenue, was due primarily to decreases in service payroll and service center occupancy costs. The increase in selling, general and administrative expenses, as a percentage of total revenues, was due primarily to increases in store, general office and employee benefits expenses, offset, in part, by a decrease in media costs. 20 The 24% increase in interest expense was due to higher debt levels incurred during the year to fund the Company's store expansion program coupled with higher interest rates. The 2% increase in net earnings before the cumulative effect of a change in accounting principle in fiscal 1995, as compared with fiscal 1994, was due primarily to increases in gross profit from merchandise sales, as a percentage of merchandise sales, and gross profit from service revenue, as a percentage of service revenue, offset, in part, by increases in selling, general and administrative expenses and interest expense, as a percentage of total revenues. EFFECTS OF INFLATION The Company uses the LIFO method of inventory valuation. Thus, the cost of merchandise sold approximates current cost. Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on revenues or results of operations during fiscal 1996, fiscal 1995 or fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements arise principally from the need to finance the acquisition, construction and equipping of new stores and to purchase inventory. The Company opened 100 stores in fiscal 1996, 75 stores in fiscal 1995 and 51 stores in fiscal 1994. In fiscal 1996, with increased levels of capital expenditures, the Company increased its debt by $43,550,000. In fiscal 1995, with an increase in cash from operating activities, the Company decreased its debt by $22,507,000. In fiscal 1994, with increased levels of capital expenditures coupled with cash utilized to purchase its stock for transfer to the Flexitrust, a flexible employee benefits trust (established April 29, 1994 to fund a portion of the Company's obligations arising from various employee compensation and benefit plans and holding 2,232,500 shares of Common Stock as of February 1, 1997), the Company increased its debt by $182,859,000. 21 The following table indicates the Company's principal cash requirements for the past three years. (dollar amounts Fiscal Fiscal Fiscal in thousands) 1996 1995 1994 Total - ---------------------------------------------------------------------------- Cash Requirements: Capital expenditures $245,246 $205,913 $185,072 $636,231 Net inventory (decrease) increase(1) (12,782) (71,351) 87,248 3,115 - ---------------------------------------------------------------------------- Total $232,464 $134,562 $272,320 $639,346 - ---------------------------------------------------------------------------- Net cash provided by operating activities (excluding the change in net inventory) $169,811 $159,968 $124,368 $454,147 -------------------------------------------------------------------------- 1 Net inventory (decrease) increase is the change in inventory less the change in accounts payable. Inventories have increased in the past three years as the Company added a net of 218 stores while the average number of stock-keeping units per store rose during the period from approximately 24,000 to approximately 27,000, many of which are higher cost hard parts. The Company currently plans to open approximately 120 new stores in fiscal 1997. Management estimates that the cost to open all 120 stores, coupled with capital expenditures relating to existing stores, warehouses and offices during fiscal 1997, will be approximately $250,000,000. The funds required to finance the store expansion, including related inventory requirements, are expected to come primarily from operating activities, with the remainder provided by unused lines of credit, which totaled $266,000,000 at February 1, 1997, or from accessing traditional lending sources which may include the public capital markets. On August 25, 1994, the Company sold $86,250,000 of 4% convertible subordinated notes due September 1, 1999. Proceeds were used to repay portions of the Company's short-term variable-rate bank debt. On April 21, 1995, the Company amended and restated a revolving credit agreement it had with several major banks to increase the amount of borrowings provided from up to $100,000,000 to up to $200,000,000. At the Company's option, the interest rate on any loan may be based on (i) the higher of the Federal funds rate plus 1/4% or the prime rate, (ii) LIBOR plus up to .63% or (iii) a negotiated rate based upon market conditions. On June 12, 1995, the Company sold $100,000,000 of 7% Notes due June 1, 2005. Proceeds were used to repay portions of the Company's long-term variable-rate bank debt, and for general corporate purposes. 22 On September 20, 1996, the Company received net proceeds of $146,250,000 from the sale of zero coupon subordinated Liquid Yield Option Notes due 2011 which have an aggregate principal amount at maturity of $271,704,000. The notes were issued at a discount representing a yield to maturity of 4%. Proceeds from the notes were used to repay the Company's short-term variable-rate bank debt and portions of the Company's long-term variable-rate bank debt and for general corporate purposes. The Company's working capital was $70,691,000 at February 1, 1997, $39,868,000 at February 3, 1996 and $121,858,000 at January 28, 1995. The Company's long-term debt, as a percentage of its total capitalization, was 37% at February 1, 1997, 36% at February 3, 1996 and 39% at January 28, 1995. FUTURE ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." This new standard requires dual presentation of basic and diluted earnings per share (EPS) on the face of the statement of earnings and requires reconciliation of the numerators and denominators of the basic and diluted EPS calculations. This statement will be effective for the fourth quarter of the Company's 1997 fiscal year. Assuming the Company had adopted the provisions of SFAS No. 128, the pro forma effect on the Company's EPS calculations for the last three fiscal years are as follows: 1996 - as reported: $1.62, basic: $1.67; 1995 - as reported: $1.34, basic: $1.37; and 1994 - as reported: $1.25, basic: $1.28. For the fiscal year ended January 28, 1995, both as reported and pro forma basic EPS information include a $.07 per share charge from the cumulative effect of an accounting change for postemployment benefits. The Company's reported EPS calculations are the same as pro forma diluted EPS. 23 ITEM 8 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders The Pep Boys - Manny, Moe & Jack We have audited the accompanying consolidated balance sheets of The Pep Boys - Manny, Moe & Jack and subsidiaries as of February 1, 1997 and February 3, 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended February 1, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Pep Boys - Manny, Moe & Jack and subsidiaries at February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note A to the consolidated financial statements, in 1994 the Company changed its method of accounting for postemployment benefits to conform with Statement of Financial Accounting Standards No. 112. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 18, 1997 24 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands, except per share amounts) February 1, February 3, 1997 1996 ----------- ----------- ASSETS Current Assets: Cash ........................................... $ 2,589 $ 11,487 Accounts receivable, less allowance for uncollectible accounts of $252 and $251....... 