**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10K/A**

**(Amendment No. 1)**

**(Mark One)**

**x**                               Annual Report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934

**Forthe fiscal year ended February 3, 2007**

**OR**

**o**                                  Transition Report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934

**Forthe transition period from                  to                  **

**Commissionfile number 1-3381**

**The Pep Boys—Manny,Moe & Jack**

(Exact name of registrantas specified in its charter)

| **Pennsylvania**                                                  |   | **23-0962915**                         |
|-------------------------------------------------------------------|--------|----------------------------------------|
| (State or other  jurisdiction of   incorporation or organization) |   | (I.R.S. employer   identification no.) |
| **3111 West Allegheny Avenue,  Philadelphia, PA**                 |   | **19132**                              |
| (Address of  principal executive office)                          |   | (Zip code)                             |

 

**215-430-9000**

(Registrant’s telephonenumber, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act:**

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

 

**Securities registeredpursuant to Section 12(g) of the Act:**

None

Indicate by check markwhether the Registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

Yes  x    No  o

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.

Yes  o    No  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x    No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicate by checkmarkwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o        Acceleratedfiler  x        Non-acceleratedfiler  o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act)

Yes  o    No  x

As of the close of businesson July 28, 2006, the aggregate market value of the voting stock held bynon-affiliates of the registrant was approximately $553,205,934.

As of April 13, 2007,there were 52,154,202 shares of the registrant’s common stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

None.

 

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**EXPLANATORY NOTE**

This amendment tothe Annual Report on Form 10-K/A (“Amendment No. 1”) is being filed in order toreflect the restatement of previously issued consolidated financial statementsas of February 3, 2007 and January 28, 2006, and for each of the three years inthe period ended February 3, 2007 included in the original Annual Report onForm 10-K for the fiscal year ended February 3, 2007, previously filed on April 18,2007 (the “Original Filing”).

Subsequent to theissuance of the Company’s consolidated financial statements included in Item 8,“Financial Statements and Supplementary Data,” in the Original Filing, theCompany determined that certain information in the condensed consolidatingfinancial statements presented in the supplemental guarantor information note(Note 8) contained errors. The correction of these errors has no impact, forany previously reported period, on the Company’s (i) consolidated balancesheets, (ii) consolidated statements of operations, (iii) consolidatedstatements of stockholders’ equity, or (iv) consolidated statements of cashflows. 

In addition, theCompany corrected its presentation of borrowings and payments under its line ofcredit agreement and vendor financing trade payable program to a gross basisversus a net basis in its consolidated statements of cash flows for each of thethree years in the period ended February 3, 2007 and corrected, for the fiscalyear ended January 29, 2005, the classification of the borrowings under thevendor financing trade payable program, which resulted in a decrease in cashflows provided by operating activities and a corresponding increase in cashflows provided by financing activities in the amount of $7.2 million. Forfurther discussion regarding the restatement, see “Note 18—Restatement ofPreviously Issued Financial Statements” under “Notes to Consolidated FinancialStatements” included in Item 8.

This Amendment No. 1 on Form 10-K/A amends andrestates only Items 8 and 9A of Part II and Item 15 of Part IV of theOriginal Filing to reflect the restatement of the Company’s consolidatedfinancial statements and notes thereto for the periods presented. The remainingitems contained within this Amendment No. 1 on Form 10-K/A consist of all otheritems originally contained in the Form 10-K for the fiscal year ended February3, 2007. These remaining items are not amended hereby, but are included for theconvenience of the reader. Except for the foregoing amended information, thisAmendment No. 1 on Form 10-K/A continues to describe conditions as of the dateof the Original Filing, and we have not updated the disclosures containedherein to reflect events that occurred at a later date. We are also updatingthe Signature Page and certifications of our Chief Executive and Financial Officerscontained in Exhibits 31.1, 31.2, 32.1 and 32.2.

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**TABLEOF CONTENTS**

|                   | ** ** | ** **                                                                                                          | ** ** | **Page** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                                |       |     |   |   |   |
| Item 1.           |       | Business                                                                                                            |       |     | 1 |   |   |
| Item 1A.          |       | Risk Factors                                                                                                        |       |     | 7 |   |   |
| Item  1B.         |       | Unresolved Staff Comments                                                                                           |       |     | 10 |   |   |
| Item 2.           |       | Properties                                                                                                          |       |     | 10 |   |   |
| Item 3.           |       | Legal Proceedings                                                                                                   |       |     | 11 |   |   |
| Item  4.          |       | Submission of Matters to a  Vote of Security Holders                                                                |       |     | 11 |   |   |
| **PART II**  |       |                                                                                                                |       |     |   |   |   |
| Item  5.          |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities |       |     | 12 |   |   |
| Item 6.           |       | Selected Financial Data                                                                                             |       |     | 14 |   |   |
| Item  7.          |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                         |       |     | 15 |   |   |
| Item  7A.         |       | Quantitative and Qualitative  Disclosures About Market Risk                                                         |       |     | 29 |   |   |
| Item  8.          |       | Financial Statements and  Supplementary Data                                                                        |       |     | 31 |   |   |
| Item  9.          |       | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure                               |       |     | 78 |   |   |
| Item  9A.         |       | Controls and Procedures                                                                                             |       |     | 78 |   |   |
| Item 9B.          |       | Other Information                                                                                                   |       |     | 82 |   |   |
| **PART III** |       |                                                                                                                |       |     |   |   |   |
| Item  10.         |       | Directors, Executive  Officers and Corporate Governance                                                             |       |     | 82 |   |   |
| Item  11.         |       | Executive Compensation                                                                                              |       |     | 82 |   |   |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     |       |     | 82 |   |   |
| Item  13.         |       | Certain Relationships and  Related Transactions and Director Independence                                           |       |     | 82 |   |   |
| Item  14.         |       | Principal Accounting Fees  and Services                                                                             |       |     | 82 |   |   |
| **PART IV**  |       |                                                                                                                |       |     |   |   |   |
| Item  15.         |       | Exhibits and Financial  Statement Schedules                                                                         |       |     | 83 |   |   |
|              |       | Signatures                                                                                                          |       |     | 88 |   |   |

 

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**PART I**

**ITEM 1**                   BUSINESS

**GENERAL**

The Pep Boys—Manny, Moe & Jack andsubsidiaries (the “Company”) is a leading automotive retail and service chain.The Company operates in one industry, the automotive aftermarket. The Companyis engaged principally in the retail sale of automotive parts, tires andaccessories, automotive repairs and maintenance and the installation of parts.The Company’s primary operating unit is its SUPERCENTER format. As ofFebruary 3, 2007, the Company operated 593 stores consisting of 582SUPERCENTERS and one SERVICE & TIRE CENTER, having an aggregate of6,162 service bays, as well as 10 non-service/non-tire format PEP BOYS EXPRESSstores. The Company operates approximately 12,167,000 gross square feet ofretail space, including service bays. The SUPERCENTERS average approximately20,700 square feet and the 10 PEP BOYS EXPRESS stores average approximately9,700 square feet. The Company believes that its unique SUPERCENTER formatoffers the broadest capabilities in the industry and positions the Company togain market share and increase its profitability by serving “do-it-yourself”(retail) and “do-it-for-me” (service labor, installed merchandise and tires)customers with the highest quality merchandise and service offerings.

Thefollowing table sets forth the percentage of total revenues from continuingoperations contributed by each class of similar products or services for theCompany and should be read in conjunction with the Consolidated FinancialStatements and Notes thereto included elsewhere herein:

| ** **               | ** ** | **Year ended**        | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
| Parts and  Accessories   |       |                       | 68.5       | % |   |   | 69.3 | % |   |   | 67.8 | % |   |
| Tires                    |       |                       | 14.1       |   |   |   | 13.6 |   |   |   | 14.2 |   |   |
| Total Merchandise  Sales |       |                       | 82.6       |   |   |   | 82.9 |   |   |   | 82.0 |   |   |
| Service Labor            |       |                       | 17.4       |   |   |   | 17.1 |   |   |   | 18.0 |   |   |
| Total Revenues           |       |                       | 100.0      | % |   |   | 100.0 | % |   |   | 100.0 | % |   |

 

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As of February 3,2007 the Company operated its stores in 36 states and Puerto Rico. Thefollowing table indicates, by state, the number of stores the Company had inoperation at the end of fiscal 2002, 2003, 2004, 2005and 2006, and the numberof stores opened and closed by the Company during each of the last four fiscalyears:

**NUMBEROF STORES AT END OF FISCAL YEARS 2002 THROUGH 2006**

| **State**      | ** ** | ** ** | ** ** | **2006  Year  End** | ** ** | **Closed** | ** ** | **Opened** | ** ** | **2005  Year  End** | ** ** | **Closed** | ** ** | **Opened** | ** ** | **2004  Year  End** | ** ** | **Closed** | ** ** | **Opened** | ** ** | **2003  Year  End** | ** ** | **Closed** | ** ** | **Opened** | ** ** | **2002  Year  End** | ** ** |
|----------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|---------------------|------------|
| Alabama        |       | 1          |       |                | —     |       | —     |       | 1          |                |       | —     |       | —     |       | 1                   |       | —     |       | —     |       | 1                   |       | —     |       | —     |       | 1                   |       |
| Arizona        |       | 22         |       |                | —     |       | —     |       | 22         |                |       | —     |       | —     |       | 22                  |       | —     |       | —     |       | 22                  |       | 1          |       | —     |       | 23                  |       |
| Arkansas       |       | 1          |       |                | —     |       | —     |       | 1          |                |       | —     |       | —     |       | 1                   |       | —     |       | —     |       | 1                   |       | —     |       | —     |       | 1                   |       |
| California     |       | 121        |       |                | —     |       | —     |       | 121        |                |       | 1          |       | —     |       | 122                 |       | —     |       | —     |       | 122                 |       | 12         |       | —     |       | 134                 |       |
| Colorado       |       | 8          |       |                | —     |       | —     |       | 8          |                |       | —     |       | —     |       | 8                   |       | —     |       | —     |       | 8                   |       | —     |       | —     |       | 8                   |       |
| Connecticut    |       | 8          |       |                | —     |       | —     |       | 8          |                |       | —     |       | —     |       | 8                   |       | —     |       | —     |       | 8                   |       | —     |       | —     |       | 8                   |       |
| Delaware       |       | 6          |       |                | —     |       | —     |       | 6          |                |       | —     |       | —     |       | 6                   |       | —     |       | —     |       | 6                   |       | —     |       | —     |       | 6                   |       |
| Florida        |       | 43         |       |                | —     |       | —     |       | 43         |                |       | —     |       | —     |       | 43                  |       | —     |       | —     |       | 43                  |       | 4          |       | —     |       | 47                  |       |
| Georgia        |       | 25         |       |                | —     |       | —     |       | 25         |                |       | —     |       | —     |       | 25                  |       | —     |       | —     |       | 25                  |       | 1          |       | —     |       | 26                  |       |
| Illinois       |       | 23         |       |                | —     |       | —     |       | 23         |                |       | —     |       | —     |       | 23                  |       | —     |       | —     |       | 23                  |       | 1          |       | —     |       | 24                  |       |
| Indiana        |       | 9          |       |                | —     |       | —     |       | 9          |                |       | —     |       | —     |       | 9                   |       | —     |       | —     |       | 9                   |       | —     |       | —     |       | 9                   |       |
| Kansas         |       | 2          |       |                | —     |       | —     |       | 2          |                |       | —     |       | —     |       | 2                   |       | —     |       | —     |       | 2                   |       | —     |       | —     |       | 2                   |       |
| Kentucky       |       | 4          |       |                | —     |       | —     |       | 4          |                |       | —     |       | —     |       | 4                   |       | —     |       | —     |       | 4                   |       | —     |       | —     |       | 4                   |       |
| Louisiana      |       | 10         | **         |                | —     |       | —     |       | 10         | **                  |       | —     |       | —     |       | 10                  |       | —     |       | —     |       | 10                  |       | —     |       | —     |       | 10                  |       |
| Maine          |       | 1          |       |                | —     |       | —     |       | 1          |                |       | —     |       | —     |       | 1                   |       | —     |       | —     |       | 1                   |       | —     |       | —     |       | 1                   |       |
| Maryland       |       | 19         |       |                | —     |       | —     |       | 19         |                |       | —     |       | —     |       | 19                  |       | —     |       | —     |       | 19                  |       | —     |       | —     |       | 19                  |       |
| Massachusetts  |       | 7          |       |                | —     |       | —     |       | 7          |                |       | —     |       | —     |       | 7                   |       | —     |       | —     |       | 7                   |       | 1          |       | —     |       | 8                   |       |
| Michigan       |       | 7          |       |                | —     |       | —     |       | 7          |                |       | —     |       | —     |       | 7                   |       | —     |       | —     |       | 7                   |       | —     |       | —     |       | 7                   |       |
| Minnesota      |       | 3          |       |                | —     |       | —     |       | 3          |                |       | —     |       | —     |       | 3                   |       | —     |       | —     |       | 3                   |       | —     |       | —     |       | 3                   |       |
| Missouri       |       | 1          |       |                | —     |       | —     |       | 1          |                |       | —     |       | —     |       | 1                   |       | —     |       | —     |       | 1                   |       | —     |       | —     |       | 1                   |       |
| Nevada         |       | 12         |       |                | —     |       | —     |       | 12         |                |       | —     |       | —     |       | 12                  |       | —     |       | —     |       | 12                  |       | —     |       | —     |       | 12                  |       |
| New Hampshire  |       | 4          |       |                | —     |       | —     |       | 4          |                |       | —     |       | —     |       | 4                   |       | —     |       | —     |       | 4                   |       | —     |       | —     |       | 4                   |       |
| New Jersey     |       | 28         |       |                | —     |       | —     |       | 28         |                |       | —     |       | —     |       | 28                  |       | —     |       | —     |       | 28                  |       | 1          |       | —     |       | 29                  |       |
| New Mexico     |       | 8          |       |                | —     |       | —     |       | 8          |                |       | —     |       | —     |       | 8                   |       | —     |       | —     |       | 8                   |       | —     |       | —     |       | 8                   |       |
| New York       |       | 29         |       |                | —     |       | —     |       | 29         |                |       | —     |       | —     |       | 29                  |       | —     |       | —     |       | 29                  |       | 2          |       | —     |       | 31                  |       |
| North Carolina |       | 10         |       |                | —     |       | —     |       | 10         |                |       | —     |       | —     |       | 10                  |       | —     |       | —     |       | 10                  |       | 1          |       | —     |       | 11                  |       |
| Ohio           |       | 12         |       |                | —     |       | —     |       | 12         |                |       | —     |       | —     |       | 12                  |       | —     |       | —     |       | 12                  |       | 1          |       | —     |       | 13                  |       |
| Oklahoma       |       | 6          |       |                | —     |       | —     |       | 6          |                |       | —     |       | —     |       | 6                   |       | —     |       | —     |       | 6                   |       | —     |       | —     |       | 6                   |       |
| Pennsylvania   |       | 42         |       |                | —     |       | —     |       | 42         |                |       | —     |       | —     |       | 42                  |       | —     |       | —     |       | 42                  |       | 3          |       | —     |       | 45                  |       |
| Puerto Rico    |       | 27         |       |                | —     |       | —     |       | 27         |                |       | —     |       | —     |       | 27                  |       | —     |       | —     |       | 27                  |       | —     |       | —     |       | 27                  |       |
| Rhode Island   |       | 3          |       |                | —     |       | —     |       | 3          |                |       | —     |       | —     |       | 3                   |       | —     |       | —     |       | 3                   |       | —     |       | —     |       | 3                   |       |
| South Carolina |       | 6          |       |                | —     |       | —     |       | 6          |                |       | —     |       | —     |       | 6                   |       | —     |       | —     |       | 6                   |       | —     |       | —     |       | 6                   |       |
| Tennessee      |       | 7          |       |                | —     |       | —     |       | 7          |                |       | —     |       | —     |       | 7                   |       | —     |       | —     |       | 7                   |       | —     |       | —     |       | 7                   |       |
| Texas          |       | 54         |       |                | —     |       | —     |       | 54         |                |       | 1          |       | —     |       | 55                  |       | —     |       | —     |       | 55                  |       | 5          |       | —     |       | 60                  |       |
| Utah           |       | 6          |       |                | —     |       | —     |       | 6          |                |       | —     |       | —     |       | 6                   |       | —     |       | —     |       | 6                   |       | —     |       | —     |       | 6                   |       |
| Virginia       |       | 16         |       |                | —     |       | —     |       | 16         |                |       | —     |       | —     |       | 16                  |       | —     |       | —     |       | 16                  |       | 1          |       | —     |       | 17                  |       |
| Washington     |       | 2          |       |                | —     |       | —     |       | 2          |                |       | —     |       | —     |       | 2                   |       | —     |       | —     |       | 2                   |       | —     |       | —     |       | 2                   |       |
| Total          |       | 593        |       |                | —     |       | —     |       | 593        |                |       | 2          |       | —     |       | 595                 |       | —     |       | —     |       | 595                 |       | 34         |       | —     |       | 629                 |       |

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********            **Due to damage sustained as a result ofHurricane Katrina in August 2005, two stores were temporarily closed atfiscal 2005 year end and one store remained closed at fiscal 2006 year end.

**STORE IMPROVEMENTS**

In fiscal 2006, theCompany incurred approximately $37,924,000 of its total capital expenditures of$53,903,000 to maintain and improve its stores. Approximately one third ofthese expenditures resulted from the Company’s store redesign plan whichresults in better merchandising within its retail business, promotescross-selling and improves the overall customer experience. In fiscal 2006, theCompany grand reopened 104 remodeled stores. We expect to grand reopenapproximately 125 remodeled stores in each of 2007 and 2008 with the remainingapproximately 50 stores to be completed in 2009. The funding of our remodelingsis expected to come from net cash generated from operating activities and theCompany’s existing line of credit.

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**PRODUCTS ANDSERVICES**

Each Pep Boys SUPERCENTER and PEP BOYS EXPRESS storecarries a similar product line, with variations based on the number and type ofcars registered in the markets where the store is located. A full complement ofinventory at a typical SUPERCENTER includes an average of approximately 22,000items (approximately 21,000 items at a PEP BOYS EXPRESS store). The Company’sproduct lines include: tires (not stocked at PEP BOYS EXPRESS stores);batteries; new and remanufactured parts for domestic and import vehicles;chemicals and maintenance items; fashion, electronic, and performanceaccessories; personal transportation merchandise; and select non-automotivemerchandise that appeals to automotive “Do-It-Yourself” customers, such asgenerators, power tools and canopies.

In addition to offering a wide variety of high qualityname brand products, the Company sells an array of high quality products undervarious private label names. The Company sells tires under the names CORNELL®, FUTURA® andDEFINITYTM; andbatteries under the name PROSTART®.The Company also sells wheel covers under the name FUTURA®; water pumps and cooling system partsunder the name PROCOOL®; airfilters, anti-freeze, chemicals, cv axles, lubricants, oil, oil filters, oiltreatments, transmission fluids and wiper blades under the name PROLINE®; alternators, battery boosterpacks and starters under the name PROSTART®; power steering hoses and power steering pumps under thename PROSTEER®; brakesunder the name PROSTOP®;brakes, starters and ignition under the name VALUEGRADE; and paints under thename VARSITY®. Allproducts sold by the Company under various private label names accounted forapproximately 24% of the Company’s merchandise sales in fiscal 2006, andapproximately 22% and 33% in fiscal 2005 and 2004.

The Company has service bays in 583 of its 593locations. While each service department has the ability to perform virtually alltypes of automotive service (except body work), the Company continuouslyevaluates the types of services it offers, focusing on the most profitablemaintenance and repair services.

The Company’s commercial automotive parts deliveryprogram, branded PEP EXPRESS PARTS®, is designed to increase the Company’smarket share with the professional installer and to leverage its inventoryinvestment. The program satisfies the installed merchandise customer by takingadvantage of the breadth and quality of its parts inventory as well as itsexperience supplying its own service bays and mechanics. As of February 3,2007, 459, or approximately 77%, of the Company’s stores provide commercialparts delivery.

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

The Company primarily uses an “Everyday Low Price”(EDLP) strategy in establishing its selling prices. Management believes thatEDLP provides better value to its customers on a day-to-day basis, helps levelcustomer demand and allows more efficient management of inventories. On aweekly basis, the Company employs a promotional pricing strategy on selectitems to drive increased customer traffic.

The Company uses various forms of advertising topromote its category-dominant product offering, its state-of-the-art serviceand repair capabilities and its commitment to customer service andsatisfaction. The Company is committed to an effective promotional schedulewith a weekly circular program, extra-effort promotions supported by Run ofPaper (ROP) and radio and television advertising during highly seasonal timesof the year and various in-store promotions.

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In fiscal 2006, approximately 37% of the Company’stotal revenues were cash transactions (including personal checks) with theremainder being credit and debit card transactions and commercial creditaccounts.

The Company does notexperience significant seasonal fluctuation in the generation of its revenues.

**STORE OPERATIONSAND MANAGEMENT**

All Pep Boys stores are open seven days a week. EachSUPERCENTER has a Retail Manager and Service Manager (PEP BOYS EXPRESS STORESonly have a Retail Manager) who report up through a distinct organization ofArea Directors and Divisional Vice Presidents specializing in operating theirrespective businesses. The Divisional Vice Presidents—Service report to theSenior Vice President—Service. The Senior Vice President—Service and DivisionalVice Presidents—Retail report to the Executive Vice President—Operations, whoin turn, reports directly to the President & Chief Executive Officer.The President & Chief Executive Officer serves as the Company’sprincipal operations officer. A Retail Manager’s and a Service Manager’saverage length of service with the Company is approximately 7.7 and 5.3years, respectively.

Supervision and controlover the individual stores are facilitated by means of the Company’s computersystem, operational handbooks and regular visits to the individual stores byArea Directors and Divisional Vice Presidents. All of the Company’sadvertising, accounting, purchasing, management information systems, and mostof its administrative functions are conducted at its corporate headquarters inPhiladelphia, Pennsylvania. Certain administrative functions for the Company’sdivisional operations are performed at various regional offices of the Company.See, “Item 2. Properties.”

**INVENTORY CONTROLAND DISTRIBUTION**

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

Each Pep Boys store has anautomatic inventory replenishment system that automatically orders additionalinventory when a store’s inventory on hand falls below the target levels. Inaddition, the Company’s centralized buying system, coupled with continuedadvancement in its warehouse and distribution systems, has enhanced theCompany’s ability to control its inventory.

**SUPPLIERS**

During fiscal 2006, the Company’s ten largestsuppliers accounted for approximately 40% of the merchandise purchased by theCompany. No single supplier accounted for more than 17% of the Company’s purchases.The Company has no long-term contracts under which the Company is required topurchase merchandise. Management believes that the relationships the Companyhas established with its suppliers are generally good.

In the past, the Companyhas not experienced difficulty in obtaining satisfactory sources of supply andbelieves that adequate alternative sources of supply exist, at substantiallysimilar cost, for virtually all types of merchandise sold in its stores.

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**COMPETITION**

The business of the Company is highly competitive. TheCompany encounters competition from nationwide and regional chains and fromlocal independent merchants. The Company’s competitors include general, fullrange, discount or traditional department stores which carry automotive partsand accessories and/or have automotive service centers, as well as specializedautomotive retailers. Generally, the specialized automotive retailers focus oneither the “do-it-yourself” or “do-it-for-me” areas of the business. TheCompany believes that its operation in both the “do-it-yourself” and“do-it-for-me” areas of the business positively differentiates it from most ofits competitors. However, certain competitors are larger in terms of salesvolume, store size, and/or number of stores. Therefore, these competitors haveaccess to greater capital and management resources and have been operatinglonger in particular geographic areas than the Company.

The Company believes thatthe warranty policies in connection with the higher priced items it sells, suchas tires, batteries, brake linings and other major automotive parts andaccessories, are comparable or superior to those of its competitors.

**REGULATION**

The Company is subject tovarious federal, state and local laws and governmental regulations relating tothe operation of its business, including those governing the handling, storageand disposal of hazardous substances contained in the products it sells anduses in its service bays, the recycling of batteries, tires and usedlubricants, and the ownership and operation of real property.

**EMPLOYEES**

AtFebruary 3, 2007, the Company employed 18,794 persons as follows:

| **Description** | ** ** | ** ** | ** ** | **Full-time** | ** ** | **%** | ** ** | **Part-time** | ** ** | **%**  | ** ** | **Total** | ** ** | **%**  | ** ** |
|-----------------|------------|------------|------------|---------------|------------|-------|------------|---------------|------------|--------|------------|-----------|------------|--------|------------|
| Retail          |       |       | 5,023      |          |       | 37.7  |       |          | 3,831      |   |       | 70.2      |       | 8,854  |       | 47.1 |   |
| Service Center  |       |       | 6,764      |          |       | 50.7  |       |          | 1,549      |   |       | 28.5      |       | 8,313  |       | 44.2 |   |
| STORE TOTAL     |       |       | 11,787     |          |       | 88.4  |       |          | 5,380      |   |       | 98.7      |       | 17,167 |       | 91.3 |   |
| Warehouses      |       |       | 696        |          |       | 5.2   |       |          | 66         |   |       | 1.2       |       | 762    |       | 4.1 |   |
| Offices         |       |       | 857        |          |       | 6.4   |       |          | 8          |   |       | 0.1       |       | 865    |       | 4.6 |   |
| TOTAL EMPLOYEES |       |       | 13,340     |          |       | 100.0 |       |          | 5,454      |   |       | 100.0     |       | 18,794 |       | 100.0 |   |

 

**TheCompany had no union employees as of February 3, 2007. At the end offiscal 2005, the Company employed approximately 14,358 full-time and 5,622part-time employees.**

**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

Certain statementscontained herein, including in “Item 1. Business” and “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations”,constitute “forward-looking statements” within the meaning of The PrivateSecurities Litigation Reform Act of 1995. The words “guidance,” “expects,”“anticipates,” “estimates,” “forecasts” and similar expressions are intended toidentify these forward-looking statements. Forward-looking statements includemanagement’s expectations regarding future financial performance, automotiveaftermarket trends, levels of competition, business development activities,future capital expenditures, financing sources and availability and the effectsof regulation and litigation. Although we believe that the expectationsreflected in these forward-looking statements are based on reasonableassumptions, we can give no assurance that our expectations will be achieved.Our actual results may differ materially from the results discussed in theforward-looking statements due to factors beyond our control, including thestrength of the national and regional 

5

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economies,retail and commercial consumers’ ability to spend, the health of the varioussectors of the automotive aftermarket, the weather in geographical regions witha high concentration of our stores, competitive pricing, the location andnumber of competitors’ stores, product and labor costs and the additionalfactors described in our filings with the Securities and Exchange Commission(“SEC”). See, “Item 1A. Risk Factors.” We assume no obligation to update orsupplement forward-looking statements that become untrue because of subsequentevents.

**SEC REPORTING**

We electronically file certain documents with, orfurnish such documents to, the SEC, including annual reports on Form 10-K,quarterly reports on Form 10-Q, and current reports on Form 8-K,along with any related amendments to those reports filed or furnished pursuantto Section 13(a) or 15(d) of the Exchange Act. Fromtime-to-time, we may also file registration and related statements pertainingto equity or debt offerings. You may read and copy any materials we file withthe SEC at the SEC’s Office of Filings and Information Services at 100 FStreet, NE, Washington, DC 20549. You may obtain information regarding theOffice of Filings and Information Services by calling the SEC at 1-800-SEC-0330.In addition, the SEC maintains an Internet website at www.sec.gov that containsreports, proxy and information statements, and other information regardingissuers that file or furnish documents electronically with the SEC.

We provide free electronic access to our annual,quarterly and current reports (and all amendments to these reports) on ourInternet website, www.pepboys.com. These reports are available on our websiteas soon as reasonably practicable after we electronically file or furnish suchmaterials with or to the SEC. Information on our website does not constitutepart of this Annual Report, and any references to our website herein areintended as inactive textual references only.

Copies of our SEC reportsare also available free of charge from our investor relations department.Please call 215-430-9720 or write Pep Boys, Investor Relations,3111 West Allegheny Avenue, Philadelphia, PA 19132.

**EXECUTIVE OFFICERSOF THE COMPANY**

Thefollowing table indicates the names, ages and tenures with the Company andpositions (together with the year of election to such positions) of theexecutive officers of the Company:

| **Name**          | ** ** | ** ** | ** ** | **Age**             | ** ** | **Tenure  with  Company**                                                                                    | ** ** | **Position with the Company and Date of  Election to Position** |
|-------------------|------------|------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|
| Jeffrey C. Rachor |       | 45         |       |    — |       | President &  Chief Executive Officer since March 26, 2007                                      |
| Harold L. Smith   |       | 56         |       | 4 years             |       | Executive Vice  President—Merchandising, Marketing, Supply Chain and Commercial since  August 2003 |
| Mark S. Bacon     |       | 43         |       | 2 years             |       | Executive Vice  President—Operations since August 2006                                             |
| Joseph A. Cirelli |       | 47         |       | 30 years            |       | Senior Vice  President—Service since October 2005                                                  |
| Mark L. Page      |       | 50         |       | 31 years            |       | Senior Vice  President—Parts and Tires since October 2005                                          |
| Harry F. Yanowitz |       | 40         |       | 4 years             |       | Senior Vice President—Chief  Financial Officer since August 2004                                   |

 

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Jeffrey C. Rachor, President & ChiefExecutive Officer, joined the Company on March 26, 2007, after having mostrecently served as President, Chief Operating Officer, and a Director of SonicAutomotive Inc, a Fortune 300 company and the third largest automotive retailerin the United States. Prior to joining Sonic in 1997, he served as ChiefOperating Officer and General Manager of Nelson Bowers Dealerships and heldpositions with American Suzuki Motor and General Motors corporations.

Harold L. Smith, Executive Vice President—Merchandising,Marketing, Supply Chain and Commercial, joined the Company in August 2003after most recently serving in such capacity for CSK Auto. Prior to CSK Auto,Mr. Smith served as the President of Bass Pro Companies, a leading outdoorrecreation retailer. Before Bass Pro, he served as CEO of several retailcompanies, including Builders Emporium, Ernst Home Centers, and HomeownersDo-It-Yourself Centers.

Mark S. Bacon, Executive Vice President, Operations—MarkS. Bacon was named Executive Vice President—Operations in August 2006.Mr. Bacon joined the Company in February 2005 as Senior VicePresident—Retail Operations and assumed overall responsibility for both retailand service operations in October 2005. Prior to joining the Company, hewas Senior Vice President, Sales and Operations for Staples and has also heldvarious operations positions with companies such as Wal-Mart and Hills Stores.

Joseph A. Cirelli was named Senior Vice President—Servicein October 2005. Since March 1977, Mr. Cirelli has served theCompany in positions of increasing seniority, including Vice President—RealEstate and Development, Vice President—Operations Administration, and VicePresident—Customer Satisfaction.

Mark L. Page was named Senior Vice President—Parts &Tires in October 2005 and has been a Senior Vice President of the Companysince March 1993. Since June 1975, Mr. Page has served theCompany in various store operations positions of increasing seniority.

Harry F. Yanowitz was named Senior Vice President—ChiefFinancial Officer in August 2004. Mr. Yanowitz joined the Company inJune 2003 as Senior Vice President—Strategy & BusinessDevelopment after having most recently served as Managing Director of SherpaInvestments, a private investment firm. Previously, he was President ofChapters, Canada’s largest book retailer. Prior to joining Chapters,Mr. Yanowitz was a consultant with Bain & Company.

Each of the officersserves at the pleasure of the Board of Directors of the Company.

**ITEM1A     RISK FACTORS**

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

**Risks Related toPep Boys**

***If we are unable to generate sufficient cash flowsfrom our operations, our liquidity will suffer and we may be unable to satisfyour obligations.***

**We require significant capital tofund our business. While we believe we have the ability to sufficiently fundour planned operations and capital expenditures for the balance of fiscal year2007, circumstances could arise that would materially affect our liquidity. Forexample, cash flows from our operations could be affected by changes inconsumer spending habits or the failure to maintain favorable vendor paymentterms or our inability to successfully implement sales growth initiatives. Wemay be unsuccessful in securing alternative financing when needed, on termsthat we consider acceptable, or at all.**

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The degree to whichwe are leveraged could have important consequences to your investment in oursecurities, including the following risks: 

·       ourability to obtain additional financing for working capital, capitalexpenditures, acquisitions or general corporate purposes may be impaired in thefuture;

·       asubstantial portion of our cash flow from operations must be dedicated to thepayment of principal and interest on our debt, thereby reducing the fundsavailable for other purposes;

·       ourfailure to comply with financial and operating restrictions placed on us andour subsidiaries by our credit facilities could result in an event of defaultthat, if not cured or waived, could have a material adverse effect on ourbusiness or our prospects; and

·       ifwe are substantially more leveraged than some of our competitors, we might beat a competitive disadvantage to those competitors that have lower debt serviceobligations and significantly greater operating and financial flexibility thanwe do. 

***We depend on our relationships with our vendors and adisruption of these relationships or of our vendors’ operations could have amaterial adverse effect on our business and results of operations.***

Our business depends on developing and maintainingproductive relationships with our vendors. Many factors outside our control mayharm these relationships. For example, financial difficulties that some of ourvendors may face may increase the cost of the products we purchase from them.In addition, our failure to promptly pay, or order sufficient quantities ofinventory from our vendors may increase the cost of products we purchase or maylead to vendors refusing to sell products to us at all. A disruption of ourvendor relationships or a disruption in our vendors’ operations could have amaterial adverse effect on our business and results of operations. 

