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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
=== === === === === === === === === ===
* 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
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
============= ============= ============== ============== =============
(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
========== ==========
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
========== ========== =========
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
========== ======= ========= ========= ========= ========= =========
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
................................................................................................
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
- ---------------------------------------------------------------------------------------------------------------------
*Uncollectible accounts written off.
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