7,653 4,165 Merchandise inventories......................... 520,082 417,852 Prepaid expenses................................ 33,042 15,628 Deferred income taxes........................... 16,982 16,338 Other........................................... 24,570 1,003 ---------- ---------- Total Current Assets........................ 604,918 466,473 Property and Equipment - at cost: Land............................................ 278,345 243,738 Building and improvements....................... 794,244 695,029 Furniture, fixtures and equipment............... 448,425 356,605 Construction in progress........................ 22,528 12,431 ---------- ---------- 1,543,542 1,307,803 Less accumulated depreciation and amortization.. 353,808 293,751 ---------- ---------- Total Property and Equipment................ 1,189,734 1,014,052 Other............................................. 23,713 19,483 ---------- ---------- $1,818,365 $1,500,008 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................. $ 337,536 $ 222,524 Accrued expenses................................. 133,557 95,875 Short-term borrowings............................ 63,000 - Current maturities of long-term debt............. 134 108,206 ---------- ---------- Total Current Liabilities.................... 534,227 426,605 ---------- ---------- Long-Term Debt, less current maturities............ 217,178 280,793 Deferred Income Taxes.............................. 50,382 40,900 Convertible Subordinated Notes..................... 86,250 86,250 Zero Coupon Convertible Subordinated Notes......... 152,237 - Commitments and Contingencies Stockholders' Equity: Common Stock, par value $1 per share: Authorized 500,000,000 shares; Issued and outstanding 63,119,491 and 62,084,021............................. 63,119 62,084 Additional paid-in capital....................... 162,660 139,202 Retained earnings................................ 612,581 524,443 ---------- ---------- 838,360 725,729 Less cost of shares in benefits trust - 2,232,500 shares, at cost.................... 60,269 60,269 ---------- ---------- Total Stockholders' Equity................... 778,091 665,460 ---------- ---------- Total Stockholders' Equity.............. $1,818,365 $1,500,008 ========== ========== <FN> See notes to consolidated financial statements. 25 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (dollar amounts in thousands, except per share amounts) February 1, February 3, January 28, Year ended 1997 1996 1995 - ----------------------------------- ----------- ----------- ----------- Merchandise Sales.................. $1,554,757 $1,355,008 $1,211,536 Service Revenue.................... 273,782 239,332 195,449 ---------- ---------- ---------- Total Revenues..................... 1,828,539 1,594,340 1,406,985 ---------- ---------- ---------- Costs of Merchandise Sales......... 1,070,263 943,875 847,158 Costs of Service Revenue........... 220,757 194,942 163,032 ---------- ---------- ---------- Total Costs of Revenues............ 1,291,020 1,138,817 1,010,190 ---------- ---------- ---------- Gross Profit from Merchandise Sales 484,494 411,133 364,378 Gross Profit from Service Revenue.. 53,025 44,390 32,417 ---------- ---------- ---------- Total Gross Profit................. 537,519 455,523 396,795 Selling, General and Administrative Expenses......................... 350,419 296,089 247,872 ---------- ---------- ---------- Operating Profit................... 187,100 159,434 148,923 Nonoperating Income................ 2,435 2,090 3,490 Interest Expense................... 30,306 32,072 25,931 ---------- ---------- ---------- Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle............. 159,229 129,452 126,482 Income Taxes....................... 58,405 47,958 46,474 ---------- ---------- ---------- Earnings Before Cumulative Effect of Change in Accounting Principle 100,824 81,494 80,008 Cumulative Effect of Change in Accounting Principle............. - - (4,300) ---------- ---------- --------- Net Earnings $ 100,824 $ 81,494 $ 75,708 ========== ========== ========= Earnings per Share Before Cumulative Effect of Change in Accounting Principle............. $ 1.62 $ 1.34 $ 1.32 Cumulative Effect of Change in Accounting Principle............. - - (.07) ---------- ---------- --------- Net Earnings per Share $ 1.62 $ 1.34 $ 1.25 ========== ========== ========= <FN> See notes to consolidated financial statements. 26 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollar amounts in thousands, except per share amounts) Common Stock Additional Total ------------------- Paid-in Retained Treasury Benefits Stockholders' Shares Amount Capital Earnings Stock Trust Equity ---------- ------- -------- --------- --------- --------- ------------ Balance, January 29, 1994 61,060,055 $61,060 $122,977 $388,653 $(24,931) $ - $547,759 Net earnings.................... 75,708 75,708 Cash dividends ($.17 per share). (10,073) (10,073) Exercise of stock options and related tax benefits...... 427,543 428 7,568 7,996 Dividend reinvestment plan...... 14,081 14 421 435 Acquisitions and transfers of 75,000 shares to employees' savings plan....... (122) 807 685 Acquisitions and transfers of 2,232,500 shares of treasury stock to benefits trust................ (112) 24,124 (60,269) (36,257) ---------- ------- --------- -------- ------- --------- ---------- Balance, January 28, 1995...... 61,501,679 61,502 130,732 454,288 - (60,269) 586,253 Net earnings................... 81,494 81,494 Cash dividends ($.19 per share) (11,339) (11,339) Exercise of stock options and related tax benefits..... 555,471 555 7,829 8,384 Dividend reinvestment plan..... 26,871 27 662 689 Acquisitions and transfers of 140,000 shares to employees' savings plan...... (21) (21) ---------- ------- ---------- --------- --------- --------- --------- Balance, February 3, 1996...... 62,084,021 62,084 139,202 524,443 - (60,269) 665,460 Net earnings................... 100,824 100,824 Cash dividends ($.21 per share) (12,686) (12,686) Exercise of stock options and related tax benefits..... 1,002,333 1,002 22,977 23,979 Dividend reinvestment plan..... 33,137 33 1,025 1,058 Acquisitions and transfers of 150,500 shares to employees' savings plan...... (544) (544) ---------- ------- --------- --------- --------- --------- --------- Balance, February 1, 1997 63,119,491 $63,119 $162,660 $612,581 $ - $(60,269) $778,091 ========== ======= ========= ========= ========= ========= ========= <FN> See notes to consolidated financial statements. 27 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollar amounts in thousands) February 1, February 3, January 28, Year ended 1997 1996 1995 - ------------------------------------------------------- ---------- ----------- ----------- Cash Flows from Operating Activities: Net earnings.......................................... $ 100,824 $ 81,494 $ 75,708 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and amortization......................... 65,757 53,456 44,402 Accretion of discount on zero coupon convertible subordinated notes................................... 2,238 - - Cumulative effect of accounting change................ - - 4,300 Increase in deferred income taxes..................... 