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

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

***We are subject to environmental laws and may besubject to environmental liabilities that could have a material adverse effecton us in the future.***

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

**Risks Related toOur Industry**

***Our industry is highly competitive, and pricecompetition in some categories of the automotive aftermarket or a loss of trustin our participation in the “do-it-for-me” market, could cause a materialdecline in our revenues and earnings.***

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The automotive aftermarketretail and service industry is highly competitive and subjects us to a widevariety of competitors. We compete primarily with the following types ofbusinesses in each category of the automotive aftermarket: 

***Do-It-Yourself***

*Retail*

·       automotiveparts and accessories stores; 

·       automobiledealers that supply manufacturer replacement parts and accessories; and 

·       mass merchandisers andwholesale clubs that sell automotive products and select non-automotivemerchandise that appeals to automotive “Do-It-Yourself” customers, such asgenerators, power tools and canopies. 

***Do-It-For-Me***

*Service Labor*

·       regionaland local full service automotive repair shops;

·       automobiledealers that provide repair and maintenance services; 

·       nationaland regional (including franchised) tire retailers that provide additionalautomotive repair and maintenance services; and 

·       national and regional(including franchised) specialized automotive (such as exhaust, brake andtransmission) repair facilities that provide additional automotive repair andmaintenance services. 

*InstalledMerchandise/Commercial*

·       massmerchandisers, wholesalers and jobbers (some of which are associated withnational parts distributors or associations). 

*TireSales*

·       nationaland regional (including franchised) tire retailers; and 

·       massmerchandisers and wholesale clubs that sell tires. 

A number of our competitors have more financialresources, are more geographically diverse or have better name recognition thanwe do, which might place us at a competitive disadvantage to those competitors.Because we seek to offer competitive prices, if our competitors reduce theirprices we may also be forced to reduce our prices, which could cause a materialdecline in our revenues and earnings and hinder our ability to service ourdebt. 

With respect to the service labor category, themajority of consumers are unfamiliar with their vehicle’s mechanical operationand, as a result, often select a service provider based on trust. Potential occurrencesof negative publicity associated with the Pep Boys brand, the products we sellor installation or repairs performed in our service bays, whether or notfactually accurate, could cause consumers to lose confidence in our productsand services in the short or long term, and cause them to choose ourcompetitors for their automotive service needs.

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

Ourindustry depends on the number of vehicle miles driven. Factors that may causethe number of vehicle miles and our revenues and our results of operations todecrease include: 

·       theweather—as vehicle maintenance may be deferred during periods of inclementweather; 

·       theeconomy—as during periods of poor economic conditions, customers may defervehicle maintenance or repair, and during periods of good economic conditions,consumers may opt to purchase new vehicles rather than service the vehiclesthey currently own and replace worn or damaged parts; 

·       gasprices—as increases in gas prices may deter consumers from using theirvehicles; and 

·       travel patterns—as changesin travel patterns may cause consumers to rely more heavily on train andairplane transportation. 

**ITEM 1B   UNRESOLVED STAFF COMMENTS**

None.

**ITEM2      PROPERTIES**

The Company owns its five-story, approximately 300,000square foot corporate headquarters in Philadelphia, Pennsylvania. The Companyalso owns the following administrative regional offices—approximately 4,000square feet of space in each of Melrose Park, Illinois and Bayamon, PuertoRico. In addition, the Company leases approximately 4,000 square feet of spacefor administrative regional offices in each of Decatur, Georgia and Richardson,Texas. The Company owns a three-story, approximately 60,000 square footstructure in Los Angeles, California in which it occupies 7,200 square feet andsublets the remaining square footage to tenants.

Of the 593 store locations operated by the Company atFebruary 3, 2007, 324 are owned and 269 are leased.

Thefollowing table sets forth certain information regarding the owned and leasedwarehouse space utilized by the Company for its 593 store locations atFebruary 3, 2007:

| **Warehouse  Locations** | ** ** | ** **        | ** ** | **Products  Warehoused** | ** ** | **Square  Footage** | ** ** | **Owned or  Leased** | ** ** | **Stores Serviced**                             | ** ** | **States Serviced** |
|--------------------------|------------|-------------------|------------|--------------------------|------------|---------------------|------------|----------------------|------------|-------------------------------------------------|------------|---------------------|
| San Bernardino, CA       |       | All               |       | 600,000                  |       | Leased              |       | 164                  |       | AZ, CA, NM, NV, UT, WA                          |
| McDonough, GA            |       | All               |       | 392,000                  |       | Owned               |       | 132                  |       | AL, FL, GA, LA, NC, PR,  SC, TN, VA             |
| Mesquite, TX             |       | All               |       | 244,000                  |       | Owned               |       | 81                   |       | AR, CO, KS, LA, MO, NM,  OK, TX                 |
| Plainfield, IN           |       | All               |       | 403,000                  |       | Leased              |       | 79                   |       | IL, IN, KY, MI, MN, NY,  OH, PA, TN, VA         |
| Chester, NY              |       | All               |       | 400,400                  |       | Leased              |       | 137                  |       | CT, DE, MA, MD, ME, NH,  NJ, NY, PA, RI, VA     |
| Middletown, NY           |       | All  except tires |       | 90,000                   |       | Leased              |       | —               |       | This facility does not  ship directly to stores |
| McDonough, GA            |       | All  except tires |       | 150,000                  |       | Leased              |       | —               |       | This facility does not  ship directly to stores |
| Total                    |       |              |       | 2,279,400                |       |                |       | 593                  |       |                                            |

 

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In addition to the abovedistribution centers, the Company is testing the operation of six satellitewarehouses. These satellite warehouses stock approximately 32,000 SKUs andserve an average of 12-15 stores, in addition to having retail capabilities.Four of these locations were leased and comprised 78,700 square feet, while twowere located in existing owned locations. Concurrently, during 2006, theCompany reduced its outside storage space to provide temporary storage ofmerchandise items from approximately 1,000,000 to 100,000 aggregate cubic feet.The Company anticipates that its existing and future warehouse space and itsaccess to outside storage will accommodate inventory necessary to supportfuture store expansion and any increase in stock-keeping units through the endof fiscal 2007.

**ITEM3     LEGAL PROCEEDINGS**

The Company is party tovarious actions and claims, including purported class actions, arising in thenormal course of business. The Company believes that amounts accrued for awardsor assessments in connection with such matters are adequate and that theultimate resolution of these matters will not have a material adverse effect onthe Company’s financial position, results of operations or cash flows.

**ITEM 4      SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

No matters were submitted to a vote of securityholders, through the solicitation of proxies or otherwise, during the fourthquarter of the fiscal year ended February 3, 2007.

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**PART II**

**ITEM 5**                   MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

The common stock of ThePep Boys—Manny, Moe & Jack is listed on the New York Stock Exchangeunder the symbol “PBY”. There were 6,088 registered shareholders as ofApril 13, 2007. The following table sets forth for the periods listed, thehigh and low sale prices and the cash dividends paid on the Company’s commonstock.

**MARKET PRICE PERSHARE**

| ** **                                     | ** ** | **Market Price Per Share**                | ** ** | **Cash  Dividends**                                     | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                     | ** ** | **    High    ** | ** ** | **    Low    ** | ** ** | **Per Share** | ** ** |
| ***Fiscal  year ended February 3, 2007*** |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Fourth Quarter                                 |       |                                                     | $          | 16.05                                                   |       |   |   | $ | 12.48 |   |   |   | $ | 0.0675 |   |   |
| Third Quarter                                  |       |                                                     | 14.58      |                                                    |       |   | 9.33 |   |   |   | 0.0675 |   |   |
| Second Quarter                                 |       |                                                     | 14.96      |                                                    |       |   | 10.66 |   |   |   | 0.0675 |   |   |
| First Quarter                                  |       |                                                     | 16.55      |                                                    |       |   | 14.05 |   |   |   | 0.0675 |   |   |
| ***Fiscal  year ended January 28, 2006*** |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Fourth Quarter                                 |       |                                                     | $          | 15.99                                                   |       |   |   | $ | 12.54 |   |   |   | $ | 0.0675 |   |   |
| Third Quarter                                  |       |                                                     | 14.84      |                                                    |       |   | 11.75 |   |   |   | 0.0675 |   |   |
| Second Quarter                                 |       |                                                     | 15.24      |                                                    |       |   | 12.54 |   |   |   | 0.0675 |   |   |
| First Quarter                                  |       |                                                     | 18.80      |                                                    |       |   | 14.06 |   |   |   | 0.0675 |   |   |

 

It is the presentintention of the Company’s Board of Directors to continue to pay regularquarterly cash dividends; however, the declaration and payment of futuredividends will be determined by the Board of Directors in its sole discretionand will depend upon the earnings, financial condition and capital needs of theCompany and other factors which the Board of Directors deems relevant.

**EQUITY COMPENSATIONPLANS**

Thefollowing table sets forth the Company’s shares authorized for issuance underits equity compensation plans at February 3, 2007:

|                                                         | ** ** | **Number of securities   to be issued upon   exercise of   outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average price  of outstanding options  (excluding securities  reflected in column (a))  (b)** | ** ** | **Number of securities  remaining available for   future issuance under   equity compensation   plans (excluding securities  reflected in column (a))  (c)** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders |       |                                                                                                                                                                    | 2,493,028  |                                                                                                                                        |       |                                                                                                                                                                                                                                    | $          | 13.64 |   |   |   | 3,243,817 |   |   |
|                                                         |            |                                                                                                                                                                         |            |                                                                                                                                             |            |                                                                                                                                                                                                                                         |            |  |  |  |  |  |  |  |

 

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**STOCK PRICEPERFORMANCE**

The following graphcompares the cumulative total return on shares of Pep Boys Stock over the pastfive years with the cumulative total return on shares of companies in(1) the Standard & Poor’s SmallCap 600 Index, (2) theS&P 600 Specialty Stores Index and (3) the S&P 600 AutomotiveRetail Index. Pep Boys moved from the S&P 600 Specialty Stores Index to theS&P 600 Automotive Retail Index upon its formation in May 2005. Untilsuch time as the S&P 600 Automotive Retail index has five years of history,Pep Boys will show a comparison to both peer group indexes. The comparisonassumes that $100 was invested in January 2002 in Pep Boys Stock and ineach of the indices and assumes reinvestment of dividends.

 

| **Company / Index**         | ** ** | ** ** | ** ** | **Jan. 2002** | ** ** | **Jan. 2003** | ** ** | **Jan. 2004** | ** ** | **Jan. 2005** | ** ** | **Jan. 2006** | ** ** | **Jan. 2007** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| Pep Boys                              |       |       | $          | 100                |       |               |       | $                  | 66         |               |       |               | $          | 143                |       |   |   | $ | 109 |   |   |   | $ | 105 |   |   |   | $ | 110 |   |   |
| S&P SmallCap  600 Index           |       |       | $          | 100                |       |               |       | $                  | 83         |               |       |               | $          | 122                |       |   |   | $ | 139 |   |   |   | $ | 170 |   |   |   | $ | 187 |   |   |
| S&P 600  Specialty Stores Index   |       |       | $          | 100                |       |               |       | $                  | 84         |               |       |               | $          | 137                |       |   |   | $ | 125 |   |   |   | $ | 122 |   |   |   | $ | 125 |   |   |
| S&P 600 Automotive  Retail Index* |       |       |       |               |       |               |       |               |       |               |       |               |       |               | $          | 100 |   |   |   | $ | 130 |   |   |   | $ | 170 |   |   |

 

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*                    TheS&P 600 Automotive Retail Index was created in May 2005. Therefore,the total return for January 2006 is for the period from May 2005through January 2006.

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**ITEM 6**                   SELECTEDFINANCIAL DATA

Thefollowing tables set forth the selected financial data for the Company andshould be read in conjunction with the Consolidated Financial Statements andNotes thereto included elsewhere herein.

| **Year ended**                                                                                                                | ** ** | ** **                                                                                  | ** ** | **Feb. 3,   2007** | ** ** | **Jan. 28,   2006** | ** ** | **Jan. 29,   2005** | ** ** | **Jan. 31,   2004** | ** ** | **Feb. 1,   2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                         | ** ** | **(dollar amounts are in thousands, except share data)** | ** ** |
| **STATEMENT  OF OPERATIONS DATA(5)**                                                                                               |       |                                                                                        |       |                         |       |                          |       |                          |       |                          |       |
| Merchandise sales                                                                                                                  |       | $                                                                                           | 1,876,290  |                         | $          | 1,854,408                     |       | $                             | 1,863,015  |                          | $          | 1,728,386                    |       | $ | 1,697,628 |   |
| Service revenue                                                                                                                    |       | 395,871                                                                                     |       | 383,621                      |       | 409,881                       |       | 405,884                       |       | 400,149                       |       |
| Total revenues                                                                                                                     |       | 2,272,161                                                                                   |       | 2,238,029                    |       | 2,272,896                     |       | 2,134,270                     |       | 2,097,777                     |       |
| Gross profit from merchandise sales                                                                                                |       | 539,954                                                                                     |       | 476,856                      |       | 517,871                       |       | 486,087                       | (3)        | 507,702                       | (4)        |
| Gross profit from service revenue                                                                                                  |       | 31,802                                                                                      |       | 30,411                       |       | 92,739                        |       | 94,762                        | (3)        | 100,355                       | (4)        |
| Total gross profit                                                                                                                 |       | 571,756                                                                                     |       | 507,267                      |       | 610,610                       |       | 580,849                       | (3)        | 608,057                       | (4)        |
| Selling, general and administrative expenses                                                                                       |       | 551,031                                                                                     |       | 523,318                      | (1)        | 547,336                       | (2)        | 569,834                       | (3)        | 504,163                       | (4)        |
| Net Gain (Loss) from Sales of Assets(6)                                                                                            |       | 15,297                                                                                      |       | 4,826                        |       | 11,848                        |       | (61                           | )          | 1,909                         |       |
| Operating (loss) profit                                                                                                            |       | 36,022                                                                                      |       | (11,225                      | )(1)       | 75,122                        | (2)        | 10,954                        | (3)        | 105,803                       | (4)        |
| Non-operating income                                                                                                               |       | 7,023                                                                                       |       | 3,897                        |       | 1,824                         |       | 3,340                         |       | 3,097                         |       |
| Interest expense                                                                                                                   |       | 49,342                                                                                      |       | 49,040                       |       | 35,965                        |       | 38,255                        |       | 47,237                        |       |
| (Loss) earnings from continuing operations before  income taxes and cumulative effect of change in accounting  principle |       | (6,297                                                                                      | )          | (56,368                      | )(1)       | 40,981                        | (2)        | (23,961                       | )(3)       | 61,267                        | (4)        |
| Net (loss) earnings from continuing operations  before cumulative effect of change in accounting principle                         |       | (2,000                                                                                      | )          | (35,799                      | )(1)       | 25,666                        | (2)        | (15,145                       | )(3)       | 38,881                        | (4)        |
| Discontinued operations, net of tax(6)                                                                                             |       | (738                                                                                        | )          | 292                          |       | (2,087                        | )          | (16,265                       | )          | 587                           |       |
| Cumulative effect of change in accounting principle,  net of tax                                                                   |       | 189                                                                                         |       | (2,021                       | )          | —                        |       | (2,484                        | )          | —                        |       |
| Net (loss) earnings                                                                                                                |       | (2,549                                                                                      | )          | (37,528                      | )(1)       | 23,579                        | (2)        | (33,894                       | )(3)       | 39,468                        | (4)        |
| **BALANCE SHEET DATA**                                                                                                             |       |                                                                                        |       |                         |       |                          |       |                          |       |                          |       |
| Working capital                                                                                                                    |       | $                                                                                           | 163,960    |                         | $          | 247,526                       |       | $                             | 180,651    |                          | $          | 76,227                       |       | $ | 130,680 |   |
| Current ratio                                                                                                                      |       | 1.27  to 1                                                                                  |       | 1.43  to 1                   |       | 1.27  to 1                    |       | 1.10  to 1                    |       | 1.24  to 1                    |       |
| Merchandise inventories                                                                                                            |       | $                                                                                           | 607,042    |                         | $          | 616,292                       |       | $                             | 602,760    |                          | $          | 553,562                      |       | $ | 488,882 |   |
| Property and equipment-net                                                                                                         |       | 906,247                                                                                     |       | 947,389                      |       | 945,031                       |       | 923,209                       |       | 974,673                       |       |
| Total assets                                                                                                                       |       | 1,767,199                                                                                   |       | 1,821,753                    |       | 1,867,023                     |       | 1,778,046                     |       | 1,741,650                     |       |
| Long-term debt (includes all convertible debt)                                                                                     |       | 535,031                                                                                     |       | 586,239                      |       | 471,682                       |       | 408,016                       |       | 525,577                       |       |
| Total stockholders’ equity                                                                                                    |       | 567,755                                                                                     |       | 594,565                      |       | 653,456                       |       | 569,734                       |       | 605,880                       |       |
| **DATA PER COMMON SHARE**                                                                                                          |       |                                                                                        |       |                         |       |                          |       |                          |       |                          |       |
| Basic (loss) earnings from continuing operations  before cumulative effect of change in accounting principle                       |       | $                                                                                           | (0.04      | )                            | $          | (0.65                         | )(1)       | $                             | 0.46       | (2)                           | $          | (0.29                        | )(3)       | $ | 0.75 | (4) |
| Basic (loss) earnings                                                                                                              |       | (0.05                                                                                       | )          | (0.69                        | )(1)       | 0.42                          | (2)        | (0.65                         | )(3)       | 0.77                          | (4)        |
| Diluted (loss) earnings from continuing operations  before cumulative effect of change in accounting principle                     |       | (0.04                                                                                       | )          | (0.65                        | )(1)       | 0.45                          | (2)        | (0.29                         | )(3)       | 0.73                          | (4)        |
| Diluted net (loss) earnings                                                                                                        |       | (0.05                                                                                       | )          | (0.69                        | )(1)       | 0.41                          | (2)        | (0.65                         | )(3)       | 0.74                          | (4)        |
| Cash dividends declared                                                                                                            |       | 0.27                                                                                        |       | 0.27                         |       | 0.27                          |       | 0.27                          |       | 0.27                          |       |
| Stockholders’ equity                                                                                                          |       | 10.53                                                                                       |       | 10.97                        |       | 11.87                         |       | 10.79                         |       | 11.73                         |       |
| Common share price  range:                                                                                                         |       |                                                                                        |       |                         |       |                          |       |                          |       |                          |       |
| High                                                                                                                               |       | 16.55                                                                                       |       | 18.80                        |       | 29.37                         |       | 23.99                         |       | 19.38                         |       |
| Low                                                                                                                                |       | 9.33                                                                                        |       | 11.75                        |       | 11.83                         |       | 6.00                          |       | 8.75                          |       |
| **OTHER STATISTICS**                                                                                                               |       |                                                                                        |       |                         |       |                          |       |                          |       |                          |       |
| Return on average stockholders’ equity                                                                                        |       | (0.4                                                                                        | )%         | (6.0                         | )%         | 3.9                           | %          | (5.8                          | )%         | 6.7                           | %          |
| Common shares issued and outstanding                                                                                               |       | 53,934,084                                                                                  |       | 54,208,803                   |       | 55,056,641                    |       | 52,787,148                    |       | 51,644,578                    |       |
| Capital expenditures                                                                                                               |       | 53,903                                                                                      |       | 92,083                       |       | 103,766                       |       | 43,262                        |       | 43,911                        |       |
| Number of retail outlets                                                                                                           |       | 593                                                                                         |       | 593                          |       | 595                           |       | 595                           |       | 629                           |       |
| Number of service  bays                                                                                                            |       | 6,162                                                                                       |       | 6,162                        |       | 6,181                         |       | 6,181                         |       | 6,527                         |       |

 

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(1)                Includes a pretax charge of $4,200 related to an assetimpairment charge reflecting the remaining value of a commercial sales softwareasset, which was included in selling, general and administrative expenses.

(2)                Includes a pretax charge of $6,911 related to certainexecutive severance obligations.

(3)                Includes pretax charges of $88,980 related to corporaterestructuring and other one-time events of which $29,308 reduced gross profitfrom merchandise sales, $3,278 reduced gross profit from service revenue and$56,394 was included in selling, general and administrative expenses.

(4)                Includes pretax charges of $2,529 related to the ProfitEnhancement Plan of which $2,014 reduced the gross profit from merchandisesales, $491 reduced gross profit from service revenue and $24 was included inselling, general and administrative expenses.

(5)                Statement of operations data reflects 53 weeks for yearended February 3, 2007 while the prior years reflect 52 weeks.

(6)                Prior fiscal year amounts reflect reclassificationsto separately disclose NetGain (Loss) from Sales of Assets from Costs of Merchandise Sales and the changein classification of a store from discontinued operations to continuingoperations.

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**ITEM 7**                   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**OVERVIEW**

***Introduction***

Pep Boys is a leader in the automotive aftermarket,with 593 stores and more than 6,000 service bays located throughout 36 statesand Puerto Rico. All of our stores feature the nationally recognized Pep Boysbrand name, established through more than 80 years of providing high-qualityautomotive merchandise and services, and are company-owned, ensuring chain-wideconsistency for our customers. We are the only national chain offeringautomotive service, accessories, tires and parts under one roof, positioning usto achieve our goal of becoming the category dominant one-stop shop forautomotive maintenance and accessories.

Of our 593 stores, 582 are what we refer to asSUPERCENTERS, which feature an average of 11 state-of-the-art service bays,with an average of more than 20,000 square feet per SUPERCENTER. Our store sizeallows us to display and sell a more complete offering of merchandise in a widerarray of categories than our competitors, with a focus on the high-growthaccessories segment and a comprehensive tire offering. We leverage thisinvestment in inventory through our ability to install what we sell in ourservice bays and by offering this merchandise to both commercial and retailcustomers.

Our fiscal year ends on the Saturday nearestJanuary 31, which results in an extra week every six years. Our fiscalyear ended February 3, 2007 was a 53-week year with the fourthquarter including 14 weeks versus 13 weeks in fiscal 2005. All other yearsincluded in this report are 52 weeks.

Total revenues for the fiscal year endedFebruary 3, 2007 were $2,272,161,000 as compared to the $2,238,029,000recorded in the prior year. On a 52 week basis, comparable merchandise salesdecreased 0.5% and comparable service revenue increased 1.3%. While we believethe macro economic environment negatively impacted our business throughout2006, we were pleased with the increase in our service revenue which showed steadyimprovement in the second half of fiscal 2006. Continued focus on our servicecenter productivity and service manager retention has helped recapture thismarket share.

Our net loss per share in the fifty-three weeks endedFebruary 3, 2007 was $.05 per share or $.64 per share improvement over the$.69 loss per share recorded in 2005. Continual focus on our business strategyduring the year permitted us to improve margins through better productacquisition costs and cost control incentives, which resulted in a reduction ofour loss per share.

In addition to the improved operating performanceduring 2006, the Company focused significantly on improving its cash flow andstrengthening its balance sheet. In the third quarter of 2006, we increased ourSenior Secured Term Loan facility to $320,000,000, in order to refinance ourConvertible Senior Notes due June 1, 2007, and extended the facility’smaturity to 2013, currently, the date of our first significant funded debtmaturity. Our cash flow from operating activities improved by $130,817,000 andcapital expenditures were $35,733,000 less then last year.

During 2006 we reinvested in our existing stores toredesign their interiors and enhance their exterior appeal. Our new interiordesign features four distinct merchandising worlds: accessories (fashion,electronic and performance merchandise), maintenance (hard parts andchemicals), garage (repair shop and travel) and service (including tire, wheeland accessory installation). We believe that this layout provides customerswith a clear and concise way of finding what they need and promotescross-selling. Modifications to the exterior of our stores are designed toincrease customer traffic.

During 2006 we grandreopened 104 Stores in the following markets: New York—32 (first quarter);Denver, CO, Colorado Springs, CO, Orlando, FL, Miami, FL, and West Palm Beach,FL—34 (second quarter); Northern Florida and Mobile-Pensacola, FL—13 (thirdquarter); Dallas, TX, Waco, TX, 

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Abilene,TX and Tyler, TX—25 (fourth quarter). We expect to grand reopen approximately125 remodeled stores in each of 2007 and 2008 with the remaining approximately50 stores to be completed in 2009.

***Business Strategy***

*Keeping Our MerchandisingFresh and Exciting.*   We continually merchandiseour stores with a new and flexible product mix designed to increase customerpurchases. We take advantage of our industry-leading average retailsquare footage to increase the appeal of our merchandise displays. We utilizeproduct-specific advertising to highlight promotional items and pricing,primarily through weekly print advertising.

*·**      *Enhancing Our Stores.   We areinvesting in our existing stores to redesign our interiors and enhance theirexterior appeal. We believe that this layout will provide customers with aclear and concise way of finding what they need and will promote cross-selling.

*·**      *Improving Service Center Performance.   Weare working to improve the financial performance of our service centeroperations by improving tire sales and related attachment sales, and improvinglabor productivity. To improve tire sales, we have reduced our advertised openingprice points, while offering attractive opportunities for customers to upgradeto tires with better warranties, features, or brands. In addition, we haveemphasized training our staff to offer beneficial services related to each tiresale such as wheel balancing, alignments and warranties, as well as to providea thorough safety check that highlights any further car maintenance or repairneeds. We continually tailor our labor costs to labor sales volumes providingan opportunity to improve labor productivity going forward.

*·**      *Improve Store Productivity.   Wecontinually focus on improving the returns of our investment in store assetsthrough managing our store portfolio, and taking advantage of opportunities forstore relocations, disposals or new store additions. Any net store growth willfocus primarily upon increasing penetration in our existing markets to furtherleverage our investments.

The following discussionexplains the material changes in our results of operations for the fifty-threeweeks ended February 3, 2007, and fifty-two weeks ended January 28,2006, and January 28, 2005.

**CAPITAL & LIQUIDITY**

***Capital Resourcesand Needs***

Our cash requirements arise principally from thepurchase of inventory, capital expenditures related to existing stores, officesand distribution centers and our stock repurchase program.

In fiscal 2006, improved operating results and workingcapital management, real estate sales and reduced capital expenditures allowedus to reduce our total debt by $48,975,000 and to repay in full $24,669,000 ofborrowings against our company-owned life insurance policy assets.

While the primary capital expenditures for the fiscalyear 2006 continue to be attributed to store redesigning, the rate of our storerefurbishment program was decreased significantly both as a result of ourdecision in the second quarter to extend it through fiscal 2009 as well as itsincreased cost effectiveness. We remodeled 120 stores in 2006 and grandreopened 104 stores. In 2007, we expect to remodel 137 stores with theremaining being completed in late 2008 or early 2009.

On September 7, 2006 our Board of Directorsrenewed our stock repurchase program, resetting the authorized amount of sharesthat we can repurchase under the program to $100,000,000. We will purchase ourcommon stock on the open market or in privately negotiated transactions fromtime to time in 

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accordance with therequirements of the SEC. In the fourth quarter of fiscal 2006, we hadrepurchased $7,311,000 at an average of $14.77 per share. This program expireson September 30, 2007.

Our capital expenditure program in 2007 is expected tobe similar to the fiscal 2006 program, with inventory levels in 2007 comparableto 2006.

We anticipate that cash provided by operatingactivities, our existing line of credit, cash on hand and future access to thecapital markets will exceed our expected cash requirement in fiscal 2007.

The Company’s workingcapital was $163,960,000 at February 3, 2007, $247,526,000 atJanuary 28, 2006, and $180,651,000 at January 29, 2005. The Company’slong-term debt, as a percentage of its total capitalization, was 49% atFebruary 3, 2007, 50% at January 28, 2006 and 42% at January 29,2005 respectively. As of February 3, 2007, the Company had a $357,500,000line of credit, with an availability of approximately $190,000,000. Our currentportion of long term debt is $3,490,000 at February 3, 2007.

*Contractual Obligations*

Thefollowing chart represents the Company’s total contractual obligations andcommercial commitments as of February 3, 2007:

| ** **                                                  | ** ** | ** **                                       | ** ** | **Due in less** | ** ** | **Due in**           | ** ** | **Due in**                | ** ** | **Due after**             | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **Obligation**                                              | ** ** | ** **                                       | ** ** | **Total**                 | ** ** | **than 1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **5 years** | ** ** |
| ** **                                                  | ** ** | **(dollar amounts in thousands)** | ** ** |
| Long-term debt(1)                                           |       | $                                                | 537,836    |                      |       | $                         | 3,201      |                           |       | $                              | 24,028     |   | $ | 6,456 |   | $ | 504,151 |   |
| Operating leases                                            |       | 482,849                                          |       |                      | 57,670     |                      |       | 100,902                        |       | 84,727                         |       | 239,550 |   |
| Expected  scheduled interest payments on all long-term debt |       | 289,487                                          |       |                      | 39,932     |                      |       | 118,285                        |       | 116,270                        |       | 15,000 |   |
| Capital leases                                              |       | 685                                              |       |                      | 289        |                      |       | 239                            |       | 157                            |       | — |   |
| Total cash obligations                                      |       | $                                                | 1,310,857  |                      |       | $                         | 101,092    |                           |       | $                              | 243,454    |   | $ | 207,610 |   | $ | 758,701 |   |
|                                                             |            |                                                  |            |                           |            |                           |            |                                |            |                                |            |  |  |  |  |  |  |  |  |  |

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(1)          Long-term debt includescurrent maturities.

Thetable excludes our pension obligation. We made voluntary contributions of$504,000, $1,867,000 and $1,819,000, to our pension plans in fiscal 2006, 2005and 2004, respectively. Future plan contributions are dependent upon actualplan asset returns and interest rates. We expect contributions to approximate$1,258,000 in fiscal 2007. See Note 9 of Notes to Consolidated FinancialStatements in “Item 8 Financial Statements and Supplementary Data” for furtherdiscussion of our pension plans.

| ** **                      | ** ** | ** **                                       | ** ** | **Due in less** | ** ** | **Due in**           | ** ** | **Due in**                | ** ** | **Due after**             | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **Commercial Commitments** | ** ** | ** **                                       | ** ** | **Total**                 | ** ** | **than 1 year** | ** ** | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **5 years** | ** ** |
| ** **                      | ** ** | **(dollar amounts in thousands)** | ** ** |
| Import letters of credit        |       | $                                                | 487        |                      |       | $                         | 487        |                           |       |                           | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Standby letters of credit       |       | 55,708                                           |       |                      | 42,708     |                      |       |                           | 13,000     |                           |       |   | — |   |   |   | — |   |   |
| Surety bonds                    |       | 11,224                                           |       |                      | 11,016     |                      |       |                           | 208        |                           |       |   | — |   |   |   | — |   |   |
| Purchase obligations(1)(2)      |       | 18,011                                           |       |                      | 15,398     |                      |       |                           | 1,900      |                           |       |   | 713 |   |   |   | — |   |   |
| Total commercial commitments    |       | $                                                | 85,430     |                      |       | $                         | 69,609     |                           |       |                           | $          | 15,108 |   |   |   | $ | 713 |   |   |   | $ | — |   |   |
|                                 |            |                                                  |            |                           |            |                           |            |                                |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Ouropen purchase orders are based on current inventory or operational needs andare fulfilled by our vendors within short periods of time. We currently do nothave minimum purchase commitments under our vendor supply agreements andgenerally our open purchase orders (orders that have not been shipped) are notbinding agreements. Those purchase obligations that are in transit from ourvendors at February 3, 2007 are considered to be a contractual obligation.

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(2)          In the first quarter offiscal 2005, we entered into a contractual commitment to purchase approximately$4,800,000 of products over a six-year period. The commitment for years twothrough five is approximately $950,000 per year, while the final year’scommitment is approximately half that amount. Following year two, we areobligated to pay the vendor a per unit fee if there is a shortfall between ourcumulative purchases during the two year period and the minimum purchaserequirement. For years three through six, we are obligated to pay the vendor aper unit fee for any annual shortfall. The maximum annual obligation under anyshortfall is approximately $950,000. At February 3, 2007, we expect to meet thecumulative minimum purchase requirements under this contract.

*Long-term Debt*

On January 27, 2006the Company entered into a $200,000,000 Senior Secured Term Loan facility dueJanuary 27, 2011. This facility is secured by the real property andimprovements associated with 154 of the Company’s stores. Interest at the rateof London Interbank Offered Rate (LIBOR) plus 3.0% on this facility was payableby the Company starting in February 2006. Proceeds from this facility wereused to satisfy and discharge the Company’s then outstanding $43,000,000 6.88%Medium Term Notes due March 6, 2006 and $100,000,000 6.92% Term EnhancedRemarketable Securities (TERMS) due July 7, 2016 and to reduce borrowingsunder the Company’s line of credit by approximately $39,000,000.

On October 30, 2006,the Company amended and restated the Senior Secured Term Loan facility to(i) increase the size from $200,000,000 to $320,000,000, (ii) extendthe maturity from January 27, 2011 to October 27, 2013,(iii) reduce the interest rate from LIBOR plus 3.00% to LIBOR plus 2.75%.An additional 87 stores (bringing the total to 241 stores) were added to thecollateral pool securing the facility. Proceeds were used to satisfy anddischarge $119,000,000 in outstanding 4.25% convertible Senior Notes dueJune 1, 2007.