8,838 2,034 5,611 Loss (gain) from sales of assets...................... (34) 201 (1,406) Changes in operating assets and liabilities: Increase in accounts receivable, prepaid expenses and other........................................... (44,950) (2,445) (7,854) Increase in merchandise inventories................... (102,230) (51,009) (60,971) Increase (decrease) in accounts payable............... 115,012 122,360 (26,277) Increase in accrued expenses.......................... 37,138 25,228 3,607 ---------- ---------- ---------- Total Adjustments.................................. 81,769 149,825 (38,588) ---------- ---------- ---------- Net Cash Provided by Operating Activities.......... 182,593 231,319 37,120 ---------- ---------- ---------- Cash Flows from Investing Activities: Capital expenditures.................................. (245,246) (205,913) (183,872) Proceeds from sales of assets......................... 3,841 114 3,437 Other, net............................................ - - 116 ---------- ---------- ---------- Net Cash Used in Investing Activities.............. (241,405) (205,799) (180,319) ---------- ---------- ---------- Cash Flows from Financing Activities: Net (payments) borrowings under line of credit agreements.......................................... (1,500) (102,700) 117,700 Reduction of long-term debt........................... (107,187) (19,807) (22,291) Dividends paid........................................ (12,686) (11,339) (10,073) Net proceeds from issuance of notes................... 146,250 98,992 85,387 Acquisitions of treasury stock........................ - - (36,257) Proceeds from exercise of stock options............... 23,979 8,384 7,996 Proceeds from dividend reinvestment plan.............. 1,058 689 435 ---------- ---------- ---------- Net Cash Provided by (Used in) Financing Activities 49,914 (25,781) 142,897 ---------- ---------- ---------- Net Decrease in Cash.................................... (8,898) (261) (302) Cash at Beginning of Year............................... 11,487 11,748 12,050 ---------- ---------- ---------- Cash at End of Year..................................... $ 2,589 $ 11,487 $ 11,748 ========== ========== ========== ................................................................................................ Supplemental Disclosure of Cash Flow Information: Income taxes paid..................................... $ 56,336 $ 40,251 $ 46,384 Interest paid, net of amounts capitalized............. 34,081 30,155 23,959 ................................................................................................ Supplemental Disclosure of Noncash Financing Activities: Mortgage note assumed in property acquisition.......... $ - $ - $ 1,200 ................................................................................................ <FN> See notes to consolidated financial statements. 28 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 1, 1997, February 3, 1996 and January 28, 1995 (dollar amounts in thousands, except per share amounts) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS The Pep Boys - Manny, Moe & Jack and Subsidiaries (the "Company") is engaged principally in the retail sale of automotive parts and accessories, automotive maintenance and service and the installation of parts through a chain of 604 stores at February 1, 1997. The Company currently operates stores in 33 states, Washington, D.C. and Puerto Rico. FISCAL YEAR END The Company's fiscal year ends on the Saturday nearest to January 31. Fiscal years 1996, 1995 and 1994 were comprised of 52 weeks, 53 weeks and 52 weeks, respectively. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost (last-in, first-out method) or market. If the first-in, first-out method of valuing inventories had been used, inventories would have been approximately $3,300 and $10,491 higher at February 1, 1997 and February 3, 1996, respectively. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 1/2 to 40 years; furniture, fixtures and equipment, 3 to 10 years. CAPITALIZED INTEREST Interest on borrowed funds is capitalized in connection with the construction of certain long-term assets. Capitalized interest amounted to $1,575, $1,407 and $1,850 in fiscal years 1996, 1995 and 1994, respectively. SERVICE REVENUE Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. COSTS OF REVENUES Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. PENSION EXPENSE Annual pension expense is actuarially computed using the "projected unit credit method" which attributes an equal portion of total projected benefits to each year of employee service. INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities. ADVERTISING The Company expenses the production costs of advertising the first time the advertising takes place. No advertising costs were reported as an asset as of February 1, 1997. Net advertising expense for fiscal years 1996, 1995 and 1994 was $324, $973 and $2,999, respectively. POSTEMPLOYMENT BENEFITS Effective January 30, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement establishes accrual accounting standards for employer-provided benefits which cover former or inactive employees after employment, but before retirement. As a result of adopting this standard, the Company recognized a charge to earnings in fiscal 1994 of $4,300, net of income tax benefit of $2,552. 29 IMPAIRMENT OF LONG-LIVED ASSETS Effective February 4, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This standard prescribes the method for asset impairment evaluation for long-lived assets and certain identifiable intangibles that are either held and used or to be disposed of. The implementation of this standard did not have an effect on the Company's financial position or results of operations. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," on February 4, 1996. As permitted by SFAS No. 123, the Company is accounting for employee stock-based compensation plans in accordance with Accounting Principles Board (APB) opinion No. 25, "Accounting for Stock Issued to Employees," and has provided disclosures required by SFAS No. 123. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This new standard requires dual presentation of basic and diluted earnings per share (EPS) on the face of the statement of earnings and requires reconciliation of the numerators and denominators of the basic and diluted EPS calculations. This statement will be effective for the fourth quarter of the Company's 1997 fiscal year. Assuming the Company had adopted the provisions of SFAS No. 128, the pro forma effect on the Company's EPS calculations for the last three fiscal years are as follows: 1996 - as reported: $1.62, basic: $1.67; 1995 - as reported: $1.34, basic: $1.37; 1994 - as reported: $1.25, basic: $1.28. For the fiscal year ended January 28, 1995, both as reported and pro forma basic EPS information include a $.07 per share charge from the cumulative effect of an accounting change for postemployment benefits. The Company's reported EPS calculations are the same as pro forma diluted EPS. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the current year's presentation. 30 NOTE B - DEBT SHORT-TERM BORROWINGS The Company had short-term borrowings of $63,000 at February 1, 1997. The Company had short-term lines of credit with several banks totaling $159,000 at February 1, 1997. The interest rates on these lines were negotiated based upon market conditions. The weighted average interest rate on borrowings from these lines was 5.8% at February 1, 1997. The average and maximum month end balances on these borrowings were $98,696 and $154,200 during fiscal 1996. There were no borrowings classified as short-term at February 3, 1996. LONG-TERM DEBT ............................................................................... Feb. 1, Feb. 3, 1997 1996 -------- -------- 8 7/8% notes due April 15, 1996 (a)................. $ - $107,040 7% notes due June 1, 2005 .......................... 