On February 15, 2007,the Company further amended the Senior Secured Term Loan facility to reduce theinterest rate from LIBOR plus 2.75% to LIBOR plus 2.00%.

Upon maturity onJune 1, 2005, the Company retired the remaining $40,444,000 aggregateprincipal amount of its 7.0% Senior Notes with cash from operations and itsexisting line of credit.

On December 14, 2004,the Company issued $200,000,000 aggregate principal amount of 7.5% SeniorSubordinated Notes due December 15, 2014.

On December 2, 2004,the Company further amended its amended and restated line of credit agreement.The amendment increased the amount available for borrowings to $357,500,000,with an ability, upon satisfaction of certain conditions, to increase suchamount to $400,000,000. The amendment also reduced the interest rate under theagreement to LIBOR plus 1.75% (after June 1, 2005, the rate decreased toLIBOR plus 1.50%, subject to 0.25% incremental increases as excess availabilityfalls below $50,000,000). The amendment also provided the flexibility, uponsatisfaction of certain conditions, to release up to $99,000,000 of reservesrequired as of December 2, 2004 under the line of credit agreement tosupport certain operating leases. This reserve was $73,912,000 onFebruary 3, 2007. Finally, the amendment extended the term of theagreement through December 2009. The weighted average interest rate onborrowings under the line of credit agreement was 7.67 % and 6.2% atFebruary 3, 2007 and January 28, 2006, respectively.

The other notes payablehave a principal balance of $268,000 and $1,315,000 and a weighted averageinterest rate of 8.0% and 5.1% at February 3, 2007 and January 28,2006, respectively, and mature at various times through August 2016.Certain of these notes are collateralized by land and buildings with anaggregate carrying value of approximately $1,774,000 and $6,744,000 at February 3,2007 and January 28, 2006, respectively.

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*Other ContractualObligations*

In the third quarter of fiscal 2004, the Companyentered into a vendor financing program with an availability of $20,000,000.Under this program, the Company’s factor makes accelerated and discountedpayments to its vendors and the Company, in turn, makes its regularly-scheduledfull vendor payments to the factor. As of February 3, 2007 andJanuary 28, 2006, there was an outstanding balance of $13,990,000 and$11,156,000, respectively, under this program, classified as trade payableprogram liability in the consolidated balance sheet.

In October 2001, the Company entered into acontractual commitment to purchase media advertising services with equal annualpurchase requirements totaling $39,773,000 over four years. During the secondquarter of fiscal 2004, it was determined that the Company would be unable tomeet this obligation for the 2004 contract year which ended onNovember 30, 2004. As a result, the Company recorded a $1,579,000 chargeto selling, general and administrative expenses in the quarter endedJuly 31, 2004 related to the anticipated shortfall in this purchasecommitment. This agreement expired in October 2005.

The Company hasletter of credit arrangements in connection with its risk management, importmerchandising and vendor financing programs. The Company was contingentlyliable for $487,000 and $1,015,000 in outstanding import letters of credit and$55,708,000 and $41,218,000 in outstanding standby letters of credit as of February 3,2007 and January 28, 2006, respectively.

The Company was alsocontingently liable for surety bonds in the amount of approximately $11,224,000and $13,021,000 as of February 3, 2007 and January 28, 2006,respectively. The surety bonds guarantee certain of the Company’s payments (forexample utilities, easement repairs, licensing requirements and customs fees).

*Off-balance SheetArrangements*

In the thirdquarter of fiscal 2004, the Company entered into a $35,000,000 operating leasefor certain operating equipment at an interest rate of LIBOR plus 2.25%. TheCompany has evaluated this transaction in accordance with the guidance ofFinancial Accounting Standards Board Interpretation Number (FIN) 46 andre-evaluated the transaction under FIN 46R and has determined that it is notrequired to consolidate the leasing entity. As of February 3, 2007, therewas an outstanding commitment of $14,938,000 under the lease. The leaseincludes a residual value guarantee with a maximum value of approximately $172,000.The Company expects the fair market value of the leased equipment tosubstantially reduce or eliminate the Company’s payment under the residualguarantee at the end of the lease term. In accordance with FIN 45, the Companyhas recorded a liability for the fair value of the guarantee related to thisoperating lease. As of February 3, 2007 and January 28, 2006, thecurrent value of this liability was $71,000 and $105,000, respectively, whichis recorded in other long-term liabilities on the consolidated balance sheets.

On August 1,2003, the Company renegotiated $132,000,000 in operating leases. These leases,which expire on August 1, 2008, have lease payments with an effective rateof LIBOR plus 2.06%. The Company has evaluated this transaction in accordancewith the guidance of FIN 46 and re-evaluated the transaction under FIN 46R andhas determined that it is not required to consolidate the leasing entity. Theleases include a residual value guarantee with a maximum value of approximately$105,000,000. The Company expects the fair market value of the leased realestate to substantially reduce or eliminate the Company’s payment under theresidual guarantee at the end of the lease term. In accordance with FIN 45, theCompany has recorded a liability for the fair value of the guarantee related tothis operating lease. As of February 3, 2007, the current value of thisliability was $1,496,000, which is recorded in other long-term liabilities onthe consolidated balance sheets. As of February 3, 2007, there was anoutstanding commitment of $117,627,000 under the lease.

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The Company leases certainproperty and equipment under operating leases and capital leases which containrenewal and escalation clauses, step rent provisions, capital improvements fundingand other lease concessions. These provisions are considered in the Company’scalculation of its minimum lease payments which are recognized as expense on astraight-line basis over the applicable lease term. In accordance with theFinancial Accounting Standards Board (FASB) Statement of Financial AccountingStandards (SFAS) No. 13, as amended by SFAS No. 29, any leasepayments that are based upon an existing index or rate are included in theCompany’s minimum lease payment calculations. Total operating lease commitmentsas of February 3, 2007 were $482,849,000.

*Pension Plans*

The Company has a definedbenefit pension plan covering its full-time employees hired on or beforeFebruary 1, 1992 and an unfunded Supplemental Executive Retirement Plan(SERP) that includes a defined benefit portion. The pension expense under theseplans for fiscal 2006, 2005, and 2004 was $3,999,000, $4,331,000 and$4,076,000, respectively. The fiscal year 2006 expense is calculated based upona number of actuarial assumptions, including an expected return on plan assetsof 6.30% and a discount rate of 5.70%. In developing the expected return onasset assumptions, the Company evaluated input from its actuaries, includingtheir review of asset class return expectations. The discount rate utilized forthe pension plans is based on a model bond portfolio with durations that matchthe expected payment patterns of the plans. The Company will continue toevaluate its actuarial assumptions and adjust as necessary. In fiscal 2006, theCompany contributed an aggregate of $504,000 to our pension plans. Based uponthe current funded status of the defined benefit pension plan and the unfundeddefined benefit portion of the SERP, aggregate cash contributions are expectedto be $1,258,000 in fiscal 2007.

On January 31, 2004,the Company amended and restated its SERP. This amendment converted the definedbenefit plan to a defined contribution plan for certain unvested participantsand all future participants. All vested participants under the defined benefitportion will continue to accrue benefits according to the defined benefitformula. In connection with these amendments, the Company settled severalobligations related to the benefits under the defined benefit SERP. Theseobligations totaled $568,000, and resulted in an expense under SFASNo. 88, “Employers’ Accounting for Settlements and Curtailments of DefinedBenefit Pension Plans and for Termination Benefits,” of approximately $774,000in fiscal 2004.

**RESULTS OF OPERATIONS**

***Management Overview-Fiscal2006***

Fiscal 2006 was a year ofcontinuous improvement to operating performance for the Company. Our operatingprofit for fiscal 2006 was $36,022,000 or a $47,247,000 improvement over theoperating loss in fiscal 2005 of $11,225,000. On a 52 week basis, ourcomparable sales were basically flat, but included a 1.3% improvement inservice revenues. With revenue flat, improvements in margins and loweroperating costs helped drive this operating profit improvement. Net loss forfiscal 2006 decreased to $2,549,000 or $0.05 per share (basic &diluted) from a net loss in 2005 of $37,528,000 or $0.69 per share(basic & diluted).

***DiscontinuedOperations***

In accordance with SFASNo. 144, our discontinued operations continues to reflect the costsassociated with the stores remaining from the 33 stores closed on July 31,2003 as part of our corporate restructuring (see Item 8 Financial Statementsand Supplementary Data- note 7).

During the second quarterof fiscal 2006, we sold a store that we have leased back and will continue tooperate for a one year period. Due to our significant continuing involvementwith this store following the sale, we reclassified back into continuingoperations, for all periods presented, this store’s revenues and 

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coststhat had been previously reclassified into discontinued operations during thethird quarter of fiscal 2005, in accordance with SFAS No. 144 and EITF 03-13.

During fiscal 2005, theCompany sold a closed store for proceeds of $931,000 resulting in a pre-taxgain of $341,000, which was recorded in discontinued operations on theconsolidated statement of operations.

During fiscal 2004, theCompany sold assets held for disposal for proceeds of $13,327,000 resulting ina loss of $91,000, which was recorded in discontinued operations on theconsolidated statement of operations.

***Analysis ofStatement of Operations***

Thefollowing table presents, for the periods indicated, certain items in theconsolidated statements of operations as a percentage of total revenues (exceptas otherwise provided) and the percentage change in dollar amounts of suchitems compared to the indicated prior period.

| ** **                                                                                                               | ** ** | **Percentage of Total Revenues** | ** ** | **Percentage Change**                          | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Year ended**                                                                                                      | ** ** | ** **                                      | ** ** | **Feb 3, 2007   (fiscal** 2006) | ** ** | **Jan. 28, 2006   (fiscal 2005)** | ** ** | **Jan. 29, 2005  (fiscal 2004)** | ** ** | **Fiscal 2006 vs.  Fiscal 2005** | ** ** | **Fiscal 2005 vs.  Fiscal 2004** | ** ** |
| Merchandise Sales                                                                                                        |       |                                            | 82.6       | %                                                   |       |   | 82.9 | % |   |   | 82.0 | % |   |   | 1.2 | % |   |   | (0.5 | )% |   |
| Service Revenue(1)                                                                                                       |       |                                            | 17.4       |                                                |       |   | 17.1 |   |   |   | 18.0 |   |   |   | 3.2 |   |   |   | (6.4 | ) |   |
| Total Revenues                                                                                                           |       |                                            | 100.0      |                                                |       |   | 100.0 |   |   |   | 100.0 |   |   |   | 1.5 |   |   |   | (1.5 | ) |   |
| Costs of Merchandise  Sales(2)                                                                                           |       |                                            | 71.2       | (3)                                                 |       |   | 74.3 | (3) |   |   | 72.2 | (3) |   |   | (3.0 | ) |   |   | 2.4 |   |   |
| Costs of Service  Revenue(2)                                                                                             |       |                                            | 92.0       | (3)                                                 |       |   | 92.1 | (3) |   |   | 77.4 | (3) |   |   | 3.1 |   |   |   | 11.4 |   |   |
| Total Costs of Revenues                                                                                                  |       |                                            | 74.8       |                                                |       |   | 77.3 |   |   |   | 73.1 |   |   |   | (1.8 | ) |   |   | 4.1 |   |   |
| Gross Profit from  Merchandise Sales                                                                                     |       |                                            | 28.8       | (3)                                                 |       |   | 25.7 | (3) |   |   | 27.8 | (3) |   |   | 13.2 |   |   |   | (7.9 | ) |   |
| Gross Profit from  Service Revenue                                                                                       |       |                                            | 8.0        | (3)                                                 |       |   | 7.9 | (3) |   |   | 22.6 | (3) |   |   | 4.6 |   |   |   | (67.2 | ) |   |
| Total Gross Profit                                                                                                       |       |                                            | 25.2       |                                                |       |   | 22.7 |   |   |   | 26.9 |   |   |   | 12.7 |   |   |   | (16.9 | ) |   |
| Selling, General and  Administrative Expenses                                                                            |       |                                            | 24.3       |                                                |       |   | 23.4 |   |   |   | 24.1 |   |   |   | 5.3 |   |   |   | (4.4 | ) |   |
| Net Gain from Sales of  Assets                                                                                           |       |                                            | 0.7        |                                                |       |   | 0.2 |   |   |   | 0.5 |   |   |   | 217.0 |   |   |   | (59.3 | ) |   |
| Operating (Loss) Profit                                                                                                  |       |                                            | 1.6        |                                                |       |   | (0.5 | ) |   |   | 3.3 |   |   |   | 420.9 |   |   |   | (114.9 | ) |   |
| Non-operating Income                                                                                                     |       |                                            | 0.3        |                                                |       |   | 0.2 |   |   |   | 0.1 |   |   |   | 80.2 |   |   |   | 113.7 |   |   |
| Interest Expense                                                                                                         |       |                                            | 2.2        |                                                |       |   | 2.2 |   |   |   | 1.6 |   |   |   | 0.6 |   |   |   | 36.4 |   |   |
| (Loss) Earnings from  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       |                                            | (0.3       | )                                                   |       |   | (2.5 | ) |   |   | 1.8 |   |   |   | 88.8 |   |   |   | (237.5 | ) |   |
| Income Tax (Benefit)  Expense                                                                                            |       |                                            | (68.2      | )(4)                                                |       |   | (36.5 | )(4) |   |   | 37.4 | (4) |   |   | (79.1 | ) |   |   | 234.3 |   |   |
| Net (Loss) Earnings from  Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       |                                            | (0.1       | )                                                   |       |   | (1.6 | ) |   |   | 1.1 |   |   |   | 94.4 |   |   |   | (239.5 | ) |   |
| Discontinued Operations,  Net of Tax                                                                                     |       |                                            | —     |                                                |       |   | — |   |   |   | (0.1 | ) |   |   | (352.7 | ) |   |   | 114.0 |   |   |
| Cumulative Effect of  Change in Accounting Principle, Net of  Tax                                                        |       |                                            | —     |                                                |       |   | (0.1 | ) |   |   | — |   |   |   | 109.4 |   |   |   | — |   |   |
| Net (Loss) Earnings                                                                                                      |       |                                            | (0.01      | )                                                   |       |   | (1.7 | ) |   |   | 1.0 |   |   |   | 93.2 |   |   |   | (259.2 | ) |   |
|                                                                                                                          |            |                                                 |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Service revenue consistsof the labor charge for installing merchandise or maintaining or repairingvehicles, excluding the sale of any installed parts or materials.

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(2)          Costs of merchandisesales include the cost of products sold, buying, warehousing and storeoccupancy costs. Costs of service revenue include service center payroll andrelated employee benefits and service center occupancy costs. Occupancy costsinclude utilities, rents, real estate and property taxes, repairs andmaintenance and depreciation and amortization expenses.

(3)          As a percentage ofrelated sales or revenue, as applicable.

(4)          Asa percentage of (Loss) Earnings from Continuing Operations Before CumulativeEffect of Change in Accounting Principle

***Fiscal 2006 vs.Fiscal 2005***

Total revenues for fiscal 2006 increased 1.5%. Fiscal2006 included 53 weeks versus 52 weeks in fiscal 2005. The 1.5% increase inrevenue was the result of an additional week of sales along with increasedimprovement in our service counter operations. On a 52 week basis, the Companyhad a decrease in comparable store revenues of 0.2%. Comparable store servicerevenue increased 1.3% while comparable store merchandise sales decreased 0.5%.All stores that are included in the comparable store sales base as of the endof the period are included in the Company’s comparable store data calculations.Upon reaching its 13th month of operation, a store is added to ourcomparable store sales base. Stores are removed from the comparable store salesbase upon their relocation or closure. Once a relocated store reaches its 13th month of operation at its new location, it isadded back into our comparable store sales base. Square footage increases areinfrequent and immaterial and, accordingly, are not considered in ourcalculations of comparable store data.

Gross profit from merchandise sales increased, as apercentage of merchandise sales, to 28.8% in fiscal 2006 from 25.7% in fiscal2005. The increase in dollars was $63,098,000 or a 13.2% increase from theprior year. This increase, as a percentage of merchandise sales, was due toimproved product margins and decreased warehousing costs partially offset byhigher occupancy costs. The increase in merchandise margins resulted from therestructuring of our vendor agreements, lower freight costs and loweracquisition costs. Effective January 29, 2006, substantially all of ourvendor agreements were restructured to no longer identify specific incrementalexpenses for cooperative advertising; therefore all vendor support funds arenow treated as a reduction of inventories and are recognized as an increase togross profit from merchandise sales when the inventories are sold, inaccordance with EITF 02-16. Gross profit from merchandise sales fromfiscal 2006 improved by approximately $37,100,000 compared to fiscal 2005,primarily as a result of these changes. Warehousing costs were reduced due to amore efficient store replenishment schedule and the absence in fiscal 2006 ofcertain costs associated with the fiscal 2005 relocation of our SouthernCalifornia distribution center. Increased occupancy costs were the result ofhigher utility costs and higher depreciation expense associated with our storeremodel program. The Company’s gross profit classification may not becomparable to the classification used by certain other entities. Some entities(including the Company) include distribution, store occupancy, buying and othercosts in cost of goods sold. Other entities exclude such costs from grossprofit, including them instead in general and administrative and / or sales andmarketing expenses.

Gross profit from service revenue increased, as apercentage of service revenue, to 8.0% in fiscal 2006 from 7.9% in fiscal 2005.The increase in dollars was $1,391,000 or a 4.6% increase from the prior year.This increase as a percentage of service revenue was primarily due to lowerworkers compensation expense and repairs and maintenance costs offset by costassociated with providing free or discounted towing services to our customers.

Net gain from sales of assets increased, as percentageof total revenue to 0.7% from 0.2% in fiscal 2005. The $10,471,000 increaseresulted from the sale of one owned property and the leasehold interest inanother in 2006 versus the sale of one owned property in 2005.

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Selling, general and administrative expensesincreased, as a percentage of total revenues, to 24.3% in fiscal 2006 from23.4% in fiscal 2005. This was a $27,713,000 or 5.3% increase over the prioryear. This increase, as a percentage of total revenues, was due primarily tohigher net media expense offset by reduced general office expense. The increasein net media expense was caused by a change in our vendor agreements whichresulted in a different application of EITF 02-16, whereby approximately$35,700,000 in vendor support funds were recorded as a reduction to advertisingcost in fiscal 2005 (see above explanation of vendor agreement restructuring).General office expense was favorable by $5,007,000 primarily due to the Companyincurring a $4,200,000 software impairment charge in fiscal 2005.

Interest expense increased $302,000 to $49,342,000 infiscal 2006 from fiscal 2005. Included in fiscal 2006 was $4,200,000 of costsassociated with the early satisfaction and discharge of $119,000,000 4% SeniorConvertible Notes due in June, 2007 and in fiscal 2005, $ 9,738,000 in interestand fees associated with the early satisfaction and discharge of our$43,000,000 6.88% Medium Term Notes and $100,000,000 6.92% Term EnhancedRemarketable Securities (TERMS). Also in fiscal 2006, the Company incurred ahigher weighted average interest rate, offset by lower debt levels and areduction to interest expense for the increase in the fair value of theinterest rate swap of $1,490,000.

Non-operating income increased as a percentage oftotal revenues from 0.2% in 2005 to 0.3% in 2006. This 80% increase of$3,126,000 was a result of interest earned on the investment of funds used forthe early satisfaction and discharge of the Senior Convertible notes.

Our income tax benefit as a percentage of loss fromcontinuing operations before income taxes and cumulative effect of change inaccounting principle increased to 68.2% or $4,297,000 versus 36.5% or$20,569,000. The increase in the effective rate is due to a non-cash adjustmentof $2,451,000 to our state deferred liabilities resulting from a change in theCompany’s filing position.

Loss from discontinued operations decreased from again of $292,000, net of tax, in fiscal 2005 to a loss of $738,000, net of tax,in fiscal 2006 due to continuing expenses incurred from locations associatedwith the corporate restructuring which occurred in fiscal 2003.

Net loss decreased, as apercentage of total revenues, due primarily to an increase in gross profit frommerchandise sales as a percentage of merchandise sales, an increase in gain onsale of assets, increase in non-operating income offset by higher selling,general and administrative expenses.

*Effects of Inflation*

The Company uses the LIFOmethod of inventory valuation. Thus, the cost of merchandise sold approximatescurrent cost. Although the Company cannot accurately determine the preciseeffect of inflation on its operations, it does not believe inflation has had amaterial effect on revenues or results of operations during all fiscal yearspresented.

***Fiscal 2005 vs.Fiscal 2004***

Total revenues for fiscal 2005 decreased 1.5%. Thisdecrease was due primarily to a decrease in comparable store revenues of 1.3%.Comparable store service revenue decreased 6.1% while comparable storemerchandise sales decreased 0.2%.

Gross profit from merchandise sales decreased, as apercentage of merchandise sales, to 25.7% in fiscal 2005 from 27.8% in fiscal2004. This was a 7.9% or $41,015,000 decrease from the prior year. Thisdecrease, as a percentage of merchandise sales, was due to increases inwarehousing costs and occupancy costs, and decreases in merchandise margins.The increase in warehousing costs was from increases in rent expense and rentalequipment for the new warehouse in San Bernardino, CA. The increase in storeoccupancy costs was due to increased lease expense associated with the newpoint-of sale system and building and equipment maintenance expenses related tothe store refurbishment program. The decrease 

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in merchandise marginresulted from higher tire costs, a less favorable product mix consisting ofmore sales from lower margin products and higher freight costs.

Gross profit from service revenue decreased, as apercentage of service revenue, to 7.9% in fiscal 2005 from 22.6% in fiscal2004. This was a 67.2% or $62,328,000 decrease from the prior year. This decrease,as a percentage of service revenue, was due to decreased service revenueagainst fixed occupancy costs, in addition to increased payroll and benefits.The decrease in service revenue resulted primarily from decreased customertraffic and reduced tire sales, which results in fewer tire-related servicesand a negative impact on the overall service results. The increase in payrolland benefits was primarily due to a restructuring of field operations intoseparate retail and service teams on January 30, 2005. In connection withthis restructuring, certain retail personnel, who were previously utilized inmerchandising roles supporting the service business, were reassigned to purelyservice-related responsibilities. The labor and benefit costs related to theseassociates, approximately $21,132,000, which were previously recognized inselling, general and administrative expenses, are now recognized in costs ofservice revenue.

Net gain from sales of assets decreased, as percentageof total revenue to 0.2% from 0.5% in fiscal 2004. The $7,022,000 decreaseresulted from the sale of one owned property in 2005 versus the sale of adistribution center in 2004.

Selling, general and administrative expensesdecreased, as a percentage of total revenues, to 23.4% in fiscal 2005 from24.1% in fiscal 2004. This was a $24,018,000 or 4.4% decrease from the prioryear. This decrease, as a percentage of total revenues, was due primarily todecreases in store expenses, general office costs and employee benefits,offset, in part, by an increase in net media expense. The decrease in storeexpenses was primarily caused by a decrease of approximately $21,132,000 inpayroll and related benefit costs (see above explanation of field operationsrestructuring), offset by increased hiring expenses, and travel expenseassociated with the store refurbishment program. The decrease in administrativeexpenses was primarily due to the recognition of $6,911,000 of executiveseverance in 2004, offset by a $4,200,000 asset impairment charge reflectingthe remaining value of a commercial sales software asset in 2005, higher travelcosts, auditing and tax services and meeting costs. The increase in net mediaexpense was due primarily to incremental circular advertising and salespromotion expenses of approximately $11,000,000 related to the grandreopenings.

Interest expense increased 36.4% or $13,075,000 dueprimarily to $9,738,000 in interest and fees associated with the earlysatisfaction and discharge of the Company’s $43,000,000 6.88% Medium Term Notes($342,000 of interest through original maturity) and the $100,000,000 6.92%TERMS ($1,296,000 of interest through original maturity, and $8,100,000 topurchase an associated call option).

Earnings from discontinued operations increased from aloss of $2,087,000, net of tax, in fiscal 2004 to earnings of $292,000, net oftax, in fiscal 2005 due primarily to changes in assumptions for sublet incomeand expenses related to closed stores.

Net earnings decreased, asa percentage of total revenues, due primarily to a decrease in total grossprofit, an increase in interest expense and the impact of a net charge for thecumulative effect of a change in accounting principle for the adoption of FIN47, “Accounting for Conditional Asset Retirement Obligations” recorded infiscal 2005, offset by decreases in income tax expense and loss fromdiscontinued operations.

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*Industry Comparison*

Weoperate in the U.S. automotive aftermarket, which has two general competitivearenas: the Do-It-For-Me (“DIFM”) (service labor, installedmerchandise and tires) market and the Do-It-Yourself (“DIY”) (retailmerchandise) market. Generally, the specialized automotive retailers focus oneither the “DIY” or “DIFM” areas of the business. We believe that operation inboth the “DIY” and “DIFM” areas of the business positively differentiates usfrom most of our competitors. Although we manage our store performance at astore level in aggregation, we believe that the following presentation shows anaccurate comparison against competitors within the two sales arenas. We competein the “DIY” area of the business through our retail sales floor and commercialsales business (Retail Sales). Our Service Center business (labor and installedmerchandise and tires) competes in the “DIFM” area of the industry. Thefollowing table presents the revenues and gross profit for each area of thebusiness.

| ** **                                       | ** ** | **Year ended** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|
| **(dollar amounts in thousands)** | ** ** | ** **          | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
| Retail Sales(1)                                  |       | $                   | 1,352,395  |   | $ | 1,356,784 |   | $ | 1,352,695 |   |
| Service Center  Revenue(2)                       |       | 919,766             |       | 881,245 |   | 920,201 |   |
| Total Revenues                                   |       | $                   | 2,272,161  |   | $ | 2,238,029 |   | $ | 2,272,896 |   |
| Gross Profit from  Retail Sales(3)               |       | $                   | 381,247    |   | $ | 343,860 |   | $ | 355,270 |   |
| Gross Profit from  Service Center Revenue(3)     |       | 190,509             |       | 163,407 |   | 255,340 |   |
| Total Gross Profit                               |       | $                   | 571,756    |   | $ | 507,267 |   | $ | 610,610 |   |
|                                                  |            |                     |            |  |  |  |  |  |  |  |  |  |

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(1)          Excludes revenues frominstalled products.

(2)          Includes revenues frominstalled products.

(3)          GrossProfit from Retail Sales includes the cost of products sold, buying,warehousing and store occupancy costs. Gross Profit from Service Center Revenueincludes the cost of installed products sold, buying, warehousing, servicecenter payroll and related employee benefits and service center occupancycosts. Occupancy costs include utilities, rents, real estate and propertytaxes, repairs and maintenance and depreciation and amortization expenses.

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

Management’s Discussion and Analysis of FinancialCondition and Results of Operations discusses the Company’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. On an on-going basis, management evaluates its estimatesand judgments, including those related to customer incentives, product returnsand warranty obligations, bad debts, inventories, income taxes, financingoperations, restructuring costs, retirement benefits, share based compensation,risk participation agreements and contingencies and litigation. Managementbases its estimates and judgments on historical experience and on various otherfactors that are believed to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions.

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The Companybelieves that the following represent its more critical estimates andassumptions used in the preparation of the consolidated financial statements,although not all inclusive:

·       TheCompany evaluates whether inventory is stated at the lower of cost or marketbased on historical experience with the carrying value and life of inventory.The assumptions used in this evaluation are based on current market conditionsand the Company believes inventory is stated at the lower of cost or market inthe consolidated financial statements. In addition, historically the Companyhas been able to return excess items to vendors for credit. Future changes invendors, in their policies or in their willingness to accept returns of excessinventory could require a revision in the estimates. If our estimates regardingexcess or obsolete inventory are inaccurate, we may be exposed to losses orgains that could be material. A 10% difference in these estimates atFebruary 3, 2007 would have affected net earnings by approximately$428,000 for the fiscal year ended February 3, 2007.

·       TheCompany has risk participation arrangements with respect to casualty and healthcare insurance, including the maintaining of stop loss coverage with thirdparty insurers to limit our total exposure. A reserve for the liabilitiesassociated with these agreements is established using actuarial methodsfollowed in the insurance industry and our historical claims experience. Theamounts included in the Company’s costs related to these arrangements areestimated and can vary based on changes in assumptions, claims experience orthe providers included in the associated insurance programs. A 10% change inour self-insurance liabilities at February 3, 2007 would have affected netearnings by approximately $2,723,000 for the fiscal year ended February 3,2007.

·       TheCompany records reserves for future product returns, warranty claims andinventory shrinkage. The reserves are based on current sales of products andhistorical claims and inventory shrinkage experience. If actual experiencediffers from historical levels, revisions in the Company’s estimates may berequired. A 10% change in these reserves at February 3, 2007 would haveaffected net earnings by approximately $329,000 for the fiscal year endedFebruary 3, 2007.

·       The Company has significantpension costs and liabilities that are developed from actuarial valuations.Inherent in these valuations are key assumptions including discount rates,expected return on plan assets, mortality rates and merit and promotionincreases. The Company is required to consider current market conditions,including changes in interest rates, in selecting these assumptions. Changes inthe related pension costs or liabilities may occur in the future due to changesin the assumptions. The following table highlights the sensitivity of ourpension obligations and expense to changes in these assumptions, assuming allother assumptions remain constant:

| **Change in Assumption**                  | ** ** | ** **         | ** ** | **Impact on Annual  Pension Expense** | ** ** | **Impact on Projected  Benefit Obligation** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|------------------------------------------------------|------------|------------------------------------------------------------|------------|
| 0.50 percentage  point decrease in discount rate    |       | Increase  $480,000 |       | Increase  $3,795,000                                 |       |
| 0.50 percentage  point increase in discount rate    |       | Decrease  $480,000 |       | Decrease  $3,795,000                                 |       |
| 5.0% decrease in  expected rate of return on assets |       | Increase  $187,000 |       | —                                               |       |
| 5.0% increase in  expected rate of return on assets |       | Decrease $187,000  |       | —                                               |       |

 

·       TheCompany periodically evaluates its long-lived assets for indicators ofimpairment. Management’s judgments are based on market and operationalconditions at the time of evaluation. Future events could cause management’sconclusion on impairment to change, requiring an adjustment of these assets totheir then current fair market value.

·       Wehave a share-based compensation plan, which includes stock options andrestricted stock units, or RSUs. We account for our share-based compensationplans as prescribed by the fair value provisions of SFAS No. 123R. Wedetermine the fair value of our stock options at the date of the grant usingthe Black-Scholes option-pricing model. The RSUs are awarded at a price equalto the 

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market price of ourunderlying stock on the date of the grant. The pricing model and generallyaccepted valuation techniques require management to make assumptions and toapply judgment to determine the fair value of our awards. These assumptions andjudgments include the expected life of stock options, expected stock pricevolatility, future employee stock option exercise behaviors and the estimate ofaward forfeitures. We do not believe there is a reasonable likelihood therewill be a material change in the future estimates or assumptions we use todetermine stock-based compensation expense. However, if actual results aredifferent from these assumptions, the share-based compensation expense reportedin our financial statements may not be representative of the actual economiccost of the share-based compensation. In addition, significant changes in theseassumptions could materially impact our share-based compensation expense onfuture awards. A 10% change in our share-based compensation expense forthe fiscal year ended February 3, 2007 would have affected net incomeby approximately $97,000 for the fiscal year ended February 3, 2007.

·       TheCompany is required to estimate its income taxes in each of the jurisdictionsin which it operates. This requires the Company to estimate its actual currenttax exposure together with assessing temporary differences resulting fromdiffering treatment of items, such as depreciation of property and equipmentand valuation of inventories, for tax and accounting purposes. The Companydetermines its provision for income taxes based on federal and state tax lawsand regulations currently in effect, some of which have been recently revised.Legislation changes currently proposed by certain states in which we operate,if enacted, could increase our transactions or activities subject to tax. Anysuch legislation that becomes law could result in an increase in our stateincome tax expense and our state income taxes paid, which could have a materialeffect on our net income.

The temporary differencesbetween the book and tax treatment of income and expenses result in deferredtax assets and liabilities, which are included within our consolidated balancesheets. We must then assess the likelihood that our deferred tax assets will berecovered from future taxable income. To the extent we believe that recovery isnot more likely than not, we must establish a valuation allowance. To theextent we establish a valuation allowance or change the allowance in a futureperiod, income tax expense will be impacted. Actual results could differ fromthis assessment if adequate taxable income is not generated in future periods.Net deferred tax liabilities as of February 3, 2007 and January 28,2006 totaled $28,931,000 and $18,354,000, respectively, representingapproximately 2.4% and 1.5% of liabilities, respectively.

**RECENT ACCOUNTINGSTANDARDS**

In February 2006, the FASB issued SFASNo. 155, “Accounting for Certain Hybrid Financial Instruments—an amendmentof FASB Statements No. 133 and 140.” This statement simplifies accountingfor certain hybrid instruments currently governed by SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” or SFASNo. 133, by allowing fair value remeasurement of hybrid instruments thatcontain an embedded derivative that otherwise would require bifurcation. SFASNo. 155 also eliminates the guidance in SFAS No. 133 ImplementationIssue No. D1, “Application of Statement 133 to Beneficial Interests inSecuritized Financial Assets,” which provides such beneficial interests are notsubject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities—a Replacement of FASB Statement No. 125,” by eliminatingthe restriction on passive derivative instruments that a qualifyingspecial-purpose entity may hold. SFAS No. 155 is effective for financialinstruments acquired or issued after the beginning of our fiscal year 2007. Weare currently evaluating the impact of SFAS No. 155 on our consolidatedfinancial statements and will adopt the standard February 4, 2007.

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In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets—an amendment of FASB StatementNo. 140.” SFAS No. 156 amends SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments ofLiabilities,” with respect to the accounting for separately recognizedservicing assets and servicing liabilities. SFAS No. 156 is effective forfiscal years beginning after September 15, 2006. We are currentlyevaluating the impact of SFAS No. 156 on our consolidated financialstatements and will adopt the standard February 4, 2007.

In June of 2006, the FASB ratified the consensusreached by the Emerging Issues Task Force on Issue 06-3, How TaxesCollected from Customers and Remitted to Governmental Authorities Should bePresented in the Income Statement (That Is, Gross versus NetPresentation). The scope of this consensus includes any tax assessed by agovernmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer and may include, but is not limitedto sales, use, value added and some excise taxes. Additionally, thisconsensus seeks to address how a company should address the disclosure of suchitems in interim and annual financial statements, either gross or net pursuantto APB Opinion No. 22, Disclosure of Accounting Policies. TheCompany is required to adopt this statement in fiscal 2007. The Companypresents sales net of sales taxes in its consolidated statement of operationsand does not anticipate changing its policy as a result of EITF 06-3.

In July of 2006, the FASB released FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes—anInterpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a modelfor the recognition and measurement of a tax position taken or expected to betaken in a tax return, and provides guidance on derecognition, classification,interest and penalties, disclosure and transition. FIN 48 is effective forfinancial statements issued for fiscal years beginning after December 15,2006. The Company does not expect the adoption of this statement to have amaterial impact on its consolidated financial statements.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (SFAS No. 157). SFAS 157 definesthe term fair value, establishes a framework for measuring it within generallyaccepted accounting principles and expands disclosures about its measurements.SFAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactof SFAS No. 157 on our consolidated financial statements.

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans—an Amendment of FASBStatements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS No. 158requires entities to:

·       Recognizeon its balance sheet the funded status (measured as the difference between thefair value of plan assets and the benefit obligation) of pension and otherpostretirement benefit plans;

·       Recognize,through comprehensive income, certain changes in the funded status of a definedbenefit and post retirement plan in the year in which the changes occur;

·       Measureplan assets and benefit obligations as of the end of the employer’s fiscalyear; and

·       Discloseadditional information.

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Therequirement to recognize the funded status of a benefit plan and the additionaldisclosure requirements are effective for fiscal years ended afterDecember 15, 2006. Accordingly, the Company adopted SFAS No.158 for itsfiscal year ended February 3, 2007. The incremental effect from applyingSFAS No. 158 on individual line items in the Company’s consolidated balancesheets at February 3, 2007 follows:

| ** **                                           | ** ** | **Before**                 | ** ** | ** **      | ** ** | **After**                  | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|-----------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **Application of**    | ** ** | ** **      | ** ** | **Application of**    | ** ** |
| ** **                                           | ** ** | **SFAS No. 158** | ** ** | **Adjustments** | ** ** | **SFAS No. 158** | ** ** |
| **Deferred  Income Taxes**                           |       |                       | $          | 22,996          |       |                       |       | $ | 1,832 |   |   |   | $ | 24,828 |   |   |
| **Other  Long Term Assets**                          |       |                       | 69,635     |            |       |                       | (1,651     | ) |   |   | 67,984 |   |   |
| **Total  Assets**                                    |       |                       | 1,767,018  |            |       |                       | 181        |   |   |   | 1,767,199 |   |   |
| **Accrued  Expenses**                                |       |                       | 292,280    |            |       |                       | —     |   |   |   | 292,280 |   |   |
| **Other  Long Term Liabilities**                     |       |                       | 56,998     |            |       |                       | 3,235      |   |   |   | 60,233 |   |   |
| **Total  Liabilities**                               |       |                       | 1,196,209  |            |       |                       | 3,235      |   |   |   | 1,199,444 |   |   |
| **Accumulated  Other Comprehensive Loss**            |       |                       | (6,326     | )               |       |                       | (3,054     | ) |   |   | (9,380 | ) |   |
| **Total  Stockholders’ Equity**                 |       |                       | 570,809    |            |       |                       | (3,054     | ) |   |   | 567,755 |   |   |
| **Total Liabilities and  Stockholders’ Equity** |       |                       | 1,767,018  |            |       |                       | 181        |   |   |   | 1,767,199 |   |   |

 

The requirement to measure plan assets and benefitobligations as of the date of the employer’s fiscal year-end is effective forfiscal years ending after December 15, 2008. The Company’s currentmeasurement date is December 31. The Company will not elect early adoptionof these additional SFAS No.158 requirements and will adopt these requirementsfor the fiscal year ended January 31, 2009.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities.” SFAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value. SFASNo. 159 is effective for fiscal years beginning after November 15,2007. We are currently evaluating the impact of SFAS No. 159 on ourconsolidated financial statements.

**ITEM 7A**           QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has marketrate exposure in its financial instruments primarily due to changes in interestrates.

**Variable Rate Debt**

Pursuant to terms of itsrevolving credit agreement, changes in the lender’s LIBOR could affect therates of which the Company could borrow funds thereunder. At February 3,2007, the Company had outstanding borrowings of $17,568,000 against therevolving credit agreement. Additionally, the Company has a $320,000,000 SeniorSecured Term Loan facility that bears interest at three month LIBOR plus 2.75%,which was negotiated to LIBOR plus 2.00% after February 3, 2007, and$117,627,000 of real estate operating leases and $14,938,000 of equipmentoperating leases which have lease payments that vary based on changes in LIBOR.A one percent change in the LIBOR rate for the fiscal year endedFebruary 3, 2007 would have affected net income by approximately$1,493,000 for the fiscal year ended February 3, 2007.

29

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**Fixed Rate Debt**

Thetable below summarizes the fair value and contract terms of fixed rate debtinstruments held by the Company at February 3, 2007:

| **(dollar amounts in thousands)** | ** ** | ** ** | ** ** | **Amount** | ** ** | **Average  Interest Rate** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|---------------------------------|------------|
| Fair value at  February 3, 2007             |       | $          | 189,268    |       |       |                            |       |   |
| Expected maturities:                             |       |       |       |       |       |                            |       |
| 2007                                             |       | $          | 268        |       |       | 8.00                            | %          |   |
| 2008                                             |       | —     |       |       | —     |                            |       |
| 2009                                             |       | —     |       |       | —     |                            |       |
| 2010                                             |       | —     |       |       | —     |                            |       |
| 2011                                             |       | —     |       |       | —     |                            |       |
| Thereafter                                       |       | 200,000    |       |       | 7.50       | %                               |       |
|                                             |       | $          | 200,268    |       |       |                            |       |   |

 

At January 28, 2006,the Company had outstanding $319,215,000 of fixed rate notes with an aggregatefair market value of $315,039,000.

**Interest Rate Swap**

On June 3, 2003, the Company entered into aninterest rate swap for a notional amount of $130,000,000. The Company haddesignated the swap as a cash flow hedge of the Company’s real estate operatinglease payments. The interest rate swap converts the variable LIBOR portion ofthe lease payment to a fixed rate of 2.90% and terminates on July 1, 2008.If the critical terms of the interest rate swap or hedge item do not change,the interest rate swap is considered to be highly effective with all changes infair value included in other comprehensive income. As of February 3, 2007and January 28, 2006, the fair value was $4,150,000 and $5,790,000,respectively. In the fourth quarter of fiscal 2006, the Company determined itwas not in compliance with FAS 133 for hedge accounting and, accordingly, recordeda reduction of rent expense, which is included in Costs of Merchandise andCosts of Service Revenues, for the cumulative fair value change of $4,150,000.This change in fair value had previously been recorded in Accumulated OtherComprehensive Income (Loss) on the consolidated balance sheets. The Companyevaluated the impact of this error, along with three other errors discussed inthe next sentence, on an annual and quarterly basis and concluded there was nomaterial impact on the fourth quarter of fiscal 2006 or any historical periods,on an individual or aggregate basis. The three other errors consisted of: (i)$3,700,000 of amortization expense on leasehold improvements classified in landand therefore not depreciated, (ii) $500,000 of understated closed storereserves and (iii) $400,000 of an overstated accrual for non-qualified definedcontributions. The Company corrected these errors in the fourth quarter offiscal 2006, resulting in no material impact to the consolidated financialstatements. The Company has removed its designation as a cash flow hedge onthis transaction and records the change in fair value through its operatingstatement until the date of termination.

On November 2, 2006, the Company entered into aninterest rate swap for a notional amount of $200,000,000. The Company hasdesignated the swap a cash flow hedge on the first $200,000,000 of theCompany’s $320,000,000 senior secured notes. The interest rate swap convertsthe variable LIBOR portion of the interest payments to a fixed rate of 5.036%and terminates in October 2013. The Company did not meet the documentationrequirements of SFAS No. 133, at inception or as of February 3, 2007and, accordingly, recorded the increase in the fair value of the interest rateswap of $1,490 as a reduction to Interest Expense. The Company intends to meetthe documentation requirements of SFAS No. 133 for hedge accounting in thefirst quarter of fiscal 2007 and will then record the effective portion of thechange in fair value through Accumulated Other Comprehensive Income (Loss).

30

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**ITEM 8**                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofThe Pep Boys—Manny, Moe & JackPhiladelphia, Pennsylvania

We have audited the accompanying consolidated balancesheets of The Pep Boys—Manny, Moe & Jack and subsidiaries (the“Company”) as of February 3, 2007 and January 28, 2006, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended February 3, 2007.Our audits also included the financial statement schedule listed in the Indexat Item 15. These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the financial statements and financial statement schedule based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 statementspresent fairly, in all material respects, the financial position of The PepBoys—Manny, Moe & Jack and subsidiaries as of February 3, 2007and January 28, 2006, and the results of their operations and their cashflows for each of the three years in the period ended February 3, 2007, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

As discussed in Notes 1 and 12 to the consolidatedfinancial statements, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans*, SFASNo. 123 (revised 2004), *Share-Based Payment*,and Financial Accounting Standards Board Interpretation No. 47, *Accounting for Conditional Asset Retirement Obligations*, asof February 3, 2007, January 29, 2006, and January 28, 2006,respectively.

As discussed inNote 18, the accompanying consolidated financial statements have been restated.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as ofFebruary 3, 2007, based on the criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated April 18, 2007 (October 29, 2007 as to the effects of thematerial weakness discussed in Management’s Report On Internal Control OverFinancial Reporting, as revised) expressed an unqualified opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting and an adverse opinion on the effectiveness of theCompany’s internal control over financial reporting because of the materialweakness.

Deloitte & Touche LLP

Philadelphia,PennsylvaniaApril 18, 2007 (October 29, 2007 as to the effects of the restatementdiscussed in Note 18)

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**CONSOLIDATED BALANCE SHEETSThe Pep Boys—Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands, exceptshare data)**
|                                                                                                | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                     | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current Assets:                                                                                |       |                       |       |                       |       |
| Cash and cash  equivalents                                                                     |       | $                          | 21,884     |                       | $          | 48,281 |   |
| Accounts receivable,  less allowance for uncollectible accounts of $1,505 and $1,188      |       | 29,582                     |       | 36,434                     |       |
| Merchandise inventories                                                                        |       | 607,042                    |       | 616,292                    |       |
| Prepaid expenses                                                                               |       | 39,264                     |       | 40,952                     |       |
| Other                                                                                          |       | 70,368                     |       | 85,446                     |       |
| Assets held for disposal                                                                       |       | —                     |       | 652                        |       |
| Total Current Assets                                                                           |       | 768,140                    |       | 828,057                    |       |
| Property and  Equipment—at cost:                                                          |       |                       |       |                       |       |
| Land                                                                                           |       | 251,705                    |       | 257,802                    |       |
| Buildings and  improvements                                                                    |       | 929,225                    |       | 916,580                    |       |
| Furniture, fixtures and  equipment                                                             |       | 684,042                    |       | 671,189                    |       |
| Construction in progress                                                                       |       | 3,464                      |       | 15,858                     |       |
|                                                                                           |       | 1,868,436                  |       | 1,861,429                  |       |
| Less accumulated  depreciation and amortization                                                |       | 962,189                    |       | 914,040                    |       |
| Total Property and  Equipment—Net                                                         |       | 906,247                    |       | 947,389                    |       |
| Deferred income taxes                                                                          |       | 24,828                     |       | —                     |       |
| Other                                                                                          |       | 67,984                     |       | 46,307                     |       |
| Total Assets                                                                                   |       | $                          | 1,767,199  |                       | $          | 1,821,753 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                 | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current Liabilities:                                                                           |       |                       |       |                       |       |
| Accounts payable                                                                               |       | $                          | 265,489    |                       | $          | 261,940 |   |
| Trade payable program  liability                                                               |       | 13,990                     |       | 11,156                     |       |
| Accrued expenses                                                                               |       | 292,280                    |       | 290,761                    |       |
| Deferred income taxes                                                                          |       | 28,931                     |       | 15,417                     |       |
| Current maturities of  long-term debt and obligations under capital lease                      |       | 3,490                      |       | 1,257                      |       |
| Total Current  Liabilities                                                                     |       | 604,180                    |       | 580,531                    |       |
| Long-term debt and  obligations under capital leases, less current maturities                  |       | 535,031                    |       | 467,239                    |       |
| Convertible long-term  debt                                                                    |       | —                     |       | 119,000                    |       |
| Other long-term  liabilities                                                                   |       | 60,233                     |       | 57,481                     |       |
| Deferred income taxes                                                                          |       | —                     |       | 2,937                      |       |
| Commitments and  Contingencies                                                                 |       |                       |       |                       |       |
| Stockholders’ Equity:                                                                     |       |                       |       |                       |       |
| Common stock, par value  $1 per share: Authorized 500,000,000 shares; Issued 68,557,041 shares |       | 68,557                     |       | 68,557                     |       |
| Additional paid-in  capital                                                                    |       | 289,384                    |       | 288,098                    |       |
| Retained earnings                                                                              |       | 463,797                    |       | 481,926                    |       |
| Accumulated other  comprehensive loss                                                          |       | (9,380                     | )          | (3,565                     | )          |
| Less cost of shares in  treasury—12,427,687 shares and 12,152,968 shares                  |       | 185,339                    |       | 181,187                    |       |
| Less cost of shares in  benefits trust—2,195,270 shares                                   |       | 59,264                     |       | 59,264                     |       |
| Total Stockholders’  Equity                                                               |       | 567,755                    |       | 594,565                    |       |
| Total Liabilities and Stockholders’ Equity                                                |       | $                          | 1,767,199  |                       | $          | 1,821,753 |   |

 

See notes to the consolidated financial statements

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**CONSOLIDATED STATEMENTS OF OPERATIONSThe Pep Boys—Manny, Moe & Jack and Subsidiaries**(dollar amounts in thousands, except share data)
|                                                                                                                          | ** ** | **February 3,** | ** ** | **January 28,** | ** ** | **January 29,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| **Year ended**                                                                                                      | ** ** | ** **           | ** ** | **2007**             | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Merchandise Sales                                                                                                        |       | $                    | 1,876,290  |                 | $          | 1,854,408            |       | $ | 1,863,015 |   |
| Service Revenue                                                                                                          |       | 395,871              |       | 383,621              |       | 409,881              |       |
| Total Revenues                                                                                                           |       | 2,272,161            |       | 2,238,029            |       | 2,272,896            |       |
| Costs of  Merchandise Sales                                                                                              |       | 1,336,336            |       | 1,377,552            |       | 1,345,144            |       |
| Costs of Service  Revenue                                                                                                |       | 364,069              |       | 353,210              |       | 317,142              |       |
| Total Costs of  Revenues                                                                                                 |       | 1,700,405            |       | 1,730,762            |       | 1,662,286            |       |
| Gross Profit from  Merchandise Sales                                                                                     |       | 539,954              |       | 476,856              |       | 517,871              |       |
| Gross Profit from  Service Revenue                                                                                       |       | 31,802               |       | 30,411               |       | 92,739               |       |
| Total Gross  Profit                                                                                                      |       | 571,756              |       | 507,267              |       | 610,610              |       |
| Selling, General  and Administrative Expenses                                                                            |       | 551,031              |       | 523,318              |       | 547,336              |       |
| Net Gain from  Sales of Assets                                                                                           |       | 15,297               |       | 4,826                |       | 11,848               |       |
| Operating Profit  (Loss)                                                                                                 |       | 36,022               |       | (11,225              | )          | 75,122               |       |
| Non-operating  Income                                                                                                    |       | 7,023                |       | 3,897                |       | 1,824                |       |
| Interest Expense                                                                                                         |       | 49,342               |       | 49,040               |       | 35,965               |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (6,297               | )          | (56,368              | )          | 40,981               |       |
| Income Tax  (Benefit) Expense                                                                                            |       | (4,297               | )          | (20,569              | )          | 15,315               |       |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | (2,000               | )          | (35,799              | )          | 25,666               |       |
| (Loss) Earnings  from Discontinued Operations, Net of Tax of $306, $(168) and $1,245                                     |       | (738                 | )          | 292                  |       | (2,087               | )          |
| Cumulative Effect  of Change in Accounting Principle, Net of Tax of $(78) and $1,161                                     |       | 189                  |       | (2,021               | )          | —               |       |
| Net (Loss)  Earnings                                                                                                     |       | $                    | (2,549     | )                    | $          | (37,528              | )          | $ | 23,579 |   |
| **Basic  (Loss) Earnings per Share:**                                                                                    | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | $                    | (0.04      | )                    | $          | (0.65                | )          | $ | 0.46 |   |
| (Loss) Earnings  from Discontinued Operations, Net of Tax                                                                |       | (0.01                | )          | —               |       | (0.04                | )          |
| Cumulative Effect  of Change in Accounting Principle, Net of Tax                                                         |       | —               |       | (0.04                | )          | —               |       |
| Basic (Loss)  Earnings per Share                                                                                         |       | $                    | (0.05      | )                    | $          | (0.69                | )          | $ | 0.42 |   |
| **Diluted  (Loss) Earnings per Share:**                                                                                  | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | $                    | (0.04      | )                    | $          | (0.65                | )          | $ | 0.45 |   |
| (Loss) Earnings  from Discontinued Operations, Net of Tax                                                                |       | (0.01                | )          | —               |       | (0.04                | )          |
| Cumulative Effect  of Change in Accounting Principle, Net of Tax                                                         |       | —               |       | (0.04                | )          | —               |       |
| Diluted (Loss) Earnings  per Share                                                                                       |       | $                    | (0.05      | )                    | $          | (0.69                | )          | $ | 0.41 |   |
|                                                                                                                          |            |                      |            |                      |            |                      |            |  |  |  |  |  |

 

See notes to the consolidated financial statements

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**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYThe Pep Boys—Manny, Moe & Jack and Subsidiaries(dollar amounts in thousands, except share data)**
|                                                                   | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** **  | **Accumulated  Other  Comprehensive** | ** **  | **Benefits** | ** **  | **Total  Stockholders’** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|-------------------------|-------------|---------------------------------------|-------------|--------------|-------------|-------------------------------|------------|
| ** **                                                        | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**            | ** **  | **Shares**                            | ** **  | **Amount**   | ** **  | **Loss**                      | ** ** | **Trust** | ** ** | **Equity** | ** ** |
| **Balance,  January 31, 2004**                               | ** ** | **63,910,577**        | ** ** |                    | **$**      | **63,911**   | ** ** |                    |        | **$**                                 | **177,317** | ** **   |        |                          | **$**      | **531,933** | ** ** |   | **(8,928,159** | **)** | **$** | **(144,148** | **)** |   | **$** | **(15** | **)** |   | **$** | **(59,264** | **)** |   | **$** | **569,734** | ** ** |   |
| Comprehensive Income:                                             |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |
| Net income                                                        |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         | 23,579      |                          |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |
| Minimum pension  liability adjustment, net  of tax                |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   | (5,799 | ) |   |   |   |   | ** ** | ** ** |   |
| Fair market value  adjustment on derivatives, net of tax          |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   | 962 |   |   |   |   |   | ** ** | ** ** |   |
| Total  Comprehensive Income                                       |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        | ** **                    |       | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **18,742** | ** ** |   |
| Issuance of Common  Stock                                         |       | 4,646,464             |       |                    | 4,646      | ** **   |       |                    | 104,208     |                                  |        |         |        |                          |       |   |   |   | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **108,854** | ** ** |   |
| Cash dividends  ($.27 per share)                                  |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         | (15,676     | )                             |       | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **(15,676** | **)** |   |
| Effect of stock  options and related tax  benefits                |       |                  |       |                    |       | ** **   |       |                    | 2,064       |                                  |        |         | (2,984      | )                             |       | 638,210 |   | 10,137 | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **9,217** | ** ** |   |
| Stock compensation  expense                                       |       |                  |       |                    |       | ** **   |       |                    | 1,184       |                                  |        |         |        |                          |       |   | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **1,184** | ** ** |   |
| Repurchase of  Common Stock                                       |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       | (3,077,000 | ) | (39,718 | ) |   | ** ** | ** ** |   | ** ** | ** ** |   | **(39,718** | **)** |   |
| Dividend  reinvestment plan                                       |       |                  |       |                    |       | ** **   |       |                    | 193         |                                  |        |         | (72         | )                             |       | 61,819 |   | 998 | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **1,119** | ** ** |   |
| **Balance,  January 29, 2005**                               | ** ** | **68,557,041**        | ** ** |                    | **68,557** | ** **   |       |                    | **284,966** | ** **                            |        |         | **536,780** | ** **                    |       | **(11,305,130** | **)** | **(172,731** | **)** |   | **(4,852** | **)** |   | **(59,264** | **)** |   | **653,456** | ** ** |   |
| Comprehensive Loss:                                               |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |
| Net loss                                                          |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         | (37,528     | )                             |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |
| Minimum pension  liability adjustment, net  of tax                |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   | (22 | ) |   |   |   |   | ** ** | ** ** |   |
| Fair market value  adjustment on derivatives, net of tax          |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   | 1,309 |   |   |   |   |   | ** ** | ** ** |   |
| Total  Comprehensive Loss                                         |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        | ** **                    |       | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **(36,241** | **)** |   |
| Cash dividends  ($.27 per share)                                  |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         | (14,686     | )                             |       | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **(14,686** | **)** |   |
| Effect of stock  options and related tax  benefits                |       |                  |       |                    |       | ** **   |       |                    | 1,719       |                                  |        |         | (2,520      | )                             |       | 338,856 |   | 5,592 |   |   | ** ** | ** ** |   | ** ** | ** ** |   | **4,791** | ** ** |   |
| Effect of  restricted stock unit conversions                      |       |                  |       |                    |       | ** **   |       |                    | (636        | )                                     |        |         |        |                          |       | 28,981 |   | 433 |   |   | ** ** | ** ** |   | ** ** | ** ** |   | **(203** | **)** |   |
| Stock compensation  expense                                       |       |                  |       |                    |       | ** **   |       |                    | 2,049       |                                  |        |         |        |                          |       |   |   |   | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **2,049** | ** ** |   |
| Repurchase of  Common Stock                                       |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       | (1,282,600 | ) | (15,562 | ) |   | ** ** | ** ** |   | ** ** | ** ** |   | **(15,562** | **)** |   |
| Dividend  reinvestment plan                                       |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         | (120        | )                             |       | 66,925 |   | 1,081 | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **961** | ** ** |   |
| **Balance,  January 28, 2006**                               | ** ** | **68,557,041**        | ** ** |                    | **68,557** | ** **   |       |                    | **288,098** | ** **                            |        |         | **481,926** | ** **                    |       | **(12,152,968** | **)** | **(181,187** | **)** |   | **(3,565** | **)** |   | **(59,264** | **)** |   | **594,565** | ** ** |   |
| Comprehensive Loss:                                               |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |
| Net loss                                                          |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         | (2,549      | )                             |       |   |   |   |   |   |   |   |   |   |   |   | ** ** | ** ** |   |
| Minimum pension  liability adjustment, net  of tax                |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   | 887 |   |   |   |   |   | ** ** | ** ** |   |
| Fair market value  adjustment on derivatives, net of tax          |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   |   |   |   |   | (3,648 | ) |   |   |   |   | ** ** | ** ** |   |
| Total  Comprehensive Loss                                         |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        | ** **                    |       | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **(5,310** | **)** |   |
| Cash dividends  ($.27 per share)                                  |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         | (14,757     | )                             |       | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **(14,757** | **)** |   |
| Incremental effect  from adoption of FAS No. 158, net of tax |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       |   | ** ** | ** ** | ** ** |   | (3,054 | ) |   | ** ** | ** ** |   | **(3,054** | **)** |   |
| Effect of stock  options and related tax  benefits                |       |                  |       |                    |       | ** **   |       |                    | (669        | )                                     |        |         | (657        | )                             |       | 80,641 |   | 1,387 |   |   | ** ** | ** ** |   | ** ** | ** ** |   | **61** | ** ** |   |
| Effect of  restricted stock unit conversions                      |       |                  |       |                    |       | ** **   |       |                    | (1,096      | )                                     |        |         |        |                          |       | 74,107 |   | 712 |   |   | ** ** | ** ** |   | ** ** | ** ** |   | **(384** | **)** |   |
| Stock compensation  expense                                       |       |                  |       |                    |       | ** **   |       |                    | 3,051       |                                  |        |         |        |                          |       |   |   |   | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | **3,051** | ** ** |   |
| Repurchase of  Common Stock                                       |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         |        |                          |       | (494,800 | ) | (7,311 | ) |   | ** ** | ** ** |   | ** ** | ** ** |   | **(7,311** | **)** |   |
| Dividend  reinvestment plan                                       |       |                  |       |                    |       | ** **   |       |                    |        |                                  |        |         | (166        | )                             |       | 65,333 |   | 1,060 |   |   | ** ** | ** ** |   | ** ** | ** ** |   | **894** | ** ** |   |
| **Balance,  February 3, 2007**                               | ** ** | **68,557,041**        | ** ** |                    | **$**      | **68,557**   | ** ** |                    |        | **$**                                 | **289,384** | ** **   |        |                          | **$**      | **463,797** | ** ** |   | **(12,427,687** | **)** | **$** | **(185,339** | **)** |   | **$** | **(9,380** | **)** |   | **$** | **(59,264** | **)** |   | **$** | **567,755** | ** ** |   |

 

See notes to the consolidated financial statements

34

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**CONSOLIDATED**STATEMENTS OF CASH FLOWSThe Pep Boys—Manny, Moe & Jack and Subsidiaries (dollar amounts in thousands)
|                                                                                                        | ** ** | **Year ended**                            | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **February 3,  2007**                     | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
| ** **                                                                                             | ** ** | **(As restated,  See Note 18)** | ** ** | **(As restated,  See Note 18)** | ** ** | **(As restated,  See Note 18)** | ** ** |
| Cash Flows from Operating Activities:                                                                  |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net (Loss) Earnings                                                                                    |       |                                           | $          | (2,549 | ) |   |   | $ | (37,528 | ) |   |   | $ | 23,579 |   |   |
| Adjustments to Reconcile Net (Loss) Earnings to Net  Cash Provided by (Used in) Continuing Operations: |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net loss (earnings) from discontinued operations                                                       |       |                                           | 738        |   |   |   | (292 | ) |   |   | 2,087 |   |   |
| Depreciation and amortization                                                                          |       |                                           | 88,476     |   |   |   | 79,887 |   |   |   | 76,620 |   |   |
| Cumulative effect of change in accounting principle,  net of tax                                       |       |                                           | (189       | ) |   |   | 2,021 |   |   |   | — |   |   |
| Accretion of asset retirement obligation                                                               |       |                                           | 269        |   |   |   | 109 |   |   |   | 135 |   |   |
| Loss on defeasance of convertible debt                                                                 |       |                                           | 755        |   |   |   | — |   |   |   | — |   |   |
| Stock compensation expense                                                                             |       |                                           | 3,051      |   |   |   | 2,049 |   |   |   | 1,184 |   |   |
| Cancellation of vested stock options                                                                   |       |                                           | (1,056     | ) |   |   | — |   |   |   | — |   |   |
| Deferred income taxes                                                                                  |       |                                           | (8,316     | ) |   |   | (27,792 | ) |   |   | 26,853 |   |   |
| Deferred gain on sale leaseback                                                                        |       |                                           | —     |   |   |   | — |   |   |   | (130 | ) |   |
| Reduction in asset retirement liability                                                                |       |                                           | —     |   |   |   | (1,815 | ) |   |   | — |   |   |
| Gain from sales of assets                                                                              |       |                                           | (15,297    | ) |   |   | (4,826 | ) |   |   | (11,848 | ) |   |
| Loss on impairment of assets                                                                           |       |                                           | 840        |   |   |   | 4,200 |   |   |   | — |   |   |
| Change in fair value of derivatives                                                                    |       |                                           | (5,568     | ) |   |   | — |   |   |   | — |   |   |
| Excess tax benefits from stock based awards                                                            |       |                                           | (95        | ) |   |   | — |   |   |   | — |   |   |
| Increase in cash surrender value of life insurance  policies                                           |       |                                           | (2,143     | ) |   |   | (3,389 | ) |   |   | (3,540 | ) |   |
| Changes in operating assets and liabilities:                                                           |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in accounts receivable, prepaid  expenses and other                                |       |                                           | 24,045     |   |   |   | 15,166 |   |   |   | (17,753 | ) |   |
| Decrease (increase) in merchandise inventories                                                         |       |                                           | 9,250      |   |   |   | (13,532 | ) |   |   | (49,198 | ) |   |
| Increase (decrease) in accounts payable                                                                |       |                                           | 3,549      |   |   |   | (49,041 | ) |   |   | (31,624 | ) |   |
| (Decrease) increase in accrued expenses                                                                |       |                                           | (4,165     | ) |   |   | (18,864 | ) |   |   | 25,853 |   |   |
| Increase (decrease) in other long-term liabilities                                                     |       |                                           | 2,093      |   |   |   | 16,760 |   |   |   | (1,272 | ) |   |
| Net Cash Provided by (Used in) Continuing Operations                                                   |       |                                           | 93,688     |   |   |   | (36,887 | ) |   |   | 40,964 |   |   |
| Net Cash Used in Discontinued Operations                                                               |       |                                           | (1,258     | ) |   |   | (1,500 | ) |   |   | (2,732 | ) |   |
| Net Cash Provided by (Used in) Operating Activities                                                    |       |                                           | 92,430     |   |   |   | (38,387 | ) |   |   | 38,214 |   |   |
| Cash Flows from Investing Activities:                                                                  |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash paid for property and equipment                                                                   |       |                                           | (50,212    | ) |   |   | (85,945 | ) |   |   | (88,068 | ) |   |
| Proceeds from sales of assets                                                                          |       |                                           | 17,542     |   |   |   | 4,043 |   |   |   | 18,021 |   |   |
| Proceeds from sales of assets held for disposal                                                        |       |                                           | —     |   |   |   | 6,913 |   |   |   | — |   |   |
| (Repayment) proceeds from life insurance policies                                                      |       |                                           | (24,669    | ) |   |   | 24,655 |   |   |   | — |   |   |
| Premiums paid on life insurance policies                                                               |       |                                           | —     |   |   |   | (605 | ) |   |   | (1,778 | ) |   |
| Net Cash Used in Continuing Operations                                                                 |       |                                           | (57,339    | ) |   |   | (50,939 | ) |   |   | (71,825 | ) |   |
| Net Cash Provided by Discontinued Operations                                                           |       |                                           | —     |   |   |   | 916 |   |   |   | 13,327 |   |   |
| Net Cash Used in Investing Activities                                                                  |       |                                           | (57,339    | ) |   |   | (50,023 | ) |   |   | (58,498 | ) |   |
| Cash Flows from Financing Activities:                                                                  |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Borrowings under line of credit agreements                                                             |       |                                           | 586,993    |   |   |   | 628,066 |   |   |   | 667,121 |   |   |
| Payments under line of credit agreements                                                               |       |                                           | (635,562   | ) |   |   | (570,081 | ) |   |   | (659,019 | ) |   |
| Excess tax benefits from stock based awards                                                            |       |                                           | 95         |   |   |   | — |   |   |   | — |   |   |
| Borrowings on trade payable program liability                                                          |       |                                           | 76,713     |   |   |   | 107,618 |   |   |   | 7,237 |   |   |
| Payments on trade payable program liability                                                            |       |                                           | (73,879    | ) |   |   | (96,462 | ) |   |   | (7,216 | ) |   |
| Payments for finance issuance costs                                                                    |       |                                           | (2,217     | ) |   |   | (5,150 | ) |   |   | (5,500 | ) |   |
| Proceeds from issuance of notes                                                                        |       |                                           | 121,000    |   |   |   | 200,000 |   |   |   | 200,000 |   |   |
| Reduction of long-term debt                                                                            |       |                                           | (2,263     | ) |   |   | (183,459 | ) |   |   | (189,991 | ) |   |
| Reduction of convertible debt                                                                          |       |                                           | (119,000   | ) |   |   | — |   |   |   | (31,000 | ) |   |
| Payments on capital lease obligations                                                                  |       |                                           | (227       | ) |   |   | (383 | ) |   |   | (1,040 | ) |   |
| Dividends paid                                                                                         |       |                                           | (14,757    | ) |   |   | (14,686 | ) |   |   | (15,676 | ) |   |
| Repurchase of common stock                                                                             |       |                                           | —     |   |   |   | (15,562 | ) |   |   | (39,718 | ) |   |
| Proceeds from issuance of common stock                                                                 |       |                                           | —     |   |   |   | — |   |   |   | 108,854 |   |   |
| Proceeds from exercise of stock options                                                                |       |                                           | 722        |   |   |   | 3,071 |   |   |   | 6,887 |   |   |
| Proceeds from dividend reinvestment plan                                                               |       |                                           | 894        |   |   |   | 961 |   |   |   | 1,119 |   |   |
| Net Cash (Used in) Provided by Financing Activities                                                    |       |                                           | (61,488    | ) |   |   | 53,933 |   |   |   | 42,058 |   |   |
| Net (Decrease) Increase in Cash and Cash Equivalents                                                   |       |                                           | (26,397    | ) |   |   | (34,477 | ) |   |   | 21,774 |   |   |
| Cash and Cash Equivalents at Beginning of Year                                                         |       |                                           | 48,281     |   |   |   | 82,758 |   |   |   | 60,984 |   |   |
| Cash and Cash Equivalents at End of Year                                                               |       |                                           | $          | 21,884 |   |   |   | $ | 48,281 |   |   |   | $ | 82,758 |   |   |
| Cash paid for interest, net of amounts capitalized                                                     |       |                                           | $          | 46,245 |   |   |   | $ | 50,602 |   |   |   | $ | 30,019 |   |   |
| Cash received from income tax refunds                                                                  |       |                                           | $          | 1 |   |   |   | $ | 10,097 |   |   |   | $ | 23,290 |   |   |
| Cash paid for income taxes                                                                             |       |                                           | $          | 632 |   |   |   | $ | 1,770 |   |   |   | $ | 48,732 |   |   |
| Supplemental Disclosure of Cash Flow Information:                                                      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Non-cash investing activities:                                                                         |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Changes in accrued purchases of property and  equipment                                                |       |                                           | $          | 3,691 |   |   |   | $ | 6,138 |   |   |   | $ | 15,698 |   |   |
| Write off of equipment and recognition of insurance  receivable                                        |       |                                           | $          | — |   |   |   | $ | 345 |   |   |   | $ | — |   |   |
| Non-cash financing activities:                                                                         |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Equipment capital leases                                                                               |       |                                           | $          | 84 |   |   |   | $ | 789 |   |   |   | $ | 1,413 |   |   |
| Repurchase of common stock not settled                                                                 |       |                                           | $          | 7,311 |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

See notes to the consolidated financial statements

35

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**BUSINESS**   ThePep Boys—Manny, Moe & Jack and subsidiaries (the “Company”) is engagedprincipally in the retail sale of automotive parts and accessories, automotivemaintenance and service and the installation of parts through a chain ofstores. The Company currently operates stores in 36 states and Puerto Rico.