100,000 100,000 Indebtedness to banks under revolving credit agreement dated April 21, 1995 (b)............................... 40,000 80,000 6 5/8% notes due May 15, 2003 ...................... 75,000 75,000 Other revolving lines of credit (c)................. - 24,500 Mortgage notes payable at annual interest rates ranging from 5.8% to 8.0% (d)...................................... 2,312 2,459 -------- -------- 217,312 388,999 Less current maturities.......................... 134 108,206 -------- -------- Total long-term debt................................ $217,178 $280,793 ======== ======== ............................................................................. (a) The 8 7/8% notes were extinguished on April 15, 1996. (b) The Company has a revolving credit agreement with ten major banks providing for borrowings of up to $200,000. Funds may be drawn and repaid anytime prior to March 30, 2001. Sixty days prior to each anniversary date, the Company may request, and upon agreement of each bank, extend the maturity of this facility an additional year. If one of that banks fails to agree to this extension, the Company has the right to replace the bank. At the Company's option, the interest rate on any loan may be based on (i) the higher of the federal funds rate plus 1/4% or the prime rate, (ii) LIBOR plus up to .63% or (iii) a negotiated rate based upon market conditions. The weighted average interest rate was 5.7% at February 1, 1997 and 5.8% at February 3, 1996. (c) The Company had short-term lines of credit with several banks totaling $144,000 at February 3, 1996. Borrowings under these lines of credit at February 3, 1996 totaling $24,500 were classified as long-term debt. The weighted average interest rate on borrowings from these lines was 5.5% at February 3, 1996. The interest rates on these lines were negotiated based upon market conditions. The average and maximum month end balances on these borrowings were $44,400 and $102,300 during fiscal 1995. The Company has a revolving credit agreement with a bank which permits the Company to borrow an aggregate of $10,000. Upon the bank's demand, this line is due and payable in 13 months. There were no borrowings outstanding under this agreement at February 1, 1997 and February 3, 1996. The interest rate on this line, at the Company's election, is based on the prime rate, a "CD-based" rate, a "LIBOR-based" rate or a negotiated rate based upon market conditions. (d) The weighted average interest rate on the mortgage notes payable was 6.9% at February 1, 1997 and February 3, 1996. These notes, which mature at various times through August 2016, are collateralized by land and building with an aggregate carrying value of approximately $7,862 at February 1, 1997. 31 CONVERTIBLE SUBORDINATED NOTES On August 24, 1994 the Company sold $86,250 of 4% convertible subordinated notes. These notes are convertible by the holders into the common stock of the Company at any time on or before September 1, 1999 (the maturity date) at a conversion price of $41 per share subject to adjustment in certain events. The notes are redeemable, in whole or in part, at the option of the Company at any time on or after September 15, 1997, at a redemption price of 101% of the principal amount and at par on or after September 1, 1998. The notes are subordinated to all existing and future senior indebtedness of the Company. ZERO COUPON CONVERTIBLE SUBORDINATED NOTES On September 20, 1996, the Company issued $271,704 principal amount (at maturity) of Liquid Yield Option Notes (LYONs) with a price to the public of $150,000. The net proceeds to the Company were $146,250. The issue price of each such LYON was $552.07 and there will be no periodic payments of interest. The LYONs will mature on September 20, 2011, at $1,000 per LYON, representing a yield to maturity of 4.0% per annum (computed on a semiannual bond equivalent basis). Each LYON is convertible at the option of the holder at any time on or prior to maturity, unless previously redeemed or otherwise purchased, into common stock of the Company at a conversion rate of 12.929 shares per LYON. The LYONs are redeemable at the option of the holder on September 20, 2001 and September 20, 2006 at the issue price plus accrued original issue discount. The Company, at its option, may elect to pay the purchase price on any such purchase date in cash or common stock, or any combination thereof. No LYONs were converted in 1996. In addition, on or prior to September 20, 2001, the Company will purchase for cash any LYON, at the option of the holder, in the event of change in control of the Company. The LYONs are subordinated to all existing and future senior indebtedness of the Company. Several of the Company's debt agreements require the maintenance of certain financial ratios and covenants. Approximately $84,774 of the Company's net worth was not restricted by these covenants at fiscal year end. The Company is in compliance with all debt covenants at February 1, 1997. The annual maturities of all long-term debt for the next five years are $134 in 1997, $157 in 1998, $86,420 in 1999, $183 in 2000 and $40,197 in 2001. Any compensating balance requirements related to all revolving credit agreements and debt were satisfied by balances available from normal business operations. The Company was contingently liable for outstanding letters of credit in the amount of approximately $29,097 at February 1, 1997. NOTE C - LEASE COMMITMENTS The Company leases certain property and equipment under operating leases which contain renewal and escalation clauses. Aggregate minimum rental commitments for leases having noncancelable lease terms of more than one year are approximately: 1997 - $30,910; 1998 - $29,876; 1999 - $28,834; 2000 - $28,474; 2001 - $28,817; thereafter - $320,560. Rental expenses incurred for operating leases in 1996, 1995 and 1994 were $33,616, $22,302 and $18,474, respectively. NOTE D - STOCKHOLDERS' EQUITY RIGHTS AGREEMENT On December 31, 1987, the Company distributed as a dividend one common share purchase right on each of its common shares. The rights will not be exercisable or transferable apart from the Company's common stock until a person or group, as defined in the rights agreement (dated December 17, 1987 and as amended on June 6, 1989), without the proper consent of the Company's Board of Directors, acquires 20% or more, or makes an offer to acquire 30% or more of the Company's outstanding stock, exclusive of stock holdings as of December 17, 1987. When exercisable, the rights entitle the holder to purchase one share of the Company's common stock for $55. Under certain circumstances, including the acquisition of 20% of the Company's stock by a person or group, the rights entitle the holder to purchase common stock of the Company or common stock of an acquiring company having a market value of twice the exercise price of the right. The rights do not have voting power and are subject to redemption by the Company's Board of Directors for $.02 per right anytime before a 20% position has been acquired and for 15 days thereafter, at which time the rights become nonredeemable. The rights expire on December 31, 1997. BENEFITS TRUST On April 29, 1994, the Company established a flexible employee benefits trust with the intention of purchasing up to $75,000 worth of the Company's common shares. The repurchased shares will be held in the trust and will be used to fund the Company's existing benefit plan obligations including healthcare programs, savings and retirement plans and other benefit obligations. The trust will allocate or sell the repurchased shares over the next 15 years to fund these benefit programs. As shares are released from the trust, the Company will charge or credit additional paid-in capital for the difference between the fair value of shares released and the original cost of the shares to the trust. For financial reporting purposes, the trust is consolidated with the accounts of the Company. All dividend and interest transactions between the trust and the Company are eliminated. 