**FISCAL YEAR END**   TheCompany’s fiscal year ends on the Saturday nearest to January 31. Fiscalyear 2006 which ended February 3, 2007, was comprised of 53 weeks andfiscal years 2005, which ended January 28, 2006, and 2004, which endedJanuary 29, 2005, were comprised of 52 weeks.

**PRINCIPLES OFCONSOLIDATION**   The consolidated financialstatements include the accounts of the Company and its wholly owned subsidiaries.All significant intercompany balances and transactions have been eliminated.

**USE OF ESTIMATES**   Thepreparation of the Company’s consolidated financial statements in conformitywith accounting principles generally accepted in the United States of Americanecessarily requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

**MERCHANDISE INVENTORIES**   Merchandiseinventories are valued at the lower of cost or market. Cost is determined byusing the last-in, first-out (LIFO) method. An actual valuation of inventoryunder the LIFO method can be made only at the end of each fiscal year based oninventory and costs at that time. Accordingly, interim LIFO calculations mustbe based on management’s estimates of expected fiscal year-end inventory levelsand costs. If the first-in, first-out (FIFO) method of costing inventory hadbeen used by the Company, inventory would have been $593,265 and $615,698 as ofFebruary 3, 2007 and January 28, 2006, respectively.

During the fourth quarter of fiscal 2006, the Companychanged its process for counting its physical inventories. Previously, theCompany conducted, using its own employees, a physical inventory count of itsinventory during the last weekend of its fiscal year and estimated itsinventory levels, including shrink estimates, as of the end of the first threefiscal quarters of each year. The Company now utilizes a third party to conductphysical counts of its inventory throughout the year and then utilizes asystemized roll-forward process to determine its physical inventory levels atthe end of each fiscal quarter. As a result of this change, the Company established,and will revise quarterly, a reserve for estimated inventory shrinkage basedupon the historical results of its cycle count program.

The Company also recordsvaluation adjustments (reserves) for potentially excess and obsoleteinventories based on current inventory levels, the historical analysis ofproduct sales and current market conditions. The nature of the Company’sinventory is such that the risk of obsolescence is minimal and excess inventoryhas historically been returned to the Company’s vendors for credit. The Companyprovides reserves when less than full credit is expected from a vendor or whenmarket is lower than recorded costs. The Company’s reserves against inventoryfor these matters were $13,462 and $12,822 as of February 3, 2007 and January 28,2006, respectively.

36

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CASH AND CASH EQUIVALENTS**   Cashequivalents include all short-term, highly liquid investments with a maturityof three months or less when purchased. All credit and debit card transactionsthat process in less than seven days are also classified as cash and cashequivalents.

**PROPERTY AND EQUIPMENT**   Propertyand equipment are recorded at cost. Depreciation and amortization are computedusing the straight-line method over the following estimated useful lives:building and improvements, 5 to 40 years, and furniture, fixtures and equipment,3 to 10 years. Maintenance and repairs are charged to expense as incurred. Uponretirement or sale, the cost and accumulated depreciation are eliminated andthe gain or loss, if any, is included in the determination of net income. TheCompany reviews long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable.

**SOFTWARE CAPITALIZATION**   TheCompany, in accordance with AICPA Statement of Position 98-1,“Accounting for the Costs of Computer Software Developed or Obtained forInternal Use”, capitalizes certain direct development costs associated withinternal-use software, including external direct costs of material andservices, and payroll costs for employees devoting time to the softwareprojects. These costs are amortized over a period not to exceed five yearsbeginning when the asset is substantially ready for use. Costs incurred duringthe preliminary project stage, as well as maintenance and training costs, areexpensed as incurred.

**CAPITALIZED INTEREST**   Intereston borrowed funds is capitalized in connection with the construction of certainlong-term assets. Capitalized interest was immaterial in fiscal years 2006,2005 and 2004.

**REVENUE RECOGNITION**   TheCompany recognizes revenue from the sale of merchandise at the time themerchandise is sold. Service revenues are recognized upon completion of theservice. The Company records revenue net of an allowance for estimated futurereturns. The Company establishes reserves for sales returns and allowances basedon current sales levels and historical return rates. Return activity isimmaterial to revenue and results of operations in all periods presented.

**ACCOUNTS RECEIVABLE****  **Accounts receivable are primarilycomprised of amounts due from commercial customers. The Company records anallowance for doubtful accounts based on percentage of sales. The allowance isrevised on a monthly basis against historical data for adequacy. Specificaccounts are written off against the allowance when management determines theaccount is uncollectible.

**TRADE PAYABLE PROGRAMLIABILITY****  **Inthe third quarter of fiscal 2004, the Company entered into a vendor financingprogram with an availability of $20,000. Under this program, the Company’sfactor makes accelerated and discounted payments to its vendors and theCompany, in turn, makes its regularly-scheduled full vendor payments to thefactor. There were outstanding balances of $13,990 and $11,156 under theprogram at February 3, 2007 and January 28, 2006, respectively.

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

37

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

The Company accounts forvendor support funds in accordance with Financial Accounting Standards Board(FASB) Emerging Issues Task Force (EITF) Issue No. 02-16,“Accounting by a Customer (Including a Reseller) for Cash ConsiderationReceived from a Vendor” (EITF 02-16). Rebates and other miscellaneousincentives are earned based on purchases or product sales. These incentives aretreated as a reduction of inventories and are recognized as a reduction to costof sales as the inventories are sold. Certain vendor allowances are usedexclusively for promotions and to partially or fully offset certain otherdirect expenses. Such allowances would be offset against the appropriateexpenses they offset, once the Company determines the allowances are forspecific, identifiable incremental expenses.

**WARRANTY RESERVE**   TheCompany provides warranties for both its merchandise sales and service labor.Warranties for merchandise are generally covered by its vendors, with theCompany covering any costs above the vendor’s stipulated allowance. Servicelabor warranties are covered in full by the Company on a limited lifetimebasis. The Company establishes its warranty reserves based on historical dataof warranty transactions. These costs are included in either our Costs ofMerchandise Sales or Costs of Service Revenue.

Componentsof the reserve for warranty costs for fiscal years ended February 3, 2007and January 28, 2006, are as follows:

| **Balance at January 29, 2005**   |   | $       | 1,324  |   |
|----------------------------------------|--------|---------|--------|--------|
| Additions related to fiscal 2005 sales |   | 13,429  |   |
| Warranty costs incurred in fiscal 2005 |   | (13,276 | )      |
| **Balance  at January 28, 2006**  |   | 1,477   |   |
| Additions related to fiscal 2006 sales |   | 11,577  |   |
| Warranty costs incurred in fiscal 2006 |   | (12,409 | )      |
| **Balance at February 3,  2007**  |   | $       | 645    |   |

 

**LEASES**   TheCompany’s policy is to amortize leasehold improvements over the lesser of thelease term or the economic life of those assets. Generally, for the stores thelease term is the base lease term and for distribution centers the lease termincludes the base lease term plus certain renewal option periods for whichrenewal is reasonably assured and for which failure to exercise the renewaloption would result in an economic penalty. The calculation for straight-linerent expense is based on the same lease term with consideration for step rentprovisions, escalation clauses, rent holidays and other lease concessions. TheCompany expenses rent during the construction or build-out phase of the lease.

**SERVICE REVENUE**   Servicerevenue consists of the labor charge for installing merchandise or maintainingor repairing vehicles, excluding the sale of any installed parts or materials.

**COSTS OF REVENUES**   Costsof merchandise sales include the cost of products sold, buying, warehousing andstore occupancy costs. Costs of service revenue include service center payrolland related employee benefits, service center occupancy costs and cost ofproviding free or discounted towing services to our customers. Occupancy costsinclude utilities, rents, real estate and property taxes, repairs andmaintenance and depreciation and amortization expenses.

**PENSION EXPENSE**   TheCompany reports all information on its pension and savings plan benefits inaccordance with FASB Statement of Financial Accounting Standards (SFAS)No. 132, “Employers’ Disclosure about Pensions and Other PostretirementBenefits (revised 2003)” (SFAS 132R), as amended 

38

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

by SFASNo. 158 “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans- an Amendment of FASB Statements No. 87, 88, 106 and132(R)”.

**INCOME TAXES**   TheCompany uses the asset and liability method of accounting for income taxes inaccordance with SFAS No. 109, “Accounting for Income Taxes.” Under thismethod, deferred income taxes are determined based upon enacted tax laws andrates applied to the differences between the financial statement and tax basesof assets and liabilities.

**ADVERTISING**   TheCompany expenses the production costs of advertising the first time theadvertising takes place. Gross advertising expense for 2006, 2005, and 2004 was$84,206, $85,809 and $73,996, respectively. No advertising costs were recordedas assets as of February 3, 2007 or January 28, 2006.

The Company restructured substantially all of itsvendor agreements in the fourth quarter of fiscal 2005 to provide flexibilityin how the Company can use vendor support funds, and eliminate theadministrative burden associated with tracking the application of such funds.Therefore, in fiscal 2006, substantially all vendor support funds were treatedas a reduction of inventories and are recognized as a reduction to cost ofmerchandise sales as inventories are subsequently sold.

Prior to fiscal year 2006,certain cooperative advertising reimbursements were netted against specific,incremental, identifiable costs incurred in connection with the selling of thevendor’s product. Cooperative advertising reimbursements of $35,702 and $36,579for fiscal years 2005 and 2004, respectively, were recorded as a reduction ofadvertising expense with the net amount included in selling, general andadministrative expenses in the consolidated statement of operations. Any excessreimbursements over these costs are characterized as a reduction of inventoryand are recognized as a reduction of cost of sales as the inventories are sold,in accordance with EITF 02-16. The amount of excess reimbursementsrecognized as a reduction of costs of sales were $53,753 and $48,950 for fiscalyears 2005 and 2004, respectively. The balance of excess reimbursementsremaining in inventory was immaterial as of January 28, 2006.

**STORE OPENING COSTS**   Thecosts of opening new stores are expensed as incurred.

**IMPAIRMENT OF LONG-LIVEDASSETS**   The Company accounts for impairedlong-lived assets in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This standard prescribes themethod for asset impairment evaluation for long-lived assets and certainidentifiable intangibles that are both held and used or to be disposed of. TheCompany evaluates the ability to recover long-lived assets whenever events orcircumstances indicate that the carrying value of the asset may not berecoverable. In the event assets are impaired, losses are recognized to theextent the carrying value exceeds the fair value. In addition, the Companyreports assets to be disposed of at the lower of the carrying amount or thefair market value less selling costs.

During fiscal 2006, theCompany recorded an $840 impairment charge principally related for one storelocation.

In the fourth quarter offiscal 2005, the Company recorded in selling, general and administrativeexpenses an impairment charge of $4,200 reflecting the remaining value of acommercial sales software asset.

**EARNINGS PER SHARE**   Earningsper share for all periods have been computed in accordance with SFASNo. 128, “Earnings Per Share” as amended by SFAS No. 123 (revised2004), “Share-Based 

39

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Payment.” Basicearnings per share is computed by dividing earnings by the weighted averagenumber of common shares outstanding during the year. Diluted earnings per shareis computed by dividing earnings plus the interest on the convertible seniornotes by the weighted average number of common shares outstanding during theyear plus the assumed conversion of dilutive convertible debt and incrementalshares that would have been outstanding upon the assumed exercise of dilutivestock options.

**ACCOUNTING FOR STOCK-BASED COMPENSATION**   AtFebruary 3, 2007, the Company has three stock-based employee compensationplans, which are described in full in Note 11, “Equity Compensation Plans.”

Effective January 29,2006, the Company adopted the provisions of Statement of Financial Accounting StandardsNo. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) requiringthat compensation cost relating to share-based payment transactions berecognized in the financial statements. The cost is measured at the grant date,based on the calculated fair value of the award, and is recognized as anexpense over the employee’s requisite service period (generally the vestingperiod of the equity award). Prior to January 29, 2006, the Companyaccounted for share-based compensation to employees in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (APB No. 25), and related interpretations. The Company alsofollowed the disclosure requirements of Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation”. The Companyadopted SFAS No. 123R using the modified prospective method and,accordingly, financial statement amounts for periods prior to January 29,2006 have not been restated to reflect the fair value method of recognizingcompensation cost relating to share-based compensation.

The Company recognized approximately $1,340 ofcompensation expense related to stock options, and approximately $1,711 ofcompensation expense related to restricted stock units (RSUs), in its operatingresults (included in selling, general and administrative expenses) for fiscalyear 2006. The related tax benefit recognized was approximately $894.Compensation expense for RSUs was $2,049 and $1,184, for fiscal year 2005 and2004 respectively, and was included in selling, general and administrativeexpenses. The cumulative effect from adopting the provisions of SFASNo. 123R in fiscal year 2006 was $189 benefit, net of tax.

The application of SFAS123(R) had the following effect on reported amounts in fiscal year 2006,relative to amounts that would have been reported using the intrinsic valuemethod under previous accounting (dollars in thousands, except per shareamounts):

|                                                                                                                   | ** ** | **SFAS 123(R)  Adjustments** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| Operating profit                                                                                                  |       |                              | $          | (1,340 | ) |   |
| Loss from Continuing Operations Before Income Taxes  and Cumulative Effect of Change in Accounting Principle |       |                              | $          | (1,340 | ) |   |
| Income Tax Benefit                                                                                                |       |                              | $          | 393 |   |   |
| Net Loss                                                                                                          |       |                              | $          | (947 | ) |   |
| Basic Loss per Share                                                                                              |       |                              | $          | (0.02 | ) |   |
| Diluted Loss per Share                                                                                            |       |                              | $          | (0.02 | ) |   |
| Cash flow from operating activities                                                                               |       |                              | $          | (95 | ) |   |
| Cash flow from financing activities                                                                               |       |                              | $          | 95 |   |   |

 

40

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Thefollowing table illustrates the effect on net earnings and earnings per shareif the Company had applied the fair value recognition provisions of SFASNo. 123, “Accounting for Stock-Based Compensation,” to stock-basedemployee compensation for the fiscal years ended as follows:

|                                                                                                     | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Net (loss)  earnings:                                                                               |       |                       |       |                       |       |   |   |   |   |
| As reported                                                                                         |       |                       | $          | (37,528                    | )          |   |   | $ | 23,579 |   |   |
| Add: Stock-based  compensation for RSU’s, net of tax                                           |       |                       | 1,301      |                       |       |   | 741 |   |   |
| Less: Total  stock-based compensation expense determined under fair value-based method,  net of tax |       |                       | (3,121     | )                          |       |   | (2,858 | ) |   |
| Pro forma                                                                                           |       |                       | $          | (39,348                    | )          |   |   | $ | 21,462 |   |   |
| Net earnings  (loss) per share:                                                                     |       |                       |       |                       |       |   |   |   |   |
| Basic:                                                                                              |       |                       |       |                       |       |   |   |   |   |
| As reported                                                                                         |       |                       | $          | (0.69                      | )          |   |   | $ | 0.42 |   |   |
| Pro forma                                                                                           |       |                       | $          | (0.72                      | )          |   |   | $ | 0.38 |   |   |
| Diluted:                                                                                            |       |                       |       |                       |       |   |   |   |   |
| As reported                                                                                         |       |                       | $          | (0.69                      | )          |   |   | $ | 0.41 |   |   |
| Pro forma                                                                                           |       |                       | $          | (0.72                      | )          |   |   | $ | 0.38 |   |   |

 

Expected volatility isbased on historical volatilities for a time period similar to that of theexpected term. In estimating the expected term of the options, the Company hasutilized the “simplified method” allowable under the Securities and ExchangeCommission, or SEC, Staff Accounting Bulletin No. 107, *Share-Based Payment*. The risk-free rate isbased on the U.S. treasury yield curve for issues with a remaining term equalto the expected term. The fair value of each option granted during fiscal years2006, 2005 and 2004 is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions:

|                                   | ** ** | **Year ended**  | ** ** |
|-----------------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **February 3,** | ** ** | **January 28,** | ** ** | **January 29,** | ** ** |
| ** **                        | ** ** | **2007**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividend yield                    |       |                 | 2.02       | % |   |   | 1.77 | % |   |   | 1.67 | % |   |
| Expected volatility               |       |                 | 53         | % |   |   | 41 | % |   |   | 41 | % |   |
| Risk-free interest rate  range:   |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| High                              |       |                 | 4.8        | % |   |   | 4.6 | % |   |   | 4.8 | % |   |
| Low                               |       |                 | 4.6        | % |   |   | 3.5 | % |   |   | 2.0 | % |   |
| Ranges of expected lives in years |       |                 | 5-7        |   |   |   | 3-8 |   |   |   | 4-8 |   |   |

 

SFAS No. 123R alsorequires the Company to change the classification, in its consolidatedstatement of cash flows, of any excess tax benefits realized upon the exerciseof stock options or issuance of RSUs, in excess of that which is associatedwith the expense recognized for financial reporting purposes. Approximately $95is reflected as a financing cash inflow rather than as a reduction of incometaxes paid in the consolidated statement of cash flows for fiscal year 2006.

41

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**COMPREHENSIVE LOSS****  **Comprehensive loss is reported inaccordance with SFAS No. 130, “Reporting Comprehensive Income.” Othercomprehensive loss includes minimum pension liability and fair market value ofcash flow hedges.

**DERIVATIVE INSTRUMENTS ANDHEDGING ACTIVITIES**   The Company may enter intointerest rate swap agreements to hedge the exposure to increasing rates withrespect to its variable rate debt, when the Company deems it prudent to do so.The Company reports derivatives and hedging activities in accordance with SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities,”as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149. Thisstatement establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts (collectively referred to as derivatives), and for hedgingactivities. It requires that an entity recognize all derivatives as eitherassets or liabilities in the statement of financial position and measure thoseinstruments at fair value.

**SEGMENT INFORMATION**   TheCompany reports segment information in accordance with SFAS No. 131,“Disclosure about Segments of an Enterprise and Related Information.” TheCompany operates in one industry, the automotive aftermarket. In accordancewith SFAS No. 131, the Company aggregates all of its stores and reportsone operating and reporting segment. Sales by major product categories are asfollows:

| Year ended         | ** ** | ** ** | ** ** | **Feb. 3,   2007** | ** ** | **Jan. 28,   2006** | ** ** | **Jan. 29,   2005** | ** ** |
|-------------------------|------------|------------|------------|------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Parts and Accessories   |       | $          | 1,555,406  |                         | $          | 1,550,309                     |       | $                             | 1,539,513  |   |
| Tires                   |       | 320,884    |       | 304,099                      |       | 323,502                       |       |
| Total Merchandise Sales |       | 1,876,290  |       | 1,854,408                    |       | 1,863,015                     |       |
| Service Labor           |       | 395,871    |       | 383,621                      |       | 409,881                       |       |
| Total Revenues          |       | $          | 2,272,161  |                         | $          | 2,238,029                     |       | $                             | 2,272,896  |   |

 

**SIGNIFICANT SUPPLIERS**   Duringfiscal 2006, the Company’s ten largest suppliers accounted for approximately40% of the merchandise purchased by the Company. No single supplier accountedfor more than 17% of the Company’s purchases. The Company has no long-termcontracts under which the Company is required to purchase merchandise.Management believes that the relationships the Company has established with itssuppliers are generally good.

**SELF INSURANCE**   TheCompany has risk participation arrangements with respect to workers’compensation, general liability, automobile liability, and other casualtycoverages. The Company has a wholly owned captive insurance subsidiary throughwhich it reinsures this retained exposure. This subsidiary uses both risksharing pools and third party insurance to manage this exposure. In addition,the Company self insures certain employee-related health care benefitliabilities. The Company maintains stop loss coverage with third party insurersthrough which it reinsures certain of its casualty and health care benefitliabilities. The Company records both liabilities and reinsurance receivablesusing actuarial methods utilized in the insurance industry based upon ourhistorical claims experience.

42

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**RECENT ACCOUNTING STANDARDS**

In February 2006, the FASB issued SFASNo. 155, “Accounting for Certain Hybrid Financial Instruments—an amendmentof FASB Statements No. 133 and 140.” This statement simplifies accountingfor certain hybrid instruments currently governed by SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” or SFASNo. 133, by allowing fair value remeasurement of hybrid instruments thatcontain an embedded derivative that otherwise would require bifurcation. SFASNo. 155 also eliminates the guidance in SFAS No. 133 ImplementationIssue No. D1, “Application of Statement 133 to Beneficial Interestsin Securitized Financial Assets,” which provides such beneficial interests arenot subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities—a Replacement of FASB Statement No. 125,” by eliminatingthe restriction on passive derivative instruments that a qualifying special-purposeentity may hold. SFAS No. 155 is effective for financial instrumentsacquired or issued after the beginning of our fiscal year 2007. We arecurrently evaluating the impact of SFAS No. 155 on our consolidatedfinancial statements and will adopt the standard February 4, 2007.

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets—an amendment of FASB StatementNo. 140.” SFAS No. 156 amends SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments ofLiabilities,” with respect to the accounting for separately recognizedservicing assets and servicing liabilities. SFAS No. 156 is effective forfiscal years beginning after September 15, 2006. We are currentlyevaluating the impact of SFAS No. 156 on our consolidated financial statements andwill adopt the standard February 4, 2007.

In June 2006, theFASB ratified the consensus reached by the Emerging Issues Task Force onIssue 06-3, “How Taxes Collected from Customers and Remitted toGovernmental Authorities Should be Presented in the Income Statement (That Is,Gross versus Net Presentation).” The scope of this consensus includes anytax assessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer and may include,but is not limited to sales, use, value added and some excisetaxes. Additionally, this consensus seeks to address how a company shouldaddress the disclosure of such items in interim and annual financialstatements, either gross or net pursuant to APB Opinion No. 22, Disclosureof Accounting Policies. The Company is required to adopt this statement infiscal 2007. The Company presents sales net of sales taxes in itsconsolidated statement of operations and does not anticipate changing itspolicy as a result of EITF 06-3.

In July 2006, theFASB released FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB Statement 109” (FIN 48). FIN 48prescribes a model for the recognition and measurement of a tax position takenor expected to be taken in a tax return, and provides guidance onderecognition, classification, interest and penalties, disclosure andtransition. The Company does not expect the adoption of this statement,beginning in fiscal 2007, will have a material impact on its consolidatedfinancial statements.

In September 2006,the SEC, staff issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements,” or SAB 108. SAB 108 was issued in order toeliminate the diversity in practice surrounding how public companies quantifyfinancial statement misstatements. SAB 108 requires that registrants quantifyerrors using both a balance sheet and income statement approach and evaluatewhether either approach results 

43

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

in amisstated amount that, when all relevant quantitative and qualitative factorsare considered, is material. SAB 108 is effective for financial statements coveringthe first fiscal year ending after November 15, 2006. We adoptedSAB 108 for the year ended February 3, 2007 with no impact onour consolidated financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines theterm fair value, establishes a framework for measuring it within generallyaccepted accounting principles and expands disclosures about its measurements.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactSFAS No. 157 will have on our consolidated financial statements beginningin fiscal 2008.

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans- an Amendment ofFASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS No. 158requires entities to:

·       Recognizeon its balance sheet the funded status (measured as the difference between thefair value of plan assets and the benefit obligation) of pension and otherpostretirement benefit plans;

·       Recognize,through comprehensive income, certain changes in the funded status of a definedbenefit and post retirement plan in the year in which the changes occur;

·       Measureplan assets and benefit obligations as of the end of the employer’s fiscalyear; and

·       Discloseadditional information.

The requirement to recognize the funded status of abenefit plan and the additional disclosure requirements are effective forfiscal years ended after December 15, 2006. Accordingly, the Companyadopted these requirements of SFAS No.158 at February 3, 2007. Theincremental effect from adopting SFAS No. 158, as of February 3,2007, on individual line items in the Company’s consolidated balance sheets atFebruary 3, 2007 follows:

|                                                     | ** ** | **Before**                 | ** ** | ** **      | ** ** | **After**                  | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|-----------------|------------|----------------------------|------------|
| ** **                                          | ** ** | **Application of**    | ** ** | ** **      | ** ** | **Application of**    | ** ** |
| ** **                                          | ** ** | **SFAS No. 158** | ** ** | **Adjustments** | ** ** | **SFAS No. 158** | ** ** |
| **Deferred Income Taxes**                           |       |                       | $          | 22,996          |       |                       |       | $ | 1,832 |   |   |   | $ | 24,828 |   |   |
| **Other Long Term Assets**                          |       |                       | 69,635     |            |       |                       | (1,651     | ) |   |   | 67,984 |   |   |
| **Total Assets**                                    |       |                       | 1,767,018  |            |       |                       | 181        |   |   |   | 1,767,199 |   |   |
| **Accrued Expenses**                                |       |                       | 292,280    |            |       |                       | —     |   |   |   | 292,280 |   |   |
| **Other Long Term Liabilities**                     |       |                       | 56,998     |            |       |                       | 3,235      |   |   |   | 60,233 |   |   |
| **Total Liabilities**                               |       |                       | 1,196,209  |            |       |                       | 3,235      |   |   |   | 1,199,444 |   |   |
| **Accumulated Other Comprehensive Loss**            |       |                       | (6,326     | )               |       |                       | (3,054     | ) |   |   | (9,380 | ) |   |
| **Total Stockholders’ Equity**                 |       |                       | 570,809    |            |       |                       | (3,054     | ) |   |   | 567,755 |   |   |
| **Total Liabilities and Stockholders’ Equity** |       |                       | 1,767,018  |            |       |                       | 181        |   |   |   | 1,767,199 |   |   |

 

The requirement to measure plan assets and benefitobligations as of the date of the employer’s fiscal year-end is effective forfiscal years ending after December 15, 2008. The Company will not electearly adoption of these additional SFAS No.158 requirements and will adoptthese requirements for the fiscal year ended January 31, 2009.

44

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities.” SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. We arecurrently evaluating the impact of SFAS No. 159 on our consolidatedfinancial statements.

**RECLASSIFICATIONS****  **Certain reclassifications have beenmade to the prior years’ consolidated financial statements to providecomparability with the current year’s presentation of Net Gain from Sales ofAssets from Cost of Merchandise Sales and the change in classification of astore from discontinued operations to continuing operations, see Note 7.

**NOTE 2—DEBT ANDFINANCING ARRANGEMENTS**

**LONG-TERM DEBT**

| ** **                                                                          | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| 7.50% Senior  Subordinated Notes, due December 2014                            |       |                       | $          | 200,000                    |       |   |   | $ | 200,000 |   |   |
| Senior Secured  Term Loan, due October 2013                                    |       |                       | 320,000    |                       |       |   | 200,000 |   |   |
| Medium-Term  Notes, 6.4% to 6.52%, due July 2007 through   September 2007 |       |                       | —     |                       |       |   | 215 |   |   |
| Other notes  payable, 8.0%                                                          |       |                       | 268        |                       |       |   | 1,315 |   |   |
| Capital lease  obligations, payable through October 2009                       |       |                       | 685        |                       |       |   | 829 |   |   |
| Line of credit  agreement, through December 2009                               |       |                       | 17,568     |                       |       |   | 66,137 |   |   |
|                                                                                |       |                       | 538,521    |                       |       |   | 468,496 |   |   |
| Less current  maturities                                                            |       |                       | 3,490      |                       |       |   | 1,257 |   |   |
| Total Long-Term Debt                                                                |       |                       | $          | 535,031                    |       |   |   | $ | 467,239 |   |   |

 

On January 27, 2006 the Company entered into a$200,000 Senior Secured Term Loan facility due January 27, 2011. Thisfacility is secured by the real property and improvements associated with 154of the Company’s stores. Interest at the rate of London Interbank Offered Rate(LIBOR) plus 3.0% on this facility was payable by the Company starting inFebruary 2006. Proceeds from this facility were used to satisfy anddischarge the Company’s then outstanding $43,000 6.88% Medium Term Notes dueMarch 6, 2006 and $100,000 6.92% Term Enhanced Remarketable Securities (TERMS)due July 7, 2016 and to reduce borrowings under the Company’s line ofcredit by approximately $39,000.

On October 30, 2006, the Company amended andrestated the Senior Secured Term Loan facility to (i) increase the sizefrom $200,000 to $320,000, (ii) extend the maturity from January 27,2011 to October 27, 2013, (iii) reduce the interest rate from LIBORplus 3.00% to LIBOR plus 2.75%. An additional 87 stores (bringing the total to241 stores) were added to the collateral pool securing the facility. Proceedswere used to satisfy and discharge $119,000 in outstanding 4.25% convertibleSenior Notes due June 1, 2007.

On February 15, 2007, the Company further amendedthe Senior Secured Term Loan facility to reduce the interest rate from LIBORplus 2.75% to LIBOR plus 2.00%.

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

The TERMS were retired on January 27, 2006 withproceeds from the Company’s Senior Secured Term Loan facility. In retiring theTERMS, the Company was obligated to purchase a call option, which, ifexercised, would have allowed the securities to be remarketed through amaturity date of July 7, 2016. The $8,100 redemption price of the calloption, which was terminated on January 27, 2006, was based upon the thenpresent value of the remaining payments on the TERMS through July 17,2016, at 5.45%, discounted at the 10-year Treasury rate.

On December 14, 2004, the Company issued $200,000aggregate principal amount of 7.5% Senior Subordinated Notes dueDecember 15, 2014.

On December 2, 2004, the Company further amendedits amended and restated line of credit agreement. The amendment increased theamount available for borrowings to $357,500, with an ability, upon satisfactionof certain conditions, to increase such amount to $400,000. The amendment alsoreduced the interest rate under the agreement to LIBOR plus 1.75% (afterJune 1, 2005, the rate decreased to LIBOR plus 1.50%, subject to 0.25%incremental increases as excess availability falls below $50,000). Theamendment also provided the flexibility, upon satisfaction of certain conditions,to release up to $99,000 of reserved credit line availability required as ofDecember 2, 2004 under the line of credit agreement to support certainoperating leases. This reserve was $73,912 on February 3, 2007. Finally,the amendment extended the term of the agreement through December 2009.The weighted average interest rate on borrowings under the line of creditagreement was 7.67 % and 6.2% at February 3, 2007 and January 28,2006, respectively.

In the third quarter of fiscal 2004, the Companyentered into a vendor financing program with an availability of $20,000. Underthis program, the Company’s factor makes accelerated and discounted payments toits vendors and the Company, in turn, makes its regularly scheduled full vendorpayments to the factor. As of February 3, 2007 and January 28, 2006,the Company had an outstanding balance of $13,990 and $11,156, respectively,under these arrangements, classified as trade payable program liability in theconsolidated balance sheets.

The other notes payablehave a principal balance of $268 and $1,315 and a weighted average interestrate of 8.0% and 5.1% at February 3, 2007 and January 28, 2006,respectively, and mature at various times through August 2016. Certain ofthese notes are collateralized by land and buildings with an aggregate carryingvalue of approximately $1,774 and $6,744 at February 3, 2007 andJanuary 28, 2006, respectively.

**CONVERTIBLE DEBT**

| ** **                                          | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| 4.25% Senior  convertible notes, due June 2007 |       |                       | $          | —                     |       |   |   | $ | 119,000 |   |   |
| Less current  maturities                            |       |                       | —     |                       |       |   | — |   |   |
| Total Long-Term  Convertible Debt                   |       |                       | $          | —                     |       |   |   | $ | 119,000 |   |   |

 

On October 27, 2006,the Company amended and restated its Senior Secured Term Loan Facility toincrease its size from $200,000 to $320,000. Proceeds from the facility wereused to satisfy and discharge the Company’s outstanding $119,000 4.25%Convertible Senior Notes due June 1, 2007 by deposit into an 

46

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

escrowfund with an independent trustee. The right of the holders of the convertiblenotes to convert them into shares of the Company’s common stock, at any timeuntil the June 1, 2007 maturity date, survives such satisfaction anddischarge. The conversion price is approximately $22.40 per share. The Companyrecorded a non-cash charge for the value of such conversion right,approximately $755 as determined by the Black-Scholes method, and $430 fordeferred financing cost.

**OTHER**

Several of the Company’s debt agreements require themaintenance of certain financial ratios and compliance with covenants. The mostrestrictive of these covenants, an EBITDA requirement, is triggered if theCompany’s availability under its line of credit agreement drops below $50,000.As of February 3, 2007 the Company had an availability of approximately$190,000 under its line of credit, and was in compliance with all covenantscontained in its debt agreements.

Theannual maturities of all long-term debt and capital lease commitments for thenext five fiscal years are:

| ** ** | ** ** | **Long-Term** | ** ** | **Capital** | ** ** | ** ** | ** ** |
|------------|------------|---------------|------------|-------------|------------|------------|------------|
| **Year**   | ** ** | ** **    | ** ** | **Debt**    | ** ** | **Leases** | ** ** | **Total** | ** ** |
| 2007       |       |          | $          | 3,201       |       |       |       | $ | 289 |   |   | $ | 3,490 |   |
| 2008       |       |          | 3,241      |        |       |       | 239        |   |   | 3,480 |   |
| 2009       |       |          | 20,787     |        |       |       | 157        |   |   | 20,944 |   |
| 2010       |       |          | 3,229      |        |       |       | —     |   |   | 3,229 |   |
| 2011       |       |          | 3,227      |        |       |       | —     |   |   | 3,227 |   |
| Thereafter |       |          | 504,151    |        |       |       | —     |   |   | 504,151 |   |
| Total      |       |          | $          | 537,836     |       |       |       | $ | 685 |   |   | $ | 538,521 |   |
|            |            |               |            |             |            |            |            |  |  |  |  |  |  |  |  |  |

 

The Company has letter ofcredit arrangements in connection with its risk management, importmerchandising and vendor financing programs. The Company was contingentlyliable for $487 and $1,015 in outstanding import letters of credit and $55,708and $41,218 in outstanding standby letters of credit as of February 3,2007 and January 28, 2006 respectively. The Company was also contingentlyliable for surety bonds in the amount of approximately $11,224 and $13,021 atFebruary 3, 2007 and January 28, 2006, respectively.

**NOTE 3—ACCRUEDEXPENSES**

TheCompany’s accrued expenses as of February 3, 2007 and January 28,2006, were as follows:

| ** **                              | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Casualty and  medical risk insurance    |       |                       | $          | 173,826                    |       |   |   | $ | 178,498 |   |   |
| Accrued  compensation and related taxes |       |                       | 44,317     |                       |       |   | 44,565 |   |   |
| Sales tax payable                       |       |                       | 11,286     |                       |       |   | 11,597 |   |   |
| Other                                   |       |                       | 62,851     |                       |       |   | 56,101 |   |   |
| Total                                   |       |                       | $          | 292,280                    |       |   |   | $ | 290,761 |   |   |

 

47

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**NOTE 4—OTHERCURRENT ASSETS**

TheCompany’s other current assets as of February 3, 2007 and January 28,2006, were as follows:

| ** **                           | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Reinsurance  premiums and receivable |       |                       | $          | 69,239                     |       |   |   | $ | 82,629 |   |   |
| Income taxes  receivable             |       |                       | —     |                       |       |   | 2,694 |   |   |
| Other                                |       |                       | 1,129      |                       |       |   | 123 |   |   |
| Total                                |       |                       | $          | 70,368                     |       |   |   | $ | 85,446 |   |   |

 

**NOTE 5—LEASE ANDOTHER COMMITMENTS**

On October 18, 2004, the Company entered into aMaster Lease agreement providing for the lease of up to $35,000 of newpoint-of-sale hardware for the Company’s stores at an interest rate of LIBORplus 2.25%. This Master Lease is reflected in the Company’s consolidatedfinancial statements as an operating lease. The Company has evaluated thistransaction in accordance with the guidance of FIN 46 and re-evaluatedthe transaction under FIN 46R and has determined that it is not required toconsolidate the leasing entity. The Company has an outstanding commitment ofapproximately $14,938 and $20,507 on this operating lease facility as ofFebruary 3, 2007 and January 28, 2006. The lease includes a residualvalue guarantee with a maximum value of approximately $172. The Company expectsthe fair market value of the leased equipment to substantially reduce oreliminate the Company’s payment under the residual guarantee at the end of thelease term.

In accordance with FIN 45, the Company has recorded aliability for the fair value of the guarantee related to this operating lease.As of February 3, 2007 and January 28, 2006, the current value ofthis liability was $71 and $105, respectively, which is recorded in otherlong-term liabilities on the consolidated balance sheets.

On August 1, 2003, the Company renegotiated$132,000 of store and distribution center operating leases. These leases, whichexpire on August 1, 2008, have lease payments with an effective rate ofLIBOR plus 2.06%. The Company has evaluated this transaction in accordance withthe guidance of FIN 46 and re-evaluated the transaction under FIN 46R and hasdetermined that it is not required to consolidate the leasing entity. As ofFebruary 3, 2007 and January 28, 2006 there was an outstandingcommitment of $117,627 and $123,970 under the leases. The leases include aresidual value guarantee with a maximum value of approximately $105,000. TheCompany expects the fair market value of the leased real estate tosubstantially reduce or eliminate the Company’s payment under the residualguarantee at the end of the lease term.

In accordance with FIN 45, the Company has recorded aliability for the fair value of the guarantee related to this operating lease.As of February 3, 2007 and January 28, 2006, the current value ofthis liability was $1,496 and $2,493, respectively, which is recorded in otherlong-term liabilities on the consolidated balance sheets.

The Company leases certain property and equipmentunder operating leases and capital leases, which contain renewal and escalationclauses, step rent provisions, capital improvements funding and other lease 

48

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

concessions. Theseprovisions are considered in the Company’s calculation of the Company’s minimumlease payments, which are recognized as expense on a straight-line basis overthe applicable lease term. In accordance with SFAS No. 13, as amended bySFAS No. 29, any lease payments that are based upon an existing index orrate are included in the Company’s minimum lease payment calculations. Futureminimum rental payments for noncancelable operating leases and capital leasesin effect as of February 3, 2007 are shown in the table below. All amountsare exclusive of lease obligations and sublease rentals applicable to storesfor which reserves, in conjunction with the restructuring, have previously beenestablished.

Theaggregate minimum rental payments for such leases having initial terms ofmore than one year are approximately:

| **Year**                                     | ** ** | ** ** | ** ** | **Operating  Leases** | ** ** | **Capital  Leases** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------------|------------|---------------------|------------|
| 2007                                         |       | $          | 57,670     |                  |       | $                   | 290        |   |   |
| 2008                                         |       | 53,788     |       |                  | 260        |                |       |
| 2009                                         |       | 47,114     |       |                  | 183        |                |       |
| 2010                                         |       | 43,548     |       |                  | —     |                |       |
| 2011                                         |       | 41,179     |       |                  | —     |                |       |
| Thereafter                                   |       | 239,550    |       |                  | —     |                |       |
| Aggregate minimum  lease payments            |       | $          | 482,849    |                  |       | $                   | 733        |   |   |
| Less: interest on  capital leases            |       |       |       |                  | (48        | )                   |       |
| Present Value of Net  Minimum Lease Payments |       |       |       |                  | $          | 685                 |       |   |

 

Rental expenses incurred for operating leases infiscal years 2006, 2005, and 2004 were $59,953, $67,601 and $60,941,respectively.

In October 2001, the Company entered into acontractual commitment to purchase media advertising services with equal annualpurchase requirements totaling $39,773 over four years. During the secondquarter of fiscal 2004, it was determined that the Company would be unable tomeet its obligation for the 2004 contract year, which ended onNovember 30, 2004. As a result, the Company recorded a $1,579 charge toselling, general and administrative expenses in the quarter ended July 31,2004 related to the anticipated shortfall in this purchase commitment. Thisagreement expired in October 2005.

Our open purchase ordersare based on current inventory or operational needs and are fulfilled by ourvendors within short periods of time. We currently do not have minimum purchasecommitments under our vendor supply agreements and generally our open purchaseorders (orders that have not been shipped) are not binding agreements. Thosepurchase obligations that are in transit from our vendors at February 3,2007 are considered to be a contractual obligation.

**NOTE 6—STOCKHOLDERS’EQUITY**

**SHAREREPURCHASE—TREASURY STOCK**   On September 7,2006, the Company renewed its share repurchase program, which had approximately$45,000 of its original $100,000 authorization remaining and was set to expireon September 30, 2006. Under the renewed program, the Board reset the 

49

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

authority back to $100,000for repurchases to be made from time to time in the open market or in privatelynegotiated transactions through September 30, 2007. The Companyrepurchased approximately 494,800 shares during fiscal 2006 for approximately$7,311.

All of these repurchased shares were placed into theCompany’s treasury. A portion of the treasury shares will be used by theCompany to provide benefits to employees under its compensation plans and inconjunction with the Company’s dividend reinvestment program. As ofFebruary 3, 2007, the Company reflected 12,427,687 shares of its commonstock at a cost of $185,339 as “cost of shares in treasury” on the Company’sconsolidated balance sheet.

**SALEOF COMMON STOCK****  **OnMarch 24, 2004, the Company sold 4,646,464 shares of common stock (parvalue $1 per share) at a price of $24.75 per share for net proceeds of$108,854.

**RIGHTSAGREEMENT**   On December 31, 1997, the Companydistributed as a dividend one common share purchase right on each of its commonshares. The rights will not be exercisable or transferable apart from theCompany’s common stock until a person or group, as defined in the rightsagreement (dated December 5, 1997), without the proper consent of the Company’sBoard of Directors, acquires 15% or more, or makes an offer to acquire 15% ormore of the Company’s outstanding stock. When exercisable, the rights entitlethe holder to purchase one share of the Company’s common stock for $125. Undercertain circumstances, including the acquisition of 15% of the Company’s stockby a person or group, the rights entitle the holder to purchase common stock ofthe Company or common stock of an acquiring company having a market value oftwice the exercise price of the right.

The rights do not have voting power and are subject toredemption by the Company’s Board of Directors for $.01 per right anytimebefore a 15% position has been acquired and for 10 days thereafter, at whichtime the rights become non-redeemable. The rights expire on December 31,2007.

**BENEFITS TRUST**   OnApril 29, 1994, the Company established a flexible employee benefits trustwith the intention of purchasing up to $75,000 worth of the Company’s commonshares. The repurchased shares will be held in the trust and will be used tofund the Company’s existing benefit plan obligations including healthcareprograms, savings and retirement plans and other benefit obligations. The trustwill allocate or sell the repurchased shares through 2023 to fund these benefitprograms. As shares are released from the trust, the Company will charge orcredit additional paid-in capital for the difference between the fair value ofshares released and the original cost of the shares to the trust. For financialreporting purposes, the trust is consolidated with the accounts of the Company.All dividend and interest transactions between the trust and the Company areeliminated. In connection with the Dutch Auction self-tender offer, 37,230shares were tendered at a price of $16.00 per share in fiscal 1999. AtFebruary 3, 2007, the Company has reflected 2,195,270 shares of its commonstock at a cost of $59,264 as “cost of shares in benefits trust” on theCompany’s consolidated balance sheet.

50

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**NOTE 7—DiscontinuedOperations**

In accordance with SFAS No. 144, our discontinuedoperations continues to reflect the costs associated with the stores remainingfrom the 33 stores closed on July 31, 2003 as part of our corporaterestructuring. The remaining reserve balance is not material.

During the second quarter of fiscal 2006, we sold astore that we have leased back and will continue to operate for a one yearperiod. Due to our significant continuing involvement with this store followingthe sale, we reclassified back into continuing operations, for all periodspresented, this store’s revenues and costs that had been previouslyreclassified into discontinued operations during the third quarter of fiscal2005, in accordance with SFAS No. 144 and EITF 03-13.

During fiscal 2005,the Company sold a closed store for proceeds of $931 resulting in a pre-taxgain of $341, which was recorded in discontinued operations on the consolidatedstatement of operations.

During fiscal 2004, the Company sold assets held fordisposal for proceeds of $13,327 resulting in a loss of $91, which was recordedin discontinued operations on the consolidated statement of operations.

**NOTE 8—SUPPLEMENTAL GUARANTOR INFORMATION**

The Company’s$200,000 aggregate principal amount of 7.50% Senior Subordinated Notes (the“Notes”) are fully and unconditionally and joint and severally guaranteed bycertain of the Company’s direct and indirectly wholly-owned subsidiaries—namely,The Pep Boys Manny Moe & Jack of California, Pep Boys—Manny, Moe & Jackof Delaware, Inc., Pep Boys—Manny, Moe & Jack of Puerto Rico, Inc. and PBYCorporation, (collectively, the “Subsidiary Guarantors”). The Notes are notguaranteed by the Company’s wholly owned subsidiary, Colchester InsuranceCompany.

The followingcondensed consolidating information presents, in separate columns, thecondensed consolidating balance sheets as of February 3, 2007 and January 28,2006 and the related condensed consolidating statements of operations andcondensed consolidating statements of cash flows for the fiscal years endedFebruary 3, 2007, January 28, 2006 and January 29, 2005 for (i) the Company(“Pep Boys”) on a parent only basis, with its investment in subsidiariesrecorded under the equity method, (ii) the Subsidiary Guarantors on a combinedbasis including the consolidation by PBY Corporation of its wholly ownedsubsidiary, The Pep Boys Manny Moe & Jack of California, (iii) thesubsidiary of the Company that does not guarantee the Notes, and (iv) theCompany on a consolidated basis.

51

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CONDENSEDCONSOLIDATING BALANCE SHEET**

| **As of February 3, 2007**                                     | ** ** | ** ** | ** ** | **Pep Boys*** | ** ** | **Subsidiary  Guarantors*** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination*** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                         | ** ** | ** ** | ** ** |               | ** ** | ** **                  |       |                             | ** ** | ** **                             |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Assets:                                                                    |       |       |       |               | ** ** | ** **                  |       |                             |       | ** **                             |       |             |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                          |       | $          | 13,581     |               |       | $                           | 7,946      | ** **                       |       |                                   | $          | 357              | ** ** |   |   | $ | — |   |   |   | $ | 21,884 |   |   |
| Accounts  receivable, net                                                          |       | 17,377     |       |               | 12,205     | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 29,582 |   |   |
| Merchandise  inventories                                                           |       | 211,445    |       |               | 395,597    | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 607,042 |   |   |
| Prepaid expenses                                                                   |       | 24,511     |       |               | 13,469     | ** **                  |       |                             | 20,044     | ** **                             |       |             | (18,760    | ) |   |   | 39,264 |   |   |
| Other                                                                              |       | —     |       |               | 2,255      | ** **                  |       |                             | 75,038     | ** **                             |       |             | (6,925     | ) |   |   | 70,368 |   |   |
| Total Current  Assets                                                              |       | 266,914    |       |               | 431,472    | ** **                  |       |                             | 95,439     | ** **                             |       |             | (25,685    | ) |   |   | 768,140 |   |   |
| Property and Equipment—at cost:                                               |       |       |       |               | ** ** | ** **                  |       |                             |       | ** **                             |       |             |       |   |   |   |   |   |   |
| Land                                                                               |       | 78,507     |       |               | 166,767    | ** **                  |       |                             | 12,893     | ** **                             |       |             | (6,462     | ) |   |   | 251,705 |   |   |
| Buildings and  improvements                                                        |       | 310,952    |       |               | 607,948    | ** **                  |       |                             | 20,937     | ** **                             |       |             | (10,612    | ) |   |   | 929,225 |   |   |
| Furniture,  fixtures and equipment                                                 |       | 289,005    |       |               | 395,037    | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 684,042 |   |   |
| Construction in  progress                                                          |       | 2,654      |       |               | 810        | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 3,464 |   |   |
|                                                                               |       | 681,118    |       |               | 1,170,562  | ** **                  |       |                             | 33,830     | ** **                             |       |             | (17,074    | ) |   |   | 1,868,436 |   |   |
| Less accumulated  depreciation and                                                 |       | 382,363    |       |               | 576,186    | ** **                  |       |                             | 239        | ** **                             |       |             | 3,401      |   |   |   | 962,189 |   |   |
| Total Property and  Equipment—Net                                             |       | 298,755    |       |               | 594,376    | ** **                  |       |                             | 33,591     | ** **                             |       |             | (20,475    | ) |   |   | 906,247 |   |   |
| Investment in  subsidiaries*                                                       |       | 1,589,279  |       |               | —     | ** **                  |       |                             | —     | ** **                             |       |             | (1,589,279 | ) |   |   | — |   |   |
| Intercompany  receivable*                                                          |       | —     |       |               | 684,520    | ** **                  |       |                             | 81,160     | ** **                             |       |             | (765,680   | ) |   |   | — |   |   |
| Deferred income  taxes                                                             |       | 24,828     |       |               | —     | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 24,828 |   |   |
| Other                                                                              |       | 63,843     |       |               | 4,141      | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 67,984 |   |   |
| Total Assets*                                                                      |       | $          | 2,243,619  |               |       | $                           | 1,714,509  | ** **                       |       |                                   | $          | 210,190          | ** ** |   |   | $ | (2,401,119 | ) |   |   | $ | 1,767,199 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                     | ** ** | ** ** | ** ** |               | ** ** | ** **                  |       |                             | ** ** | ** **                             |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Liabilities:                                                               |       |       |       |               | ** ** | ** **                  |       |                             |       | ** **                             |       |             |       |   |   |   |   |   |   |
| Accounts payable                                                                   |       | $          | 265,480    |               |       | $                           | 9          | ** **                       |       |                                   | $          | —           | ** ** |   |   | $ | — |   |   |   | $ | 265,489 |   |   |
| Trade payable  program liability                                                   |       | 13,990     |       |               | —     | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 13,990 |   |   |
| Accrued expenses*                                                                  |       | 43,815     |       |               | 72,692     | ** **                  |       |                             | 195,321    | ** **                             |       |             | (19,548    | ) |   |   | 292,280 |   |   |
| Current deferred  taxes                                                            |       | 6,344      |       |               | 28,724     | ** **                  |       |                             | —     | ** **                             |       |             | (6,137     | ) |   |   | 28,931 |   |   |
| Current maturities  of long-term debt and obligations under capital leases         |       | 3,490      |       |               | —     | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 3,490 |   |   |
| Total Current  Liabilities*                                                        |       | 333,119    |       |               | 101,425    | ** **                  |       |                             | 195,321    | ** **                             |       |             | (25,685    | ) |   |   | 604,180 |   |   |
| Long-term debt and  obligations under capital leases, less current maturities |       | 523,735    |       |               | 11,296     | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 535,031 |   |   |
| Other long-term  liabilities*                                                      |       | 53,330     |       |               | 27,378     | ** **                  |       |                             | —     | ** **                             |       |             | (20,475    | ) |   |   | 60,233 |   |   |
| Intercompany  liabilities*                                                         |       | 765,680    |       |               | —     | ** **                  |       |                             | —     | ** **                             |       |             | (765,680   | ) |   |   | — |   |   |
| Stockholders’ Equity:                                                         |       |       |       |               | ** ** | ** **                  |       |                             |       | ** **                             |       |             |       |   |   |   |   |   |   |
| Common stock*                                                                      |       | 68,557     |       |               | 2          | ** **                  |       |                             | 100        | ** **                             |       |             | (102       | ) |   |   | 68,557 |   |   |
| Additional paid-in  capital*                                                       |       | 289,384    |       |               | 386,857    | ** **                  |       |                             | 3,900      | ** **                             |       |             | (390,757   | ) |   |   | 289,384 |   |   |
| Retained earnings*                                                                 |       | 463,797    |       |               | 1,187,551  | ** **                  |       |                             | 10,869     | ** **                             |       |             | (1,198,420 | ) |   |   | 463,797 |   |   |
| Accumulated other  comprehensive loss                                              |       | (9,380     | )          |               | —     | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | (9,380 | ) |   |
| Less:                                                                              |       |       |       |               | ** ** | ** **                  |       |                             |       | ** **                             |       |             |       |   |   |   |   |   |   |
| Cost of shares in  treasury                                                        |       | 185,339    |       |               | —     | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 185,339 |   |   |
| Cost of shares in  benefits trust                                                  |       | 59,264     |       |               | —     | ** **                  |       |                             | —     | ** **                             |       |             | —     |   |   |   | 59,264 |   |   |
| Total  Stockholders’ Equity*                                                  |       | 567,755    |       |               | 1,574,410  | ** **                  |       |                             | 14,869     | ** **                             |       |             | (1,589,279 | ) |   |   | 567,755 |   |   |
| Total Liabilities and Stockholders’ Equity*                                   |       | $          | 2,243,619  |               |       | $                           | 1,714,509  | ** **                       |       |                                   | $          | 210,190          | ** ** |   |   | $ | (2,401,119 | ) |   |   | $ | 1,767,199 |   |   |

----

*                     As restated. See Note 18

52

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CONDENSED CONSOLIDATING BALANCE SHEET**

| **As of January 28, 2006**                                | ** ** | ** ** | ** ** | **Pep Boys*** | ** ** | **Subsidiary  Guarantors*** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination*** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    | ** ** |       | ** ** | ** **         |       |                        | ** ** | ** **                       |       |                                   | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Assets:                                                               |       |       |       |               |       |                        |       | ** **                       |       |                                   |       |             |       |   |   |   |   |   |   |   |   |
| Cash and  cash equivalents                                                    |       |       | $          | 12,019             |       |                        |       | $                                | 6,953      | ** **                             |       |             | $          | 29,309 |   |   |   | $ | — |   |   |   | $ | 48,281 |   |   |
| Accounts  receivable, net                                                     |       |       | 20,030     |               |       |                        | 16,404     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 36,434 |   |   |
| Merchandise  inventories                                                      |       |       | 209,384    |               |       |                        | 406,908    | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 616,292 |   |   |
| Prepaid  expenses                                                             |       |       | 33,765     |               |       |                        | 9,678      | ** **                       |       |                                   | 19,000     |             |       |   | (21,491 | ) |   |   | 40,952 |   |   |
| Other                                                                         |       |       | 6,116      |               |       |                        | 8,960      | ** **                       |       |                                   | 70,370     |             |       |   | — |   |   |   | 85,446 |   |   |
| Assets  held for disposal                                                     |       |       | —     |               |       |                        | 652        | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 652 |   |   |
| Total  Current Assets                                                         |       |       | 281,314    |               |       |                        | 449,555    | ** **                       |       |                                   | 118,679    |             |       |   | (21,491 | ) |   |   | 828,057 |   |   |
| Property  and Equipment—at cost:                                         |       |       |       |               |       |                        |       | ** **                       |       |                                   |       |             |       |   |   |   |   |   |   |   |   |
| Land                                                                          |       |       | 86,805     |               |       |                        | 170,997    | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 257,802 |   |   |
| Buildings  and improvements                                                   |       |       | 316,725    |               |       |                        | 599,855    | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 916,580 |   |   |
| Furniture,  fixtures and equipment                                            |       |       | 278,742    |               |       |                        | 392,447    | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 671,189 |   |   |
| Construction  in progress                                                     |       |       | 15,261     |               |       |                        | 597        | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 15,858 |   |   |
|                                                                          |       |       | 697,533    |               |       |                        | 1,163,896  | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 1,861,429 |   |   |
| Less  accumulated depreciation and                                            |       |       | 364,793    |               |       |                        | 549,247    | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 914,040 |   |   |
| Total  Property and Equipment—Net                                        |       |       | 332,740    |               |       |                        | 614,649    | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 947,389 |   |   |
| Investment  in subsidiaries*                                                  |       |       | 1,517,873  |               |       |                        | —     | ** **                       |       |                                   | —     |             |       |   | (1,517,873 | ) |   |   | — |   |   |
| Intercompany  receivable*                                                     |       |       | —     |               |       |                        | 630,081    | ** **                       |       |                                   | 84,563     |             |       |   | (714,644 | ) |   |   | — |   |   |
| Other                                                                         |       |       | 42,144     |               |       |                        | 3,723      | ** **                       |       |                                   | —     |             |       |   | 440 |   |   |   | 46,307 |   |   |
| Total  Assets*                                                                |       |       | $          | 2,174,071          |       |                        |       | $                                | 1,698,008  | ** **                             |       |             | $          | 203,242 |   |   |   | $ | (2,253,568 | ) |   |   | $ | 1,821,753 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’  EQUITY**                               | ** ** |       | ** ** | ** **         |       |                        | ** ** | ** **                       |       |                                   | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current  Liabilities:                                                         |       |       |       |               |       |                        |       | ** **                       |       |                                   |       |             |       |   |   |   |   |   |   |   |   |
| Accounts  payable                                                             |       |       | $          | 261,931            |       |                        |       | $                                | 9          | ** **                             |       |             | $          | — |   |   |   | $ | — |   |   |   | $ | 261,940 |   |   |
| Trade  payable program liability                                              |       |       | 11,156     |               |       |                        | —     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 11,156 |   |   |
| Accrued  expenses                                                             |       |       | 45,410     |               |       |                        | 90,428     | ** **                       |       |                                   | 195,472    |             |       |   | (40,549 | ) |   |   | 290,761 |   |   |
| Current  deferred taxes                                                       |       |       | 64         |               |       |                        | 21,690     | ** **                       |       |                                   | (6,337     | )                |       |   | — |   |   |   | 15,417 |   |   |
| Current  maturities of long-term debt and obligations under capital leases    |       |       | 1,257      |               |       |                        | —     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 1,257 |   |   |
| Total  Current Liabilities                                                    |       |       | 319,818    |               |       |                        | 112,127    | ** **                       |       |                                   | 189,135    |             |       |   | (40,549 | ) |   |   | 580,531 |   |   |
| Long-term  debt and obligations under capital leases, less current maturities |       |       | 423,572    |               |       |                        | 43,667     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 467,239 |   |   |
| Convertible  long-term debt, less current maturities                          |       |       | 119,000    |               |       |                        | —     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 119,000 |   |   |
| Other  long-term liabilities                                                  |       |       | 9,625      |               |       |                        | 28,359     | ** **                       |       |                                   | —     |             |       |   | 19,497 |   |   |   | 57,481 |   |   |
| Intercompany  liabilities*                                                    |       |       | 714,643    |               |       |                        | —     | ** **                       |       |                                   | —     |             |       |   | (714,643 | ) |   |   | — |   |   |
| Deferred  income taxes                                                        |       |       | (7,152     | )                  |       |                        | 10,089     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 2,937 |   |   |
| Stockholders’  Equity:                                                   |       |       |       |               |       |                        |       | ** **                       |       |                                   |       |             |       |   |   |   |   |   |   |   |   |
| Common  stock*                                                                |       |       | 68,557     |               |       |                        | 2          | ** **                       |       |                                   | 100        |             |       |   | (102 | ) |   |   | 68,557 |   |   |
| Additional  paid-in capital*                                                  |       |       | 288,098    |               |       |                        | 386,857    | ** **                       |       |                                   | 3,900      |             |       |   | (390,757 | ) |   |   | 288,098 |   |   |
| Retained  earnings*                                                           |       |       | 481,926    |               |       |                        | 1,116,907  | ** **                       |       |                                   | 10,107     |             |       |   | (1,127,014 | ) |   |   | 481,926 |   |   |
| Accumulated  other comprehensive loss                                         |       |       | (3,565     | )                  |       |                        | —     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | (3,565 | ) |   |
| Less:                                                                         |       |       |       |               |       |                        |       | ** **                       |       |                                   |       |             |       |   |   |   |   |   |   |   |   |
| Cost of  shares in treasury                                                   |       |       | 181,187    |               |       |                        | —     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 181,187 |   |   |
| Cost of  shares in benefits trust                                             |       |       | 59,264     |               |       |                        | —     | ** **                       |       |                                   | —     |             |       |   | — |   |   |   | 59,264 |   |   |
| Total  Stockholders’ Equity*                                             |       |       | 594,565    |               |       |                        | 1,503,766  | ** **                       |       |                                   | 14,107     |             |       |   | (1,517,873 | ) |   |   | 594,565 |   |   |
| Total  Liabilities and Stockholders’ Equity*                             |       |       | $          | 2,174,071          |       |                        |       | $                                | 1,698,008  | ** **                             |       |             | $          | 203,242 |   |   |   | $ | (2,253,568 | ) |   |   | $ | 1,821,753 |   |   |

----

*                     As restated. See Note 18

53

----

**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

| **Year ended February 3, 2007**                                                                      | ** ** | ** ** | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors*** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination*** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------------------|------------|------------------|------------|
| Merchandise Sales                                                                                                        |       | $          | 653,284    |              |       | $                           | 1,223,006  |                             |       |                                   | $          | —           |       |   |   | $ | — |   |   |   | $ | 1,876,290 |   |   |
| Service Revenue                                                                                                          |       | 138,088    |       |              | 257,783    |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 395,871 |   |   |
| Other Revenue                                                                                                            |       | —     |       |              | —     |                        |       |                             | 27,407     |                                   |       |             | (27,407    | ) |   |   | — |   |   |
| Total Revenues                                                                                                           |       | 791,372    |       |              | 1,480,789  |                        |       |                             | 27,407     |                                   |       |             | (27,407    | ) |   |   | 2,272,161 |   |   |
| Costs of Merchandise Sales                                                                                               |       | 467,514    |       |              | 868,822    |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 1,336,336 |   |   |
| Costs of Service Revenue                                                                                                 |       | 126,853    |       |              | 237,216    |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 364,069 |   |   |
| Costs of Other Revenue                                                                                                   |       | —     |       |              | —     |                        |       |                             | 32,020     |                                   |       |             | (32,020    | ) |   |   | — |   |   |
| Total Costs of Revenues                                                                                                  |       | 594,367    |       |              | 1,106,038  |                        |       |                             | 32,020     |                                   |       |             | (32,020    | ) |   |   | 1,700,405 |   |   |
| Gross Profit from Merchandise  Sales                                                                                     |       | 185,770    |       |              | 354,184    |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 539,954 |   |   |
| Gross Profit from Service Revenue                                                                                        |       | 11,235     |       |              | 20,567     |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 31,802 |   |   |
| Gross Loss from Other Revenue                                                                                            |       | —     |       |              | —     |                        |       |                             | (4,613     | )                                      |       |             | 4,613      |   |   |   | — |   |   |
| Total Gross Profit (Loss)                                                                                                |       | 197,005    |       |              | 374,751    |                        |       |                             | (4,613     | )                                      |       |             | 4,613      |   |   |   | 571,756 |   |   |
| Selling, General  and Administrative Expenses                                                                            |       | 187,672    |       |              | 358,496    |                        |       |                             | 355        |                                   |       |             | 4,508      |   |   |   | 551,031 |   |   |
| Net Gain from Dispositions of  Assets                                                                                    |       | 35         |       |              | 15,262     |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 15,297 |   |   |
| Operating Profit  (Loss)                                                                                                 |       | 9,368      |       |              | 31,517     |                        |       |                             | (4,968     | )                                      |       |             | 105        |   |   |   | 36,022 |   |   |
| Non-Operating (Expense) Income                                                                                           |       | (18,282    | )          |              | 125,271    |                        |       |                             | 1,695      |                                   |       |             | (101,661   | ) |   |   | 7,023 |   |   |
| Interest Expense (Income)                                                                                                |       | 107,102    |       |              | 49,003     |                        |       |                             | (5,207     | )                                      |       |             | (101,556   | ) |   |   | 49,342 |   |   |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of Change  in Accounting Principle |       | (116,016   | )          |              | 107,785    |                        |       |                             | 1,934      |                                   |       |             | —     |   |   |   | (6,297 | ) |   |
| Income Tax  (Benefit) Expense                                                                                            |       | (41,395    | )          |              | 36,452     |                        |       |                             | 646        |                                   |       |             | —     |   |   |   | (4,297 | ) |   |
| Equity in Earnings of Subsidiaries*                                                                                      |       | 71,932     |       |              | —     |                        |       |                             | —     |                                   |       |             | (71,932    | ) |   |   | — |   |   |
| Net (Loss) Earnings from Continuing Operations Before  Cumulative Effect of Change in Accounting Principle*              |       | (2,689     | )          |              | 71,333     |                        |       |                             | 1,288      |                                   |       |             | (71,932    | ) |   |   | (2,000 | ) |   |
| Loss From Discontinued Operations, Net of Tax                                                                       |       | (49        | )          |              | (689       | )                           |       |                             | —     |                                   |       |             | —     |   |   |   | (738 | ) |   |
| Cumulative Effect of Change in Accounting Principle, Net  of Tax                                                         |       | 189        |       |              | —     |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 189 |   |   |
| Net (Loss) Earnings*                                                                                                     |       | $          | (2,549     | )                 |       | $                           | 70,644     |                             |       |                                   | $          | 1,288            |       |   |   | $ | (71,932 | ) |   |   | $ | (2,549 | ) |   |