32 As of February 1, 1997, the Company has repurchased 2,232,500 shares of its common stock at a cost of $60,269 which is shown as "Cost of shares in benefits trust" on the Company's consolidated balance sheets. NOTE E - PENSION AND SAVINGS PLANS The Company has a pension plan covering substantially all of its full-time employees hired on or before February 1, 1992. Normal retirement age is 65. Pension benefits are based on salary and years of service. The Company's policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of ERISA. The actuarial computations using the "projected unit credit method" assumed a discount rate on benefit obligations of 7.5% in 1996 and 8.5% in 1995 and 7.8% in 1994, and an expected long-term rate of return on plan assets of 8.5%. The assumption for annual salary increases over the average remaining service lives of employees under the plan was 4% in 1996, 1995 and 1994. Variances between actual experience and assumptions for costs and returns on assets are amortized over the remaining service lives of employees under the plan. As of December 31,1996, the Company froze the accrued benefits under the plan and active participants became fully vested. The plans' trustee will continue to maintain and invest plan assets and will administer benefit payments. In accordance with SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," a curtailment gain of $1,554 was recognized in 1996. 33 Pension expense includes the following: Feb. 1, Feb. 3, Jan. 28, Year Ended 1997 1996 1995 -------- -------- -------- Normal service costs................ $1,213 $ 968 $ 1,516 Interest cost on projected benefit obligation................ 1,561 1,382 1,413 Actual return on plan assets........ (752) (720) (1,706) Net amortization of transition asset and unrecognized net gain... (214) (759) (214) Prior service cost.................. 19 19 19 Asset (gain) loss deferred.......... (974) (1,013) 56 -------- -------- -------- Total pension expense (income)...... $ 853 $ (123) $ 1,084 ======== ======== ======== Pension plan assets are stated at fair market value and are composed primarily of money market funds, fixed income investments with maturities of less than five years and the Company's common stock. The following table sets forth the reconciliation of the plan's funded status as of December 31 of each year. The actuarial present value of benefit obligation assumed a discount rate of 7.5% at December 31, 1996 and at December 31, 1995. Dec. 31, Dec. 31, 1996 1995 ---------- ---------- Actuarial present value of benefit obligation: Vested benefit obligation....................... $(22,076) $(18,532) ---------- ---------- Accumulated benefit obligation.................. $(22,076) $(19,389) ---------- ---------- Projected benefit obligation for service rendered to date..................... $(22,076) $(21,931) Plan assets at fair value....................... 20,815 20,501 ---------- ---------- Assets less than projected benefit obligation... (1,261) (1,430) Unrecognized net asset (at date of transition).. (1,071) (1,285) Unrecognized net gain from past experience different from previous assumption................................... - (384) Unrecognized prior service cost................. - 66 ---------- ---------- Accrued pension expense as of February 1, 1997 and February 3, 1996, respectively............... $ (2,332) $ (3,033) ========== ========== The Company has a 401(k) savings plan which covers all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant's contributions or 3% of the participant's compensation. The Company's savings plan contribution expense was $3,685 in 1996, $3,150 in 1995 and $2,563 in 1994. 34 NOTE F - INCOME TAXES The provision for income taxes includes the following: Feb. 1, Feb. 3, Jan. 28, Year ended 1997 1996 1995 - -------------------------------- --------- --------- --------- Current: Federal...................... $45,831 $42,276 $39,210 State........................ 3,761 3,648 4,205 Deferred: Federal...................... 8,225 1,905 2,865 State........................ 588 129 194 --------- --------- --------- $58,405 $47,958 $46,474 ========= ========= ========= A reconciliation of the statutory federal income tax rate to the effective rate of the provision for income taxes follows: Feb. 1, Feb. 3, Jan. 28, Year ended 1997 1996 1995 - -------------------------------- --------- --------- --------- Statutory tax rate.............. 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits................. 1.8 1.9 2.3 Other, net...................... (.1) .1 (.6) --------- --------- --------- 36.7% 37.0% 36.7% ========= ========= ========= Deferred income taxes relate to the following temporary differences: Feb. 1, Feb. 3, Jan. 28, Year ended 1997 1996 1995 - -------------------------------- --------- --------- --------- Depreciation.................... $ 9,330 $ 6,420 $ 4,594 Inventories..................... (1,593) (2,551) 257 Vacation accrual................ (593) (522) (259) Pension accrual................. 263 47 (406) Casualty gain................... - - 1,289 Insurance....................... 1,096 (1,143) (2,459) All other....................... 310 (217) 43 --------- --------- --------- $ 8,813 $ 2,034 $ 3,059 ========= ========= ========= 35 The following are components of the net deferred tax accounts as of February 1, 1997: Federal State Total ------- ------ ------ Deferred tax assets: Current...................... $26,426 $1,883 $28,309 Long-term.................... 18,720 1,337 20,057 Deferred tax liabilities: Current...................... 10,572 755 11,327 Long-term.................... 65,748 4,691 70,439 The following are components of the net deferred tax accounts as of February 3, 1996: Federal State Total ------- ------ ------- Deferred tax assets: Current....................... $22,191 $1,504 $23,695 Long-term..................... 15,171 1,028 16,199 Deferred tax liabilities: Current....................... 6,890 467 7,357 Long-term..................... 53,475 3,624 57,099 Items that gave rise to significant portions of the deferred tax accounts are as follows: Feb. 1, Feb. 3, Year ended 1997 1996 - -------------------------- --------- -------- Deferred tax assets: Inventories................. $10,075 $ 8,911 Vacation accrual............ 3,600 2,999 Other....................... 3,250 4,428 --------- -------- $16,925 $16,338 ========= ======== Deferred tax liabilities: Depreciation................ $48,507 $38,998 Other....................... 1,794 1,902 --------- -------- $50,301 $40,900 ========= ======== NOTE G - NET EARNINGS PER SHARE Net earnings per share is computed by dividing net earnings (adjusted by adding after-tax interest on convertible securities) by the weighted average number of common shares outstanding after giving effect to dilutive stock options and shares assumed to be issued upon conversion of the Company's convertible securities, and after reduction for shares held in benefits trust. Primary and fully diluted earnings per share are essentially the same. The adjustments to net earnings were: $3,577 in 1996, $2,200 in 1995, and $897 in 1994. The weighted average number of shares and share equivalents used were: 64,605,000 in 1996, 62,588,000 in 1995 and 61,438,000 in 1994. 36 NOTE H - STOCK OPTIONS PLANS Options to purchase the Company's common stock have been granted to key employees and certain members of the Board of Directors. The option prices are at least 100% of the fair market value of the common stock on the grant date. Under the terms of the Company's Incentive Stock Option Plan adopted in 1982, options to purchase up to 3,600,000 shares of the Company's common stock were authorized. Options granted prior to 1988 are exercisable from the date of grant. Options granted in 1988 and thereafter are exercisable on the second anniversary of the grant date. All options under this plan cannot be exercised more than ten years from the grant date. As of May 21, 1990, no additional options will be granted under this plan. Under the terms of the Company's Nonqualified Stock Option Plans, adopted in 1984 and 1985, options to purchase up to 3,300,000 shares of the Company's common stock were authorized. The options became exercisable over a five-year period with one-fifth exercisable on the grant date and one-fifth on each anniversary date for the four years following the grant date. Options granted cannot be exercised more than ten and one-half years after the grant date. As of May 21, 1990, no additional options will be granted under these plans. On May 21, 1990, the stockholders approved the 1990 Stock Incentive Plan which authorized the issuance of restricted stock and/or options to purchase up to 1,000,000 shares of the Company's common stock. An additional 1,500,000 shares were authorized by stockholders on each of May 31, 1995 and June 1, 1993. Under this plan, both incentive and nonqualified stock options may be granted to eligible participants. Incentive stock options are exercisable on the second or third anniversary of the grant date and nonqualified options become exercisable over a five-year period with one-fifth exercisable on the grant date and one- fifth on each anniversary date for the four years following the grant date. Options cannot be exercised more than ten years after the grant date. As of February 1, 1997, 732,257 shares remain available for grant. Stock option transactions for the Company's stock option plans are summarized as follows: ............................................................................. Fiscal 1996 Fiscal 1995 Fiscal 1994 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------ ------------------ ------------------ Outstanding- beginning of year........ 4,031,329 $20.91 3,662,779 $16.24 3,713,705 $14.46 Granted........ 613,702 33.64 1,042,970 30.90 469,351 28.86 Exercised...... (988,605) 18.43 (582,470) 8.16 (425,802) 12.74 Canceled....... (156,390) 31.10 (91,950) 28.76 (94,475) 24.90 Outstanding- end of year. 3,500,036 23.34 4,031,329 20.91 3,662,779 16.24 Options exercisable at year end. 2,227,917 18.53 2,724,607 16.77 2,844,931 13.64 Weighted average estimated fair value of options granted..... 11.28 11.04 ............................................................................. 37 The following table summarizes information about stock options outstanding at February 1, 1997: ............................................................................. Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 2/1/97 Life Price at 2/1/97 Price - --------------- ----------- ----------- -------- ----------- -------- $10.94 to $16.19 1,274,365 3 years $13.00 1,274,365 $13.00 $16.56 to $24.81 448,988 7 years 22.09 413,188 12.48 $25.94 to $37.38 1,776,683 9 years 31.22 540,364 13.94 - ------------------------------------------------------------------------------- $10.94 to $37.38 3,500,036 2,227,917 - ------------------------------------------------------------------------------- The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans for options granted in fiscal 1995 and thereafter been determined based on the fair value at the grant dates and recognized as compensation expense on a straight-line basis over the vesting period of the grant consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and net earnings per share would have been reduced to the pro forma amounts indicated below: Fiscal 1996 Fiscal 1995 ----------- ----------- Net earnings: As reported $100,824 $ 81,494 Pro forma $ 98,185 $ 79,938 Net earnings per share: As reported $ 1.62 $ 1.34 Pro forma $ 1.58 $ 1.32 - ------------------------------------------------------------------------------ The pro forma effect on net earnings for fiscal 1996 and fiscal 1995 are not representative of the pro forma effect on net earnings in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The fair value of each option granted during fiscal 1996 and fiscal 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: (i) 0.7% dividend yield for all years, (ii) expected volatility of 32% for all years, (iii) risk-free interest rate ranges of 5.5% to 6.7% and 5.5% to 7.5%, respectively, and (iv) expected lives ranges of 3 1/2 years to 6 years and 3 1/2 years to 5 years, respectively. - -------------------------------------------------------------------------------- NOTE I - CONTINGENCIES The Company is a defendant in a purported class action entitled "Brian Lee, Anthony Baxton, and Harry Schlein v. The Pep Boys - Manny, Moe & Jack," United States District Court for the Southern District of Alabama, Southern Division. The action was originally filed on or about May 21, 1996 in the Circuit Court of Mobile County, Alabama. The Company has since removed the case to Federal Court, and the plaintiffs have filed a motion to remand the case back to Alabama State Court. The Company has also moved to dismiss the case for failure to state a claim. The plaintiffs' motion to remand and the Company's motion to dismiss are pending before the Federal District Court. In their complaint, the plaintiffs allege that the Company sold old or used automotive batteries to consumers as if those batteries were new. The complaint purports to state causes of action for fraud and deceit, negligent misrepresentation, breach of contract and violation of state consumer protection statutes. The plaintiffs are seeking compensatory and punitive damages, as well as injunctive and equitable relief. The Company believes the claims are without merit and intends to vigorously defend this action. 38 The Company is also party to various other lawsuits and claims arising in the normal course of business. In the opinion of management, these lawsuits and claims, including the case above, are not singularly or in the aggregate, material to the Company's financial position or results of operations. NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair value of the Company's financial instruments are as follows: February 1, 1997 February 3, 1996 -------------------- --------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Assets: Cash..................... $ 2,589 $ 2,589 $ 11,487 $11,487 Accounts receivable...... 