 

----

*                    As restated.See Note 18

54

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

| **Year ended January 28, 2006**                                                                     | ** ** | ** ** | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors*** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination*** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------------------|------------|------------------|------------|
| Merchandise Sales                                                                                                       |       | $          | 643,353    |              |       | $                           | 1,211,055  |                             |       |                                   | $          | —           |       |   |   | $ | — |   |   |   | $ | 1,854,408 |   |   |
| Service Revenue                                                                                                         |       | 132,281    |       |              | 251,340    |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 383,621 |   |   |
| Other Revenue                                                                                                           |       | —     |       |              | —     |                        |       |                             | 29,500     |                                   |       |             | (29,500    | ) |   |   | — |   |   |
| Total Revenues                                                                                                          |       | 775,634    |       |              | 1,462,395  |                        |       |                             | 29,500     |                                   |       |             | (29,500    | ) |   |   | 2,238,029 |   |   |
| Costs of Merchandise Sales                                                                                              |       | 474,965    |       |              | 902,587    |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 1,377,552 |   |   |
| Costs of Service Revenue                                                                                                |       | 120,320    |       |              | 232,890    |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 353,210 |   |   |
| Costs of Other Revenue                                                                                                  |       | —     |       |              | —     |                        |       |                             | 34,188     |                                   |       |             | (34,188    | ) |   |   | — |   |   |
| Total Costs of Revenues                                                                                                 |       | 595,285    |       |              | 1,135,477  |                        |       |                             | 34,188     |                                   |       |             | (34,188    | ) |   |   | 1,730,762 |   |   |
| Gross Profit from Merchandise  Sales                                                                                    |       | 168,388    |       |              | 308,468    |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 476,856 |   |   |
| Gross Profit from Service Revenue                                                                                       |       | 11,961     |       |              | 18,450     |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 30,411 |   |   |
| Gross Loss from Other Revenue                                                                                           |       | —     |       |              | —     |                        |       |                             | (4,688     | )                                      |       |             | 4,688      |   |   |   | — |   |   |
| Total Gross Profit (Loss)                                                                                               |       | 180,349    |       |              | 326,918    |                        |       |                             | (4,688     | )                                      |       |             | 4,688      |   |   |   | 507,267 |   |   |
| Selling, General and Administrative Expenses                                                                            |       | 176,812    |       |              | 341,491    |                        |       |                             | 327        |                                   |       |             | 4,688      |   |   |   | 523,318 |   |   |
| Net (Loss) Gain from Dispositions of Assets                                                                        |       | (675       | )          |              | 5,501      |                        |       |                             | —     |                                   |       |             | —     |   |   |   | 4,826 |   |   |
| Operating Profit (Loss)                                                                                                 |       | 2,862      |       |              | (9,072     | )                           |       |                             | (5,015     | )                                      |       |             | —     |   |   |   | (11,225 | ) |   |
| Non-Operating (Expense) Income                                                                                          |       | (18,682    | )          |              | 92,005     |                        |       |                             | 575        |                                   |       |             | (70,001    | ) |   |   | 3,897 |   |   |
| Interest Expense (Income)                                                                                               |       | 88,928     |       |              | 33,987     |                        |       |                             | (3,874     | )                                      |       |             | (70,001    | ) |   |   | 49,040 |   |   |
| (Loss) Earnings from Continuing Operations Before Income  Taxes and Cumulative Effect of Change in Accounting Principle |       | (104,748   | )          |              | 48,946     |                        |       |                             | (566       | )                                      |       |             | —     |   |   |   | (56,368 | ) |   |
| Income Tax  (Benefit) Expense                                                                                           |       | (36,957    | )          |              | 16,600     |                        |       |                             | (212       | )                                      |       |             | —     |   |   |   | (20,569 | ) |   |
| Equity in Earnings of  Subsidiaries*                                                                                    |       | 30,793     |       |              | —     |                        |       |                             | —     |                                   |       |             | (30,793    | ) |   |   | — |   |   |
| Net (Loss) Earnings from Continuing Operations Before  Cumulative Effect of Change in Accounting Principle*             |       | (36,998    | )          |              | 32,346     |                        |       |                             | (354       | )                                      |       |             | (30,793    | ) |   |   | (35,799 | ) |   |
| Gain (Loss) From Discontinued Operations, Net of Tax                                                                    |       | 324        |       |              | (32        | )                           |       |                             | —     |                                   |       |             | —     |   |   |   | 292 |   |   |
| Cumulative Effect of Change in Accounting Principle, Net  of Tax                                                        |       | (854       | )          |              | (1,167     | )                           |       |                             | —     |                                   |       |             | —     |   |   |   | (2,021 | ) |   |
| Net (Loss) Earnings*                                                                                                    |       | $          | (37,528    | )                 |       | $                           | 31,147     |                             |       |                                   | $          | (354             | )          |   |   | $ | (30,793 | ) |   |   | $ | (37,528 | ) |   |

 

----

*                    As restated.See Note 18

55

----

**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

| **Year ended January 29, 2005**                                                                               | ** ** | ** ** | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors*** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination*** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|-----------------------------|------------|----------------------------------|------------|----------------------------------------|------------|------------------|------------|
| Merchandise Sales                                                                                                                 |       | $          | 647,135    |              | $          | 1,215,880                   |       |                             | $          | —                                 |       |             |       | $ | — |   |   | $ | 1,863,015 |   |
| Service Revenue                                                                                                                   |       | 141,915    |       | 267,966           |       |                        | —     |                             |       |                                   | —     |             |       | 409,881 |   |
| Other Revenue                                                                                                                     |       | —     |       | —            |       |                        | 28,432     |                             |       |                                   | (28,432    | )                |       | — |   |
| Total Revenues                                                                                                                    |       | 789,050    |       | 1,483,846         |       |                        | 28,432     |                             |       |                                   | (28,432    | )                |       | 2,272,896 |   |
| Costs of Merchandise Sales                                                                                                        |       | 469,620    |       | 875,524           |       |                        | —     |                             |       |                                   | —     |             |       | 1,345,144 |   |
| Costs of Service Revenue                                                                                                          |       | 108,554    |       | 208,588           |       |                        | —     |                             |       |                                   | —     |             |       | 317,142 |   |
| Costs of Other Revenue                                                                                                            |       | —     |       | —            |       |                        | 35,693     |                             |       |                                   | (35,693    | )                |       | — |   |
| Total Costs of Revenues                                                                                                           |       | 578,174    |       | 1,084,112         |       |                        | 35,693     |                             |       |                                   | (35,693    | )                |       | 1,662,286 |   |
| Gross Profit from Merchandise Sales                                                                                               |       | 177,515    |       | 340,356           |       |                        | —     |                             |       |                                   | —     |             |       | 517,871 |   |
| Gross Profit from Service Revenue                                                                                                 |       | 33,361     |       | 59,378            |       |                        | —     |                             |       |                                   | —     |             |       | 92,739 |   |
| Gross Loss from Other Revenue                                                                                                     |       | —     |       | —            |       |                        | (7,261     | )                                |       |                                   | 7,261      |             |       | — |   |
| Total Gross Profit (Loss)                                                                                                         |       | 210,876    |       | 399,734           |       |                        | (7,261     | )                                |       |                                   | 7,261      |             |       | 610,610 |   |
| Selling, General and Administrative Expenses                                                                                      |       | 189,161    |       | 350,598           |       |                        | 316        |                             |       |                                   | 7,261      |             |       | 547,336 |   |
| Net Gain from Sale of Assets                                                                                                      |       | 199        |       | 11,649            |       |                        | —     |                             |       |                                   | —     |             |       | 11,848 |   |
| Operating Profit (Loss)                                                                                                           |       | 21,914     |       | 60,785            |       |                        | (7,577     | )                                |       |                                   | —     |             |       | 75,122 |   |
| Non-Operating (Expense) Income                                                                                                    |       | (18,317    | )          | 71,679            |       |                        | 3,397      |                             |       |                                   | (54,935    | )                |       | 1,824 |   |
| Interest Expense                                                                                                                  |       | 64,268     |       | 26,632            |       |                        | —     |                             |       |                                   | (54,935    | )                |       | 35,965 |   |
| (Loss) Earnings from Continuing Operations Before Income  Taxes and Cumulative Effect of Change in Accounting Principle |       | (60,671    | )          | 105,832           |       |                        | (4,180     | )                                |       |                                   | —     |             |       | 40,981 |   |
| Income Tax (Benefit) Expense                                                                                                      |       | (22,515    | )          | 39,320            |       |                        | (1,490     | )                                |       |                                   | —     |             |       | 15,315 |   |
| Equity in Earnings of Subsidiaries*                                                                                               |       | 62,122     |       | —            |       |                        | —     |                             |       |                                   | (62,122    | )                |       | — |   |
| Net Earnings (Loss) from Continuing Operations Before  Cumulative Effect of Change in Accounting Principle*                       |       | 23,966     |       | 66,512            |       |                        | (2,690     | )                                |       |                                   | (62,122    | )                |       | 25,666 |   |
| Loss From Discontinued Operations, Net of Tax                                                                                     |       | (387       | )          | (1,700            | )          |                        | —     |                             |       |                                   | —     |             |       | (2,087 | ) |
| Net Earnings (Loss)*                                                                                                              |       | $          | 23,579     |              | $          | 64,812                      |       |                             | $          | (2,690                                 | )          |             |       | $ | (62,122 | ) |   | $ | 23,579 |   |

 

----

*                    As restated.See Note 18

56

----

**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

| **Year ended February 3, 2007**                                                         | ** ** | ** ** | ** ** | **Pep Boys*** | ** ** | **Subsidiary  Guarantors*** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation  Elimination*** | ** ** | **Consolidated*** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------------|------------|---------------------------------|------------|-------------------|------------|
| **Cash Flows from Operating Activities:**                                                                   |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Net (Loss)  Earnings*                                                                                       |       |       | $          | (2,549             | )          |                        |       | $                                    | 70,644     |                            |       |              | $          | 1,288 |   |   |   | $ | (71,932 | ) |   |   | $ | (2,549 | ) |   |
| Adjustments to Reconcile Net (Loss) Earnings to Net Cash  (Used in) Provided By Continuing Operations: |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Net loss  from discontinued operations                                                                      |       |       | 49         |               |       |                        | 689        |                                 |       |                            | —     |              |       |   | — |   |   |   | 738 |   |   |
| Depreciation  and amortization                                                                              |       |       | 31,795     |               |       |                        | 56,681     |                                 |       |                            | 240        |              |       |   | (240 | ) |   |   | 88,476 |   |   |
| Cumulative  effect of change in accounting principle                                                        |       |       | (189       | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (189 | ) |   |
| Accretion  of asset disposal obligation                                                                     |       |       | 95         |               |       |                        | 174        |                                 |       |                            | —     |              |       |   | — |   |   |   | 269 |   |   |
| Loss on  defeasance of convertible debt                                                                     |       |       | 755        |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 755 |   |   |
| Stock  compensation expense                                                                                 |       |       | 3,051      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 3,051 |   |   |
| Cancellation  of vested stock options                                                                       |       |       | (1,056     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (1,056 | ) |   |
| Equity in  earnings of subsidiaries*                                                                        |       |       | (71,932    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | 71,932 |   |   |   | — |   |   |
| Deferred  income taxes                                                                                      |       |       | (11,598    | )                  |       |                        | (3,055     | )                                    |       |                            | 6,337      |              |       |   | — |   |   |   | (8,316 | ) |   |
| Gain from  sale of assets                                                                                   |       |       | (35        | )                  |       |                        | (15,262    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (15,297 | ) |   |
| Loss on  impairment of assets                                                                               |       |       | 550        |               |       |                        | 290        |                                 |       |                            | —     |              |       |   | — |   |   |   | 840 |   |   |
| Gain from  derivative valuation                                                                             |       |       | (5,568     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (5,568 | ) |   |
| Excess tax  benefits from stock based awards                                                                |       |       | (95        | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (95 | ) |   |
| Increase  in cash surrender value of life insurance policies                                                |       |       | (2,143     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (2,143 | ) |   |
| Changes in operating assets and liabilities:                                                                |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Decrease  (increase) in accounts receivable, prepaid expenses and other                                |       |       | 24,587     |               |       |                        | 7,113      |                                 |       |                            | (5,712     | )                 |       |   | (1,943 | ) |   |   | 24,045 |   |   |
| (Increase)  decrease in merchandise inventories                                                             |       |       | (2,061     | )                  |       |                        | 11,311     |                                 |       |                            | —     |              |       |   | — |   |   |   | 9,250 |   |   |
| Increase  in accounts payable                                                                               |       |       | 3,549      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 3,549 |   |   |
| (Decrease)  increase in accrued expenses*                                                                   |       |       | (7,301     | )                  |       |                        | (18,154    | )                                    |       |                            | (151       | )                 |       |   | 21,441 |   |   |   | (4,165 | ) |   |
| Increase  (decrease) in other long-term liabilities*                                                        |       |       | 23,195     |               |       |                        | (1,844     | )                                    |       |                            | —     |              |       |   | (19,258 | ) |   |   | 2,093 |   |   |
| Dividends received from subsidiary*                                                                         |       |       | 527        |               |       |                        | —     |                                 |       |                            | —     |              |       |   | (527 | ) |   |   | — |   |   |
| Net cash  (used in) provided by continuing operations*                                                      |       |       | (16,374    | )                  |       |                        | 108,587    |                                 |       |                            | 2,002      |              |       |   | (527 | ) |   |   | 93,688 |   |   |
| Net cash  used in discontinued operations                                                                   |       |       | (1,258     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (1,258 | ) |   |
| Net Cash  (Used in) Provided by Operating Activities*                                                       |       |       | (17,632    | )                  |       |                        | 108,587    |                                 |       |                            | 2,002      |              |       |   | (527 | ) |   |   | 92,430 |   |   |
| **Cash Flows from Investing Activities:**                                                                   |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                                        |       |       | (23,793    | )                  |       |                        | (26,419    | )                                    |       |                            | (33,830    | )                 |       |   | 33,830 |   |   |   | (50,212 | ) |   |
| Proceeds  from sales of assets*                                                                             |       |       | 34,927     |               |       |                        | 16,445     |                                 |       |                            | —     |              |       |   | (33,830 | ) |   |   | 17,542 |   |   |
| Proceeds  from life insurance policies                                                                      |       |       | (24,669    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (24,669 | ) |   |
| Net Cash  Used in Investing Activities*                                                                     |       |       | (13,535    | )                  |       |                        | (9,974     | )                                    |       |                            | (33,830    | )                 |       |   | — |   |   |   | (57,339 | ) |   |
| **Cash  Flows from Financing Activities:**                                                                  | ** ** | ** ** | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Borrowings  under line of credit agreements*                                                                |       |       | 195,762    |               |       |                        | 391,231    |                                 |       |                            | —     |              |       |   | — |   |   |   | 586,993 |   |   |
| Payments  under line of credit agreements*                                                                  |       |       | (211,960   | )                  |       |                        | (423,602   | )                                    |       |                            | —     |              |       |   | — |   |   |   | (635,562 | ) |   |
| Excess tax  benefits from stock based awards                                                                |       |       | 95         |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 95 |   |   |
| Borrowings  on trade payable program liability*                                                             |       |       | 76,713     |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 76,713 |   |   |
| Payments  on trade payable program liability*                                                               |       |       | (73,879    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (73,879 | ) |   |
| Payments  for finance issuance costs                                                                        |       |       | (2,217     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (2,217 | ) |   |
| Proceeds  from issuance of notes                                                                            |       |       | 121,000    |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 121,000 |   |   |
| Reduction  of long-term debt                                                                                |       |       | (2,263     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (2,263 | ) |   |
| Reduction  of convertible debt                                                                              |       |       | (119,000   | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (119,000 | ) |   |
| Payments  on capital lease obligations                                                                      |       |       | (227       | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (227 | ) |   |
| Intercompany  borrowings (payments)*                                                                        |       |       | 61,846     |               |       |                        | (65,249    | )                                    |       |                            | 3,403      |              |       |   | — |   |   |   | — |   |   |
| Dividends  paid                                                                                             |       |       | (14,757    | )                  |       |                        | —     |                                 |       |                            | (527       | )                 |       |   | 527 |   |   |   | (14,757 | ) |   |
| Proceeds  from exercise of stock options                                                                    |       |       | 722        |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 722 |   |   |
| Proceeds  from dividend reinvestment plan                                                                   |       |       | 894        |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 894 |   |   |
| Net Cash  Provided by (Used in) Financing Activities*                                                       |       |       | 32,729     |               |       |                        | (97,620    | )                                    |       |                            | 2,876      |              |       |   | 527 |   |   |   | (61,488 | ) |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                                                       |       |       | 1,562      |               |       |                        | 993        |                                 |       |                            | (28,952    | )                 |       |   | — |   |   |   | (26,397 | ) |   |
| Cash and  Cash Equivalents at Beginning of Year                                                             |       |       | 12,019     |               |       |                        | 6,953      |                                 |       |                            | 29,309     |              |       |   | — |   |   |   | 48,281 |   |   |
| Cash and Cash Equivalents at End of Year                                                                    |       |       | $          | 13,581             |       |                        |       | $                                    | 7,946      |                            |       |              | $          | 357 |   |   |   | $ | — |   |   |   | $ | 21,884 |   |   |

----

*                      As restated. See Note 18

57

----

**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

| **Year ended January 28, 2006**                                                         | ** ** | ** ** | ** ** | **Pep Boys*** | ** ** | **Subsidiary  Guarantors*** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation  Elimination*** | ** ** | **Consolidated*** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------------|------------|---------------------------------|------------|-------------------|------------|
| **Cash Flows from Operating Activities:**                                                                   |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Net (Loss) Earnings*                                                                                        |       |       | $          | (37,528            | )          |                        |       | $                                    | 31,147     |                            |       |              | $          | (354 | ) |   |   | $ | (30,793 | ) |   |   | $ | (37,528 | ) |   |
| Adjustments to Reconcile Net (Loss) Earnings to Net  Cash (Used in) Provided By Continuing Operations: |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Net loss (earnings) from discontinued operations                                                            |       |       | (324       | )                  |       |                        | 32         |                                 |       |                            | —     |              |       |   | — |   |   |   | (292 | ) |   |
| Depreciation and amortization                                                                               |       |       | 29,391     |               |       |                        | 50,496     |                                 |       |                            | —     |              |       |   | — |   |   |   | 79,887 |   |   |
| Cumulative effect of change in accounting principle                                                         |       |       | 854        |               |       |                        | 1,167      |                                 |       |                            | —     |              |       |   | — |   |   |   | 2,021 |   |   |
| Accretion of asset disposal obligation                                                                      |       |       | 25         |               |       |                        | 84         |                                 |       |                            | —     |              |       |   | — |   |   |   | 109 |   |   |
| Stock compensation expense                                                                                  |       |       | 2,049      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 2,049 |   |   |
| Equity in earnings of subsidiaries*                                                                         |       |       | (30,793    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | 30,793 |   |   |   | — |   |   |
| Deferred income taxes                                                                                       |       |       | (18,604    | )                  |       |                        | (8,497     | )                                    |       |                            | (691       | )                 |       |   | — |   |   |   | (27,792 | ) |   |
| Net gain from reduction in asset retirement liability                                                       |       |       | (657       | )                  |       |                        | (1,158     | )                                    |       |                            | —     |              |       |   | — |   |   |   | (1,815 | ) |   |
| Loss (gain) from sale of assets                                                                             |       |       | 675        |               |       |                        | (5,501     | )                                    |       |                            | —     |              |       |   | — |   |   |   | (4,826 | ) |   |
| Loss on impairment of assets                                                                                |       |       | 4,200      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 4,200 |   |   |
| Increase in cash surrender value of life insurance  policies                                                |       |       | (3,389     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (3,389 | ) |   |
| Changes in operating assets and liabilities:                                                                |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Decrease (increase) in accounts receivable, prepaid  expenses and other                                     |       |       | 8,161      |               |       |                        | 11,161     |                                 |       |                            | (3,073     | )                 |       |   | (1,083 | ) |   |   | 15,166 |   |   |
| Increase in merchandise inventories                                                                         |       |       | (3,476     | )                  |       |                        | (10,056    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (13,532 | ) |   |
| Decrease in accounts payable                                                                                |       |       | (49,041    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (49,041 | ) |   |
| (Decrease) increase in accrued expenses                                                                     |       |       | (20,019    | )                  |       |                        | 2,711      |                                 |       |                            | 16,858     |              |       |   | (18,414 | ) |   |   | (18,864 | ) |   |
| (Decrease) increase in other long-term liabilities                                                          |       |       | (2,913     | )                  |       |                        | 176        |                                 |       |                            | —     |              |       |   | 19,497 |   |   |   | 16,760 |   |   |
| Net cash (used in) provided by continuing operations*                                                       |       |       | (121,389   | )                  |       |                        | 71,762     |                                 |       |                            | 12,740     |              |       |   | — |   |   |   | (36,887 | ) |   |
| Net cash used in discontinued operations                                                                    |       |       | (221       | )                  |       |                        | (1,279     | )                                    |       |                            | —     |              |       |   | — |   |   |   | (1,500 | ) |   |
| Net Cash (Used in) Provided by Operating Activities*                                                        |       |       | (121,610   | )                  |       |                        | 70,483     |                                 |       |                            | 12,740     |              |       |   | — |   |   |   | (38,387 | ) |   |
| **Cash Flows from Investing Activities:**                                                                   |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                                       |       |       | (16,455    | )                  |       |                        | (69,490    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (85,945 | ) |   |
| Proceeds from sales of assets                                                                               |       |       | 978        |               |       |                        | 3,065      |                                 |       |                            | —     |              |       |   | — |   |   |   | 4,043 |   |   |
| Proceeds from sales of assets held for disposal                                                             |       |       | —     |               |       |                        | 6,913      |                                 |       |                            | —     |              |       |   | — |   |   |   | 6,913 |   |   |
| Proceeds from life insurance policies                                                                       |       |       | 24,655     |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 24,655 |   |   |
| Premiums paid on life insurance policies                                                                    |       |       | (605       | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (605 | ) |   |
| Net cash provided by (used in) continuing operations                                                        |       |       | 8,573      |               |       |                        | (59,512    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (50,939 | ) |   |
| Net cash provided by discontinued operations                                                                |       |       | 916        |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 916 |   |   |
| Net Cash Provided by (Used in) Investing Activities                                                         |       |       | 9,489      |               |       |                        | (59,512    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (50,023 | ) |   |
| **Cash  Flows from Financing Activities:**                                                                  | ** ** | ** ** | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Borrowings under line of credit agreements*                                                                 |       |       | 213,228    |               |       |                        | 414,838    |                                 |       |                            | —     |              |       |   | — |   |   |   | 628,066 |   |   |
| Payments under line of credit agreements*                                                                   |       |       | (193,543   | )                  |       |                        | (376,538   | )                                    |       |                            | —     |              |       |   | — |   |   |   | (570,081 | ) |   |
| Borrowings on trade payable program liability*                                                              |       |       | 107,618    |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 107,618 |   |   |
| Payments on trade payable program liability*                                                                |       |       | (96,462    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (96,462 | ) |   |
| Payments for finance issuance costs                                                                         |       |       | (5,150     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (5,150 | ) |   |
| Proceeds from issuance of notes                                                                             |       |       | 200,000    |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 200,000 |   |   |
| Reduction of long-term debt                                                                                 |       |       | (183,459   | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (183,459 | ) |   |
| Payments on capital lease obligations                                                                       |       |       | (383       | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (383 | ) |   |
| Intercompany borrowings (payments)*                                                                         |       |       | 49,475     |               |       |                        | (50,792    | )                                    |       |                            | 1,317      |              |       |   | — |   |   |   | — |   |   |
| Dividends paid                                                                                              |       |       | (14,686    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (14,686 | ) |   |
| Repurchase of common stock                                                                                  |       |       | (15,562    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (15,562 | ) |   |
| Proceeds from exercise of stock options                                                                     |       |       | 3,071      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 3,071 |   |   |
| Proceeds from dividend reinvestment plan                                                                    |       |       | 961        |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 961 |   |   |
| Net Cash Provided by (Used in) Financing Activities*                                                        |       |       | 65,108     |               |       |                        | (12,492    | )                                    |       |                            | 1,317      |              |       |   | — |   |   |   | 53,933 |   |   |
| Net (Decrease) Increase in Cash and Cash Equivalents                                                        |       |       | (47,013    | )                  |       |                        | (1,521     | )                                    |       |                            | 14,057     |              |       |   | — |   |   |   | (34,477 | ) |   |
| Cash and Cash Equivalents at Beginning of Year                                                              |       |       | 59,032     |               |       |                        | 8,474      |                                 |       |                            | 15,252     |              |       |   | — |   |   |   | 82,758 |   |   |
| Cash and Cash Equivalents at End of Year                                                                    |       |       | $          | 12,019             |       |                        |       | $                                    | 6,953      |                            |       |              | $          | 29,309 |   |   |   | $ | — |   |   |   | $ | 48,281 |   |   |

----

*                      As restated. See Note 18

58

----

**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

| **Year ended January 29, 2005**                                                    | ** ** | ** ** | ** ** | **Pep Boys*** | ** ** | **Subsidiary  Guarantors*** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation  Elimination*** | ** ** | **Consolidated*** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------------|------------|---------------------------------|------------|-------------------|------------|
| **Cash Flows from Operating Activities:**                                                              |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Net Earnings (Loss)*                                                                                   |       |       | $          | 23,579             |       |                        |       | $                                    | 64,812     |                            |       |              | $          | (2,690 | ) |   |   | $ | (62,122 | ) |   |   | $ | 23,579 |   |   |
| Adjustments to Reconcile Net Earnings (Loss) to Net Cash  (Used in) Provided By Continuing Operations: |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Net loss from discontinued operations                                                                  |       |       | 387        |               |       |                        | 1,700      |                                 |       |                            | —     |              |       |   | — |   |   |   | 2,087 |   |   |
| Depreciation and amortization                                                                          |       |       | 29,261     |               |       |                        | 47,359     |                                 |       |                            | —     |              |       |   | — |   |   |   | 76,620 |   |   |
| Accretion of asset disposal obligation                                                                 |       |       | 29         |               |       |                        | 106        |                                 |       |                            | —     |              |       |   | — |   |   |   | 135 |   |   |
| Stock compensation expense                                                                             |       |       | 1,184      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 1,184 |   |   |
| Equity in earnings of subsidiaries*                                                                    |       |       | (62,122    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | 62,122 |   |   |   | — |   |   |
| Deferred income taxes                                                                                  |       |       | (19,254    | )                  |       |                        | 46,505     |                                 |       |                            | (398       | )                 |       |   | — |   |   |   | 26,853 |   |   |
| Deferred gain on sale leaseback                                                                        |       |       | (34        | )                  |       |                        | (96        | )                                    |       |                            | —     |              |       |   | — |   |   |   | (130 | ) |   |
| Gain from sale of assets                                                                               |       |       | (199       | )                  |       |                        | (11,649    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (11,848 | ) |   |
| Increase in cash surrender value of life insurance  policies                                           |       |       | (3,540     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (3,540 | ) |   |
| Changes in operating assets and liabilities:                                                           |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Increase in accounts receivable, prepaid expenses and  other                                           |       |       | (1,057     | )                  |       |                        | (5,151     | )                                    |       |                            | (12,930    | )                 |       |   | 1,385 |   |   |   | (17,753 | ) |   |
| Increase in merchandise inventories                                                                    |       |       | (14,797    | )                  |       |                        | (34,401    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (49,198 | ) |   |
| Decrease in accounts payable*                                                                          |       |       | (31,624    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (31,624 | ) |   |
| Increase (decrease) in accrued expenses                                                                |       |       | 16,992     |               |       |                        | (15,288    | )                                    |       |                            | 25,534     |              |       |   | (1,385 | ) |   |   | 25,853 |   |   |
| Decrease in other long-term liabilities                                                                |       |       | (887       | )                  |       |                        | (385       | )                                    |       |                            | —     |              |       |   | — |   |   |   | (1,272 | ) |   |
| Dividends received  from subsidiary*                                                                   |       |       | 15,000     |               |       |                        | —     |                                 |       |                            | —     |              |       |   | (15,000 | ) |   |   | — |   |   |
| Net cash (used in) provided by continuing operations*                                                  |       |       | (47,082    | )                  |       |                        | 93,512     |                                 |       |                            | 9,516      |              |       |   | (15,000 | ) |   |   | 40,946 |   |   |
| Net cash used in discontinued operations                                                               |       |       | (479       | )                  |       |                        | (2,253     | )                                    |       |                            | —     |              |       |   | — |   |   |   | (2,732 | ) |   |
| Net Cash (Used in) Provided by Operating Activities*                                                   |       |       | (47,561    | )                  |       |                        | 91,259     |                                 |       |                            | 9,516      |              |       |   | (15,000 | ) |   |   | 38,214 |   |   |
| **Cash Flows from Investing Activities:**                                                              |       |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                                  |       |       | (43,975    | )                  |       |                        | (44,093    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (88,068 | ) |   |
| Proceeds from sales of assets                                                                          |       |       | 331        |               |       |                        | 17,690     |                                 |       |                            | —     |              |       |   | — |   |   |   | 18,021 |   |   |
| Proceeds from life insurance policies                                                                  |       |       | (1,778     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (1,778 | ) |   |
| Net cash provided by (used in) continuing operations                                                   |       |       | (45,422    | )                  |       |                        | (26,403    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (71,825 | ) |   |
| Net cash provided by discontinued operations                                                           |       |       | 7,826      |               |       |                        | 5,501      |                                 |       |                            | —     |              |       |   | — |   |   |   | 13,327 |   |   |
| Net Cash Used in Investing Activities                                                                  |       |       | (37,596    | )                  |       |                        | (20,902    | )                                    |       |                            | —     |              |       |   | — |   |   |   | (58,498 | ) |   |
| **Cash  Flows from Financing Activities:**                                                             | ** ** |       |       |               |       |                        |       |                                 |       |                            |       |              |       |   |   |   |   |   |   |   |   |
| Borrowings under line of credit agreements*                                                            |       |       | 228,155    |               |       |                        | 438,966    |                                 |       |                            | —     |              |       |   | — |   |   |   | 667,121 |   |   |
| Payments under line of credit agreements*                                                              |       |       | (225,387   | )                  |       |                        | (433,632   | )                                    |       |                            | —     |              |       |   | — |   |   |   | (659,019 | ) |   |
| Borrowings on trade payable program liability*                                                         |       |       | 7,237      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 7,237 |   |   |
| Payments on trade payable program liability*                                                           |       |       | (7,216     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (7,216 | ) |   |
| Payments for finance issuance costs                                                                    |       |       | (5,500     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (5,500 | ) |   |
| Proceeds from issuance of notes                                                                        |       |       | 200,000    |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 200,000 |   |   |
| Reduction of long-term debt                                                                            |       |       | (189,991   | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (189,991 | ) |   |
| Reduction of convertible debt                                                                          |       |       | (31,000    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (31,000 | ) |   |
| Payments on capital lease obligations                                                                  |       |       | (1,040     | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (1,040 | ) |   |
| Intercompany borrowings (payments)*                                                                    |       |       | 63,536     |               |       |                        | (76,289    | )                                    |       |                            | 12,753     |              |       |   | — |   |   |   | — |   |   |
| Dividends paid                                                                                         |       |       | (15,676    | )                  |       |                        | —     |                                 |       |                            | (15,000    | )                 |       |   | 15,000 |   |   |   | (15,676 | ) |   |
| Repurchase of common stock                                                                             |       |       | (39,718    | )                  |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | (39,718 | ) |   |
| Proceeds from issuance of stock                                                                        |       |       | 108,854    |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 108,854 |   |   |
| Proceeds from exercise of stock options                                                                |       |       | 6,887      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 6,887 |   |   |
| Proceeds from dividend reinvestment plan                                                               |       |       | 1,119      |               |       |                        | —     |                                 |       |                            | —     |              |       |   | — |   |   |   | 1,119 |   |   |
| Net Cash Provided by (Used in) Financing Activities*                                                   |       |       | 100,260    |               |       |                        | (70,955    | )                                    |       |                            | (2,247     | )                 |       |   | 15,000 |   |   |   | 42,058 |   |   |
| Net Increase (Decrease) in Cash and Cash Equivalents                                                   |       |       | 15,103     |               |       |                        | (598       | )                                    |       |                            | 7,269      |              |       |   | — |   |   |   | 21,774 |   |   |
| Cash and Cash Equivalents at Beginning of Year                                                         |       |       | 43,929     |               |       |                        | 9,072      |                                 |       |                            | 7,983      |              |       |   | — |   |   |   | 60,984 |   |   |
| Cash and Cash Equivalents at End of Year                                                               |       |       | $          | 59,032             |       |                        |       | $                                    | 8,474      |                            |       |              | $          | 15,252 |   |   |   | $ | — |   |   |   | $ | 82,758 |   |   |

----

*                      As restated. See Note 18

59

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**NOTE 9—BENEFITPLANS**

**DEFINED BENEFITPLANS**

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

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

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

The Company also has a Supplemental ExecutiveRetirement Plan (SERP). This unfunded plan has a defined benefit component thatprovides key employees designated by the Board of Directors with retirement anddeath benefits. Retirement benefits are based on salary and bonuses; deathbenefits are based on salary. Benefits paid to a participant under the definedpension plan are deducted from the benefits otherwise payable under the definedbenefit portion of the SERP.