7,653 7,653 4,165 4,165 Liabilities: Accounts payable......... 337,536 337,536 222,524 222,524 Short-term borrowings.... 63,000 63,000 - - Long-term debt including current maturities...... 217,312 215,029 388,999 395,222 Convertible subordinated notes................... 86,250 88,838 86,250 83,555 Zero coupon convertible subordinated notes...... 152,237 146,041 - - ............................................................................... CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND SHORT-TERM BORROWINGS The carrying amounts approximate fair value because of the short maturity of these items. LONG-TERM DEBT INCLUDING CURRENT MATURITIES, CONVERTIBLE SUBORDINATED NOTES AND ZERO COUPON CONVERTIBLE SUBORDINATED NOTES Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The fair value estimates presented herein are based on pertinent information available to management as of February 1, 1997 and February 3, 1996. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from amounts presented herein. 39 Quarterly Financial Data (Unaudited) (dollar amounts in thousands, except per share amounts) Net Cash Market Price Year Ended Total Gross Operating Net Earnings Dividends Per Share Feb. 1, 1997 Revenues Profit Profit Earnings Per Share Per Share High Low - ----------------------------------------------------------------------------------------------------------- 1st Quarter $428,614 $121,301 $39,594 $20,116 $.33 $.0525 34 7/8 27 7/8 2nd Quarter 476,673 141,421 55,333 30,235 .49 .0525 35 1/2 28 3rd Quarter 478,819 138,287 50,109 27,777 .44 .0525 38 1/4 29 1/8 4th Quarter 444,433 136,510 42,064 22,696 .36 .0525 38 27 7/8 - ----------------------------------------------------------------------------------------------------------- Year Ended Feb. 3, 1996 - ----------------------------------------------------------------------------------------------------------- 1st Quarter $361,209 $100,387 $33,332 $16,204 $.27 $.0475 34 3/4 24 3/8 2nd Quarter 410,838 119,743 47,240 25,234 .41 .0475 32 1/4 25 1/8 3rd Quarter 411,787 115,974 41,462 21,436 .35 .0475 29 1/8 22 1/2 4th Quarter 410,506 119,419 37,400 18,620 .31 .0475 29 1/2 21 7/8 - ----------------------------------------------------------------------------------------------------------- Under the Company's present accounting system, actual gross profit from merchandise sales can be determined only at the time of physical inventory, which is taken at the end of the fiscal year. Gross profit from merchandise sales for the first, second and third quarters is estimated by the Company based upon recent historical gross profit experience and other appropriate factors. Any variation between estimated and actual gross profit from merchandise sales for the first three quarters is reflected in the fourth quarter's results. 40 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The material contained in the registrant's definitive proxy statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the Company's fiscal year (the "Proxy Statement"), under the caption "Election of Directors" is hereby incorporated herein by reference. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I, in accordance with General Instruction G(3) to Form 10-K. ITEM 11 EXECUTIVE COMPENSATION The material in the Proxy Statement under the caption "Executive Compensation" other than the material under the caption "Executive Compensation - Report of Compensation Committee of the Board of Directors on Executive Compensation" and "Executive Compensation - Performance Graph" is hereby incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The material in the Proxy Statement under the caption "Share Ownership of Certain Beneficial Owners and Management" is hereby incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The material in the Proxy Statement under the caption "Executive Compensation - Certain Relationships and Related Transactions" is hereby incorporated herein by reference. 41 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a). Page ---- 1. The following consolidated financial statements of The Pep Boys - Manny, Moe & Jack are included in Item 8. - Consolidated Balance Sheets - February 1, 1997 and February 3, 1996 25 Consolidated Statements of Earnings - Years ended February 1, 1997, February 3, 1996 and January 28, 1995 26 Consolidated Statements of Stockholders' Equity - Years ended February 1, 1997, February 3, 1996 and January 28, 1995 27 Consolidated Statements of Cash Flows - Years ended February 1, 1997, February 3, 1996, and January 29, 1994 28 Notes to Consolidated Financial Statements 29 Independent Auditors' Report 24 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves 49 All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits (3.1) Articles of Incorporation, Incorporated by reference from as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (3.2) By-Laws, as amended Incorporated by reference from the Registration Statement on Form S-3 (File No. 33-39225). (4.1) Indenture dated as of March 22, Incorporated by reference from 1991 between the Company and the Registration Statement on Bank America Trust Company of Form S-3 (File No. 33-39225). New York as Trustee, including Form of Debt Security 42 (4.2) Indenture, dated as of August Incorporated by reference from 31, 1994, between the Company the Registration Statement on and First Fidelity Bank, Form S-3 (File No. 33-55115). National Association as Trustee, including Form of Debenture (4.3) Indenture, dated as of June Incorporated by reference from 12, 1995, between the Company the Registration Statement on and First Fidelity Bank, Form S-3 (File No. 33-59859). National Association as Trustee, including Form of Debenture (4.4) Indenture, dated as of September Incorporated by reference from 20, 1996, between the Company and the Registration Statement on the Trustee, providing for the Form S-3 (File No. 333-00985. issuance of the LYONs (10.1) Medical Reimbursement Plan of Incorporated by reference from the Company the Company's Form 10-K for the fiscal year ended January 31, 1982. (10.2)* 1982 Incentive Stock Option Plan Incorporated by reference from of the Company the Company's Form 10-K for the fiscal year ended January 31, 1982. (10.3)* 1984 Non-Qualified Stock Option Incorporated by reference from Plan the Company's Form 10-K for the fiscal year ended February 2, 1985. (10.4)* 1985 Non-Qualified Stock Option Incorporated by reference from Plan the Company's Form 10-K for the fiscal year ended February 2, 1985. (10.5) Rights Agreement dated as of Incorporated by reference from December 17, 1987 between the Company's Form 8-K dated Company and the Philadelphia December 17, 1987. National Bank (10.6)* Directors' Deferred Compensation Incorporated by reference from Plan, as amended the Company's Form 10-K for the fiscal year ended January 30, 1988. (10.7)* Form of Employment Agreement, as Incorporated by reference from amended, dated as of December 12, the Company's Form 10-K for 1989 the fiscal year ended February 3, 1990. (10.8)* Amendment No. 1 to the 1985 Incorporated by reference from Non-Qualified Stock Option Plan the Company's Form 10-K for the fiscal year ended January 28, 1989. (10.9)* Amendment No. 1 to the 1982 Incorporated by reference from Incentive Stock Option Plan the Company's Form 10-K for the fiscal year ended January 28, 1989. 43 (10.10) Amendment dated June 6, 1989 Incorporated by reference from to Rights Agreement dated as of the Company's Report on Form 8 December 17, 1987 between the filed July 6, 1989. Company and the Philadelphia National Bank (10.11) Dividend Reinvestment and Stock Incorporated by reference from Purchase Plan dated January 4, the Registration Statement on 1990 Form S-3 (File No. 33-32857). (10.12)* 1990 Stock Incentive Plan Incorporated by reference from the Company's Form 10-Q for the quarter ended November 3, 1990. (10.13)* Amendment No. 1 to 1990 Stock Incorporated by reference from Incentive Plan the Company's Form 10-K for the fiscal year ended February 1, 1992. (10.14)* The Pep Boys - Manny, Moe & Incorporated by reference from Jack Trust Agreement for the the Company's Form 10-K for Executive Supplemental Pension the fiscal year ended Plan and Certain Contingent February 1, 1992. Compensation Arrangements, dated as of February 13, 1992 (10.15)* Amendment to the Executive Incorporated by reference from Supplemental Pension Plan the Company's Form 10-K for (amended and restated effective the fiscal year ended January 1, 1988), dated as of February 1, 1992. February 13, 1992 (10.16)* Consulting and Retirement Incorporated by reference from Agreement by and between the the Company's Form 10-K for Company and Benjamin Strauss, the fiscal year ended dated as of February 2, 1992 February 1, 1992. (10.17)* Amendment No. 2 to the 1982 Incorporated by reference from Incentive Stock Option Plan the Company's Form 10-Q for the quarter ended October 31, 1992. (10.18)* Amendment No. 3 to the Non- Incorporated by reference from Qualified Stock Option Plan the Company's Form 10-Q for the quarter ended October 31, 1992. (10.19)* Amendment No. 2 to the 1990 Incorporated by reference from Stock Incentive Plan the Company's Form 10-Q for the quarter ended October 31, 1992. (10.20)* President's Merit Award Program Incorporated by reference from of the Company, as amended, the Company's Form 10-K for dated as of April 1, 1992 the year ended January 30, 1993. (10.21) Flexible Employee Benefits Trust Incorporated by reference from the Company's Form 8-K dated May 6, 1994. 44 (10.22)* The Pep Boys- Manny, Moe & Jack Incorporated by reference from Pension Plan, as amended, dated the Company's Form 10-K for December 28, 1994 the year ended January 28, 1995. (10.23)* The Pep Boys Savings Plan, as Incorporated by reference from amended, dated December 28, 1994 the Company's Form 10-K for the year ended January 28, 1995. (10.24)* Executive Incentive Bonus Plan Incorporated by reference from of the Company, as amended and the Company's Form 10-K for restated as of March 30, 1994 the year ended January 28, 1995. (10.25) Credit Agreement dated as of Incorporated by reference from April 21, 1995 between the the Company's Form 10-Q for Company and the Chase Manhattan the quarter ended April 29, Bank (Agent) 1995. (10.26)* Amendments to The Pep Boys - Manny, Moe & Jack Pension Plan (10.27)* Amendment to The Pep Boys Savings Plan (10.28) Master Lease, as amended (10.29) Transaction Agreement, as amended (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent (27) Financial Data Schedule (b) No Form 8-K was filed for the fourth quarter of the year end February 1, 1997 *Management contract or compensatory plan or arrangement. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PEP BOYS - MANNY, MOE & JACK -------------------------------- (Registrant) Dated: 5/1/97 by: /s/Michael J. Holden -------------------------- Michael J. Holden Executive Vice President and Chief Financial Officer 46 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE - ----------------- -------- -------- /s/Mitchell G. Leibovitz Chairman of the Board, President 5/1/97 - --------------------------- and Chief Executive Officer -------- Mitchell G. Leibovitz (Principal Executive Officer) /s/Michael J. Holden Executive Vice President - and 5/1/97 - --------------------------- Chief Financial Officer -------- Michael J. Holden (Principal Financial and Accounting Officer) /s/Lennox K. Black Director 4/29/97 - --------------------------- -------- Lennox K. Black /s/Pemberton Hutchinson Director 4/29/97 - --------------------------- -------- Pemberton Hutchinson /s/Bernard J. Korman Director 4/28/97 - --------------------------- -------- Bernard J. Korman /s/J. Richard Leaman, Jr. Director 4/28/97 - --------------------------- -------- J. Richard Leaman, Jr. /s/Malcolmn D. Pryor Director 4/29/97 - --------------------------- -------- Malcolmn D. Pryor /s/Lester Rosenfeld Director 4/28/97 - --------------------------- -------- Lester Rosenfeld /s/Benjamin Strauss Director 4/28/97 - --------------------------- -------- Benjamin Strauss /s/Myles H. Tanenbaum Director 4/28/97 - --------------------------- -------- Myles H. Tanenbaum /s/David V. Wachs Director 4/28/97 - --------------------------- -------- David V. Wachs 47 FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K 48 THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) - --------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - --------------------------------------------------------------------------------------------------------------------- Additions Additions Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Descriptions Period Expenses Accounts Deductions* Period - -------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year Ended February 1, 1997 $251 $317 $ - $316 $252 - -------------------------------------------------------------------------------------------------------------------- Year Ended February 3, 1996 $126 $140 $ - $15 $251 - --------------------------------------------------------------------------------------------------------------------- Year Ended January 28, 1995 $50 $114 $ - $38 $126 - --------------------------------------------------------------------------------------------------------------------- <FN> *Uncollectible accounts written off. </FN> 49 INDEX TO EXHIBITS Index of Financial Statements, Financial Statement Schedule and Exhibits Page ---- 1. The following consolidated financial statements of The Pep Boys - Manny, Moe & Jack are included in Item 8. - Consolidated Balance Sheets - February 1, 1997 and February 3, 1996 25 Consolidated Statements of Earnings - Years ended February 1, 1997, February 3, 1996 and January 28, 1995 26 Consolidated Statements of Stockholders' Equity - Years ended February 1, 1997, February 3, 1996 and January 28, 1995 27 Consolidated Statements of Cash Flows - Years ended February 1, 1997, February 3, 1996, and January 29, 1994 28 Notes to Consolidated Financial Statements 29 Independent Auditors' Report 24 2. The following consolidated financial statement schedule of The Pep Boys - Manny, Moe & Jack is included. Schedule II Valuation and Qualifying Accounts and Reserves 49 All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits (10.26) Amendments to The Pep Boys - Manny, Moe & Jack Pension Plan (10.27) Amendment to The Pep Boys Savings Plan (10.28) Master Lease as amended (10.29) Transaction Agreement as amended (11) Computation of Earnings per Share (12) Computation of Ratio of Earnings to Fixed Charges (21) Subsidiaries of the Company (23) Independent Auditors' Consent (27) Financial Data Schedule 50