On January 31, 2004, the Company amended andrestated its SERP. This amendment converted the defined benefit plan to adefined contribution plan for certain unvested participants and all futureparticipants, and resulted in an expense under SFAS No. 88, “Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits” (SFAS No. 88), of approximately $2,191. Allvested participants under the defined benefits portion will continue to accruebenefits according to the previous defined benefit formula.

In fiscal 2004, the Company settled severalobligations related to the benefits under the defined benefit SERP. Theseobligations totaled $2,065. These obligations resulted in an expense under SFASNo. 88 of approximately $774 in fiscal 2004.

The Company uses a December 31 measurement datefor determining benefit obligations and the fair value of plan assets of itsplans.

60

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Pension expense includesthe following:

| ** **                               | ** ** | **Year ended**        | ** ** |
|------------------------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
| Service cost                             |       |                       | $          | 246 |   |   |   | $ | 363 |   |   |   | $ | 438 |   |   |
| Interest cost                            |       |                       | 3,071      |   |   |   | 3,011 |   |   |   | 2,903 |   |   |
| Expected return on plan  assets          |       |                       | (2,176     | ) |   |   | (2,339 | ) |   |   | (2,299 | ) |   |
| Amortization of  transitional obligation |       |                       | 163        |   |   |   | 163 |   |   |   | 163 |   |   |
| Amortization of prior  service cost      |       |                       | 360        |   |   |   | 360 |   |   |   | 364 |   |   |
| Recognized actuarial  loss               |       |                       | 2,335      |   |   |   | 2,205 |   |   |   | 1,733 |   |   |
| Net periodic benefit  cost               |       |                       | 3,999      |   |   |   | 3,763 |   |   |   | 3,302 |   |   |
| FAS No. 88  settlement charge       |       |                       | —     |   |   |   | 568 |   |   |   | 774 |   |   |
| Total Pension Expense                    |       |                       | $          | 3,999 |   |   |   | $ | 4,331 |   |   |   | $ | 4,076 |   |   |

 

61

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Thefollowing table sets forth the reconciliation of the benefit obligation, fairvalue of plan assets and funded status of the Company’s defined benefit plans:

| **Year ended**                                                                              | ** ** | ** ** | ** ** | **February 3,   2007** | ** ** | **January 28,   2006** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Change  in Benefit Obligation:**                                                               | ** ** |       | ** ** | ** **                  |       |                        | ** ** | ** ** |   |
| Benefit obligation  at beginning of year                                                         |       |       | $          | 54,349                      |       |                        |       | $ | 52,384 |   |   |
| Service cost                                                                                     |       |       | 246        |                        |       |                        | 363        |   |   |
| Interest cost                                                                                    |       |       | 3,071      |                        |       |                        | 3,011      |   |   |
| Settlement loss                                                                                  |       |       | —     |                        |       |                        | 82         |   |   |
| Actuarial loss                                                                                   |       |       | 1,446      |                        |       |                        | 2,749      |   |   |
| Benefits paid                                                                                    |       |       | (1,498     | )                           |       |                        | (4,240     | ) |   |
| Benefit Obligation  at End of Year                                                               |       |       | $          | 57,614                      |       |                        |       | $ | 54,349 |   |   |
| **Change in Plan Assets:**                                                                       | ** ** |       | ** ** | ** **                  |       |                        | ** ** | ** ** |   |
| Fair value of plan  assets at beginning of year                                                  |       |       | $          | 35,292                      |       |                        |       | $ | 35,508 |   |   |
| Actual return on  plan assets (net of expenses)                                                  |       |       | 3,392      |                        |       |                        | 1,043      |   |   |
| Employer  contributions                                                                          |       |       | 308        |                        |       |                        | 2,981      |   |   |
| Benefits paid                                                                                    |       |       | (1,498     | )                           |       |                        | (4,240     | ) |   |
| Fair Value of Plan  Assets at End of Year                                                        |       |       | $          | 37,494                      |       |                        |       | $ | 35,292 |   |   |
| **Funded (Unfunded) status at December 31**                                                 |       |       | $          | (20,120                     | )          |                        |       | $ | (19,057 | ) |   |
| **Funded (Unfunded) Status at Fiscal Year End**                                                  | ** ** |       | ** ** | ** **                  |       |                        | ** ** | ** ** |   |
| Funded (Unfunded)  status at December 31                                                    |       |       | $          | (20,120                     | )          |                        |       | $ | (19,057 | ) |   |
| Amount contributed  after measurement date                                                       |       |       | 221        |                        |       |                        | 25         |   |   |
| Funded (Unfunded) status  at fiscal year end                                                     |       |       | $          | (19,899                     | )          |                        |       | $ | (19,032 | ) |   |
| **Net Amounts Recognized on Consolidated Balance  Sheet at February 3, 2007**               | ** ** |       | ** ** | ** **                  |       |                        | ** ** | ** ** |   |
| Current benefit  liability (included in accrued expenses)                                        |       |       | $          | (2,950                      | )          |                        |       |   |   |   |
| Noncurrent benefit  liability (included in other long-term liabilities)                          |       |       | (16,949    | )                           |       |                        |       |   |   |
| Net amount  recognized at fiscal year end                                                        |       |       | $          | (19,899                     | )          |                        |       |   |   |   |
| **Reconciliation of the Funded Status at  January 28, 2006**                                | ** ** |       | ** ** | ** **                  |       |                        | ** ** | ** ** |   |
| Funded (Unfunded)  status at fiscal year end                                                     |       |       |       |                        |       |                        | $          | (19,032 | ) |   |
| Unrecognized  transition obligation                                                              |       |       |       |                        |       |                        | 817        |   |   |
| Unrecognized prior  service cost                                                                 |       |       |       |                        |       |                        | 1,358      |   |   |
| Unrecognized  actuarial loss                                                                     |       |       |       |                        |       |                        | 14,828     |   |   |
| Net amount  recognized at fiscal year end                                                        |       |       |       |                        |       |                        | $          | (2,029 | ) |   |
| **Net Amounts Recognized on Consolidated Balance  Sheet at January 28, 2006**               | ** ** |       | ** ** | ** **                  |       |                        | ** ** | ** ** |   |
| Accrued benefit  liability                                                                       |       |       |       |                        |       |                        | $          | (15,112 | ) |   |
| Intangible asset                                                                                 |       |       |       |                        |       |                        | 2,174      |   |   |
| Accumulated other  comprehensive loss                                                            |       |       |       |                        |       |                        | 10,909     |   |   |
| Net amount  recognized at fiscal year end                                                        |       |       |       |                        |       |                        | $          | (2,029 | ) |   |
| **Amounts Recognized in Other  Comprehensive Income (pre-tax) at February 3, 2007**         | ** ** |       | ** ** | ** **                  |       |                        | ** ** | ** ** |   |
| Net loss                                                                                         |       |       | $          | 13,276                      |       |                        |       |   |   |   |
| Prior service cost                                                                               |       |       | 1,651      |                        |       |                        |       |   |   |
| Net amount  recognized at fiscal year end                                                        |       |       | $          | 14,927                      |       |                        |       |   |   |   |
| **Other Comprehensive Loss Attributable to change  in Additional Minimum Liability Recognition** |       |       | $          | 3,467                       |       |                        |       | $ | 35 |   |   |
| **Accumulated Benefit Obligation at Fiscal Year  End**                                           |       |       | $          | 54,379                      |       |                        |       | $ | 50,404 |   |   |
| **Cash Flows**                                                                                   | ** ** |       | ** ** | ** **                  |       |                        | ** ** | ** ** |   |
| Employer contributions  expected during fiscal 2007                                              |       |       | $          | 1,258                       |       |                        |       | $ | 1,417 |   |   |

 

62

----

**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Thefollowing table sets forth additional fiscal year-end information for thedefined benefit portion of the Company’s SERP for which the accumulated benefitobligation is in excess of plan assets:

| **Year ended**             | ** ** | ** ** | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** |
|---------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|
| Projected benefit  obligation   |       |       | $          | 17,499                     |       |                       |       | $ | 16,859 |   |   |
| Accumulated benefit  obligation |       |       | 14,264     |                       |       |                       | 12,914     |   |   |

 

The following actuarial assumptions were used by theCompany to determine pension expense and to present disclosure benefitobligations:

| **Year ended**                                                          | ** ** | ** ** | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Weighted-Average Assumptions as  of December 31:**                    | ** ** |       | ** ** | ** **                 |       |                       | ** ** | ** **                 |       |   | ** ** | ** ** |   |
| Discount rate                                                                |       |       | 5.90       | %                          |       |                       | 5.70       | %                          |       |   |   |   |   |
| Rate of  compensation increase                                               |       |       | 4.0        | %(1)                       |       |                       | 4.0        | %(1)                       |       |   |   |   |   |
| **Weighted-Average  Assumptions for Net Periodic Benefit Cost Development:** | ** ** |       | ** ** | ** **                 |       |                       | ** ** | ** **                 |       |   | ** ** | ** ** |   |
| Discount rate                                                                |       |       | 5.70       | %                          |       |                       | 5.75       | %                          |       |   | 6.25 | % |   |
| Expected return  on plan assets                                              |       |       | 6.30       | %                          |       |                       | 6.75       | %                          |       |   | 6.75 | % |   |
| Rate of compensation  expense                                                |       |       | 4.0        | %(1)                       |       |                       | 4.0        | %(1)                       |       |   | 4.0 | %(1) |   |

----

(1)          In addition, bonuses areassumed to be 25% of base pay for the SERP.

To develop the expected long-term rate of return onassets assumption, the Company considered the historical returns and the futureexpectations for returns for each asset class, as well as the target assetallocation of the pension portfolio. This resulted in the selection of the6.30% long-term rate of return on assets assumption.

The Company selected the discount rate atDecember 31, 2006 to reflect a rate commensurate with a model bondportfolio with durations that match the expected payment patterns of the plans.

Pension plan assets are stated at fair market valueand are composed primarily of money market funds, stock index funds, fixedincome investments with maturities of less than five years, and the Company’scommon stock.

Ourtarget asset allocation is 50% equity securities and 50% fixed income. Theweighted average asset allocations by asset category are as follows:

| **Plan Assets** | ** ** | ** ** | ** ** | **As of  December 31,  2006** | ** ** | **As of   December 31,  2005** | ** ** |
|----------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|
| Equity securities    |       |       | 54         | %                                       |       |                                          | 50         | % |   |
| Fixed income         |       |       | 46         | %                                       |       |                                          | 50         | % |   |
| Total                |       |       | 100        | %                                       |       |                                          | 100        | % |   |

 

63

----

**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Equity securities include Pep Boys common stock in theamounts of $817 (2.2% of total plan assets) and $819 (2.3% of total planassets) at December 31, 2006 and December 31, 2005, respectively.

Benefitpayments, including amounts to be paid from Company assets, and reflectingexpected future service, as appropriate, are expected to be paid as follows:

| 2007             |   | $      | 2,665  |   |
|------------------|--------|--------|--------|--------|
| 2008             |   | 2,715  |   |
| 2009             |   | 3,395  |   |
| 2010             |   | 3,242  |   |
| 2011             |   | 4,167  |   |
| 2012 – 2016 |   | 25,967 |   |

 

**DEFINEDCONTRIBUTION PLAN**

As discussed above, the SERP includes a non-qualifieddefined contribution portion for key employees designated by the Board ofDirectors. The Company’s contribution expense for the defined contributionportion of the plan was $603, $560 and $678 for fiscal years 2006, 2005 and 2004,respectively.

The Company has401(k) savings plans, which cover all full-time employees who are at least21 years of age with one or more years of service. The Company contributes thelesser of 50% of the first 6% of a participant’s contributions or 3% of theparticipant’s compensation. The Company’s savings plans’ contribution expensewas $2,963, $3,126 and $3,463 in fiscal 2006, 2005 and 2004, respectively.

**DEFERREDCOMPENSATION PLAN**

In the first quarter of2004, the Company adopted a non-qualified deferred compensation plan thatallows its officers and certain other employees to defer up to 20% of theirannual salary and 100% of their annual bonus. Additionally, the first 20% of anofficer’s bonus deferred into the Company’s stock is matched by the Company ona one-for-one basis with the Company’s stock that vests and is expensed overthree years. The shares required to satisfy distributions of voluntary bonusdeferrals and the accompanying match in the Company’s stock are issued underthe Stock Incentive Plans.

**RABBI TRUST**

The Company has accountedfor the non-qualified deferred compensation plan and the SERP in accordancewith EITF 97-14, “Accounting for Deferred Compensation Arrangements WhereAmounts Earned are Held in a Rabbi Trust and Invested.” The Company establishesand maintains a deferred liability for these plans. The Company plans to fundthis liability by remitting the officers’ deferrals to a Rabbi Trust wherethese deferrals are invested in various securities, including life insurance policies.These assets are included in non-current other assets. Accordingly, all gainsand losses on these underlying investments, which are held in the Rabbi Trustto fund the deferred liability, are recognized in the Company’s consolidatedstatement of operations. Under these plans, there were liabilities of $20,761at February 3, 2007 and $16,137 at January 28, 2006.

64

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**NOTE 10—EARNINGSPER SHARE**

For fiscal years 2006, 2005 and 2004, basic earningsper share are based on net earnings divided by the weighted average number ofshares outstanding during the period. Diluted earnings per share assumes thedilutive effects of the conversion of convertible senior notes and theexercising of stock options. Adjustments for the stock options wereanti-dilutive in fiscal 2006 and 2005 and therefore excluded from thecalculation due to the Company’s net loss for the year. Additionally,adjustments for the convertible senior notes and purchase rights wereanti-dilutive in all periods presented.

Thefollowing schedule presents the calculation of basic and diluted earnings pershare for net (loss) earnings from continuing operations:

| **Year ended**                                                                                                            | ** ** | ** ** | ** ** | **February 3,   2007** | ** ** | **January 28,   2006** | ** ** | **January 29,   2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| (a) Net (loss)  earnings from continuing operations before cumulative effect of change in  accounting principle                |       |       | $          | (2,000                           | )          |                             |       | $                                | (35,799    | ) |   |   | $ | 25,666 |   |   |
| Adjustment for interest on convertible senior notes,  net of income tax effect                                                 |       |       | —     |                             |       |                             | —     |                             |       |   | — |   |   |
| (b) Adjusted net  (loss) earnings from continuing operations                                                                   |       |       | $          | (2,000                           | )          |                             |       | $                                | (35,799    | ) |   |   | $ | 25,666 |   |   |
| (c) Average number of common shares outstanding  during period                                                                 |       |       | 54,318     |                             |       |                             | 54,831     |                             |       |   | 56,361 |   |   |
| Common shares assumed issued upon conversion of  convertible senior notes                                                      |       |       | —     |                             |       |                             | —     |                             |       |   | — |   |   |
| Common shares assumed issued upon exercise of  dilutive stock options, net of assumed repurchase, at the average market  price |       |       | —     |                             |       |                             | —     |                             |       |   | 1,296 |   |   |
| (d) Average  number of common shares assumed outstanding during period                                                         |       |       | 54,318     |                             |       |                             | 54,831     |                             |       |   | 57,657 |   |   |
| Basic (Loss)  Earnings Per Share:                                                                                              |       |       |       |                             |       |                             |       |                             |       |   |   |   |   |
| Net (Loss) Earnings From Continuing Operations  Before Cumulative Effect of Change in Accounting Principle (a/c)               |       |       | $          | (0.04                            | )          |                             |       | $                                | (0.65      | ) |   |   | $ | 0.46 |   |   |
| Loss from Discontinued Operations, Net of Tax                                                                                  |       |       | (0.01      | )                                |       |                             | —     |                             |       |   | (0.04 | ) |   |
| Cumulative Effect of Change in Accounting Principle,  Net of  Tax                                                              |       |       | —     |                             |       |                             | (0.04      | )                                |       |   | — |   |   |
| Basic (Loss)  Earnings Per Share                                                                                               |       |       | $          | (0.05                            | )          |                             |       | $                                | (0.69      | ) |   |   | $ | 0.42 |   |   |
| Diluted (Loss)  Earnings Per Share:                                                                                            |       |       |       |                             |       |                             |       |                             |       |   |   |   |   |
| Net (Loss) Earnings From Continuing Operations  Before Cumulative Effect of Change in Accounting Principle (b/d)               |       |       | $          | (0.04                            | )          |                             |       | $                                | (0.65      | ) |   |   | $ | 0.45 |   |   |
| Discontinued Operations, Net of Tax                                                                                            |       |       | (0.01      | )                                |       |                             | —     |                             |       |   | (0.04 | ) |   |
| Cumulative Effect  of Change in Accounting Principle, Net of Tax                                                               |       |       | —     |                             |       |                             | (0.04      | )                                |       |   | — |   |   |
| Diluted (Loss) Earnings  Per Share                                                                                             |       |       | $          | (0.05                            | )          |                             |       | $                                | (0.69      | ) |   |   | $ | 0.41 |   |   |

 

65

----

**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

For the years endedFebruary 3, 2007, January 28, 2006 and January 29, 2005, therewere 2,459,618, 4,802,970 and 1,950,980 options and restricted stock units thatwere not included in the computation of diluted EPS because they wereantidilutive for the periods.

**NOTE 11—EQUITYCOMPENSATION PLANS**

The Company has a stock-based compensation planoriginally approved by the stockholders on May 21, 1990 under which it haspreviously granted non-qualified stock options and incentive stock options tokey employees and members of its Board of Directors. As of February 3,2007, there were no awards remaining available for grant under the 1990 Plan.The Company has a stock-based compensation plan originally approved by thestockholders on June 2, 1999 under which it has previously granted and maycontinue to grant non-qualified stock options, incentive stock options andrestricted stock units (RSUs) to key employees and members of its Board ofDirectors. As of February 3, 2007, there were 3,243,817 awards remainingavailable for grant under the 1999 Plan.

Incentive stock options and non-qualified stockoptions previously granted under the plans (i) to non-officers, vest fullyon the third anniversary of their grant date and (ii) to officers, vestover a four-year period, with one-fifth vesting on each of the grant date andthe next four anniversaries thereof. Generally, options granted prior toMarch 3, 2004 carry an expiration date of ten years and options granted onor after March 3, 2004 carry an expiration date of seven years.

RSUs previously granted to non-officers vest fully onthe third anniversary of their grant date. RSUs previously granted to officers(i) on or prior to January 28, 2006, generally vest over a four-yearperiod with one-fifth vesting on each of the grant date and the next fouranniversaries thereof and (ii) after January 28, 2006, generally vestover a four-year period with one-fourth vesting on each of the first fouranniversaries of the grant date.

The Company has also granted RSUs under the 1999 planin conjunction with its non-qualified deferred compensation plan. Under thedeferred compensation plan, the first 20% of an officer’s bonus deferred intothe Company’s stock fund is matched by the Company on a one-for-one basis withRSUs that vest over a three-year period, with one third vesting on each of thefirst three anniversaries of the grant date.

The exercise price, term and other conditionsapplicable to future stock option and RSU grants under the 1999 plan are generallydetermined by the Board of Directors; provided that the exercise price of stockoptions must be at least 100% of the quoted market price of the common stock onthe grant date. The Company currently satisfies all share requirementsresulting from RSU conversions and option exercises from its Treasury. TheCompany believes its Treasury share balance at February 3, 2007 isadequate to satisfy such activity during the next twelve-month period.

66

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Thefollowing table summarizes the options under our plans:

| ** **                          | ** ** | **Fiscal 2006** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **Shares**           | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
| Outstanding—beginning  of year |       | 4,537,155            |       |   | $ | 15.87 |   |   |
| Granted                             |       | 61,977               |       |   | 15.01 |   |   |
| Exercised                           |       | (84,500              | )          |   | 8.48 |   |   |
| Forfeited                           |       | (329,898             | )          |   | 13.36 |   |   |
| Expired                             |       | (2,083,902           | )          |   | 16.21 |   |   |
| Outstanding—end  of year       |       | 2,100,832            |       |   | 16.20 |   |   |
| Vested and expected to  vest        |       | 2,095,153            |       |   | 16.20 |   |   |
| Options exercisable at  year end    |       | 1,834,670            |       |   | 16.23 |   |   |

 

Thefollowing table summarizes information about options during the last threefiscal years (dollars in thousands except per option amount):

| ** **                                            | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| Weighted average  fair value at grant date per option |       |                 | $          | 10.04                |       |                 |       | $ | 7.66 |   |   |   | $ | 13.60 |   |   |
| Intrinsic value at  exercise date                     |       |                 | $          | 370                  |       |                 |       | $ | 2,531 |   |   |   | $ | 8,305 |   |   |

 

The aggregate intrinsic value of outstanding optionsat February 3, 2007 was $4,455, of which $4,100 were vested. AtFebruary 3, 2007, the weighted average remaining contractual term ofoutstanding options and  exercisableoptions is 4.2 years and 3.9 years. At February 3, 2007, the weightedaverage remaining contractual term and aggregate intrinsic value of outstandingand expected to vest options is 4.2 years and $4,448. The cash received andrelated tax benefit realized from options exercised during fiscal year 2006 was$722 and $252 respectively. At February 3, 2007, there was approximately$1,160 of total unrecognized pre-tax compensation cost related to non-vestedstock options, which is expected to be recognized over a weighted-averageperiod of 1.4 years.

Thefollowing table summarizes information about non-vested stock awards (RSUs)since January 29, 2006:

| ** **                          | ** ** | **Number of  RSUs** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|-------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| Nonvested at  January 29, 2006 |       |                     | 265,815    |                                   |       |   | $ | 18.41 |   |   |
| Granted                             |       |                     | 226,161    |                                   |       |   | 13.58 |   |   |
| Forfeited                           |       |                     | (62,132    | )                                      |       |   | 16.41 |   |   |
| Vested                              |       |                     | (71,058    | )                                      |       |   | 19.93 |   |   |
| Nonvested at  February 3, 2007 |       |                     | 358,786    |                                   |       |   | $ | 15.41 |   |   |

 

 

67

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Thefollowing table summarizes information about RSUs during the last three fiscalyears (dollars in thousands except per unit amount):

| ** **                                          | ** ** | **Fiscal 2006** | ** **       | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** **       |
|-----------------------------------------------------|------------|----------------------|------------------|----------------------|------------|----------------------|------------------|
| Weighted average  fair value at grant date per unit |       |                 | $ 13.58     |                 |       |                 | $ 16.71     |   |   |   | $ 22.41 |   |   |
| Fair Value at  vesting date                         |       |                 | $ 1,660     |                 |       |                 | $  881 |   |   |   | $       8 |   |   |
| Intrinsic value  at conversion date                 |       |                 | $ 1,075     |                 |       |                 | $  679 |   |   |   | $       5 |   |   |
| Tax benefits realized  from conversions             |       |                 | $  734 |                 |       |                 | $  248 |   |   |   | $       3 |   |   |

 

At February 3, 2007,there was approximately $3,370 of total unrecognized pre-tax compensation costrelated to non-vested RSUs, which is expected to be recognized over aweighted-average period of 1.7 years.

**NOTE 12—ASSETRETIREMENT OBLIGATIONS**

AtFebruary 3, 2007, the Company has a liability pertaining to the assetretirement obligation in accrued expenses and other long-term liabilities onits consolidated balance sheet. The following is a reconciliation of thebeginning balance and ending carrying amounts of the Company’s asset retirementobligation under SFAS 143 from January 29, 2005 through February 3,2007:

| Asset retirement  obligation, January 29, 2005     |   | $ 5,057 |   |
|---------------------------------------------------------|--------|--------------|--------|
| Asset retirement obligation incurred during the  period |   | 43           |   |
| Asset retirement obligation settled during the  period  |   | (141         | )      |
| Accretion expense                                       |   | 109          |   |
| Reduction in asset retirement liability                 |   | (1,945       | )      |
| Adoption of FIN 47                                      |   | 3,652        |   |
| Asset retirement  obligation, January 28, 2006     |   | 6,775        |   |
| Asset retirement obligation incurred during the  period |   | 131          |   |
| Asset retirement obligation settled during the  period  |   | (130         | )      |
| Accretion expense                                       |   | 269          |   |
| Asset retirement  obligation, February 3, 2007     |   | $ 7,045 |   |

 

In the fourth quarter of fiscal 2005, the Companyreviewed and revised its estimated settlement costs. The Company reversed$1,945 of the liability as the original estimates of the contaminationoccurrence rate and the cost to remediate such contaminations proved to behigher than actual experience is yielding. 

The Company adopted FIN 47, “Accounting forConditional Asset Retirement Obligations,” an interpretation of SFAS 143,“Asset Retirement Obligations” on January 28, 2006. This interpretationimpacted the Company in recognition of legal obligations associated withsurrendering its leased properties. These obligations were previously omittedfrom the Company’s SFAS 143 analysis due to their uncertain timing. The impactof adopting FIN 47 was the recognition of net additional leasehold improvementassets amounting to $470, an asset retirement obligation of $3,652 and a chargeof $3,182 ($2,021, net of tax), which was included in Cumulative Effect ofChange in Accounting Principle in the accompanying consolidated statement ofoperations for fiscal year 2005.

68

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Hadthe Company adopted the provisions of FIN 47 prior to January 28, 2006,the amount of the asset retirement obligations on a pro forma basis would havebeen $3,441 as of January 29, 2005. The following table summarizes the proforma net earnings and earnings per share for the fiscal year endedJanuary 29, 2005, had the Company adopted the provisions of FIN 47 priorto January 28, 2006:

| **Year ended**             | ** ** | ** ** | ** **              | **January 29,   2005** | ** ** |
|---------------------------------|------------|------------|-------------------------|----------------------------------|------------|
| Net Earnings (Loss):            |       |       |                    |                             |       |
| As reported                     |       |       | $ 23,579           |                             |       |
| Pro Forma                       |       |       | $ 23,409           |                             |       |
| Net Earnings  (Loss) per share: |       |       |                    |                             |       |
| Basic:                          |       |       |                    |                             |       |
| As reported                     |       |       | $   0.42 |                             |       |
| Pro Forma                       |       |       | $   0.42 |                             |       |
| Diluted:                        |       |       |                    |                             |       |
| As reported                     |       |       | $   0.41 |                             |       |
| Pro Forma                       |       |       | $   0.41 |                             |       |

 

**NOTE 13—INCOMETAXES**

Theprovision (benefit) for income taxes includes the following:

| ** **    | ** ** | **Year ended**        | ** **                                  |
|---------------|------------|----------------------------|---------------------------------------------|
| ** **    | ** ** | **February 3,  2007** | ** **                                  | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
| **Current:**  |       |                       |                                        |   |   |   |   |   |   |   |   |   |   |
| Federal       |       |                       | $      — |   |   |   | $         — |   |   |   | $ (21,639 | ) |   |
| State         |       |                       | 1,001                                       |   |   |   | 1,639 |   |   |   | (1,268 | ) |   |
| **Deferred:** |       |                       |                                        |   |   |   |   |   |   |   |   |   |   |
| Federal       |       |                       | (2,496                                      | ) |   |   | (20,422 | ) |   |   | 35,379 |   |   |
| State         |       |                       | (2,802                                      | ) |   |   | (1,786 | ) |   |   | 2,843 |   |   |
|          |       |                       | $ (4,297                               | ) |   |   | $ (20,569 | ) |   |   | $ 15,315 |   |   |

 

69

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

Areconciliation of the statutory federal income tax rate to the effective rateof the provision for income taxes follows:

| ** **                                       | ** ** | **Year ended**        | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **February 3,  2007** | ** ** | **January 28,  2006** | ** ** | **January 29,  2005** | ** ** |
| Statutory tax rate                               |       |                       | 35.0       | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| State income taxes, net  of federal tax benefits |       |                       | (3.6       | ) |   |   | 0.9 |   |   |   | 2.8 |   |   |
| Job credits                                      |       |                       | 5.8        |   |   |   | 0.8 |   |   |   | (1.0 | ) |   |
| State Deferred  Adjustment(a)                    |       |                       | 38.9       |   |   |   | — |   |   |   | — |   |   |
| Foreign Taxes, net of  federal benefits          |       |                       | (3.8       | ) |   |   | — |   |   |   | — |   |   |
| Other, net                                       |       |                       | (4.1       | ) |   |   | (0.2 | ) |   |   | 0.6 |   |   |
|                                             |       |                       | 68.2       | % |   |   | 36.5 | % |   |   | 37.4 | % |   |

----

(a)           The tax rate for theyear ended February 2007 includes an adjustment to the state deferredliabilities primarily due to change in the Company’s filing position in certainstates. Based on the new filing position, the Company has recorded certain taxattributes that were not recognized previously.

Itemsthat gave rise to significant portions of the deferred tax accounts are asfollows:

| ** **                       | ** ** | **February 3,  2007** | ** **    | **January 28,   2006** | ** ** |
|----------------------------------|------------|----------------------------|---------------|----------------------------------|------------|
| **Deferred tax assets:**         |       |                       |          |                             |       |   |   |   |   |
| Employee compensation            |       |                       | $ 8,227  |                             |       |   | $ 6,693 |   |   |
| Store closing reserves           |       |                       | 741           |                             |       |   | 1,087 |   |   |
| Legal                            |       |                       | 2,193         |                             |       |   | 500 |   |   |
| Benefit Accruals                 |       |                       | 1,998         |                             |       |   | 538 |   |   |
| Net operating loss carryforwards |       |                       | 46,831        |                             |       |   | 27,640 |   |   |
| Tax credit carryforwards         |       |                       | 13,944        |                             |       |   | 12,775 |   |   |
| Accrued leases                   |       |                       | 12,937        |                             |       |   | 13,522 |   |   |
| Interest rate derivatives        |       |                       | 1,305         |                             |       |   | — |   |   |
| Other                            |       |                       | 3,566         |                             |       |   | 3,049 |   |   |
| Gross deferred tax assets        |       |                       | 91,742        |                             |       |   | 65,804 |   |   |
| Valuation allowance              |       |                       | (4,077        | )                                |       |   | (3,545 | ) |   |
|                             |       |                       | $ 87,665 |                             |       |   | $ 62,259 |   |   |
| **Deferred tax liabilities:**    |       |                       |          |                             |       |   |   |   |   |
| Depreciation                     |       |                       | $ 51,017 |                             |       |   | $ 55,222 |   |   |
| Inventories                      |       |                       | 37,544        |                             |       |   | 17,655 |   |   |
| Real estate tax                  |       |                       | 2,414         |                             |       |   | 2,405 |   |   |
| Insurance                        |       |                       | 793           |                             |       |   | 3,180 |   |   |
| Interest rate derivatives        |       |                       | —        |                             |       |   | 2,151 |   |   |
|                             |       |                       | $ 91,768 |                             |       |   | $ 80,613 |   |   |
| **Net deferred tax liability**   |       |                       | $ 4,103  |                             |       |   | $ 18,354 |   |   |

 

70

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

As of February 3, 2007 and January 28, 2006,the Company had available tax net operating losses that can be carried forwardto future years. The $328,826 net operating loss carryforward in 2007 consistsof $118,802 of federal losses and $210,024 of state losses. The federal netoperating loss begins to expire in 2023 while the state net operating losseswill expire in various years beginning in 2008. 

The tax credit carryforward in 2007 consists of $4,772of alternative minimum tax credits, $3,021 of work opportunity credits, $5,829of state tax credits and $322 of charitable contribution carryforward.

The tax credit carryforward in 2006 consists of $4,412of alternative minimum tax credits, $2,612 of work opportunity credits, $ 5,506of state tax credits and $246 of charitable contribution carryforward.

Due to the uncertainty ofthe Company’s ability to realize certain state tax attributes, valuationallowances of $4,077 and $3,545 were recorded at February 3, 2007 andJanuary 28, 2006, respectively.

**NOTE 14—CONTINGENCIES**

The Company is party tovarious actions and claims, including purported class actions, arising in thenormal course of business. The Company believes that amounts accrued for awardsor assessments in connection with such matters are adequate and that theultimate resolution of these matters will not have a material adverse effect onthe Company’s financial position, results of operations or cash flows.

**NOTE 15—INTERESTRATE SWAP AGREEMENT**

On June 3, 2003, the Company entered into aninterest rate swap for a notional amount of $130,000. The Company haddesignated the swap as a cash flow hedge of the Company’s real estate operatinglease payments. The interest rate swap converts the variable LIBOR portion ofthe lease payment to a fixed rate of 2.90% and terminates on July 1, 2008.If the critical terms of the interest rate swap or hedge item do not change,the interest rate swap is considered to be highly effective with all changes infair value included in other comprehensive income. As of February 3, 2007and January 28, 2006, the fair value was $4,150 and $5,790, respectively.In the fourth quarter of fiscal 2006, the Company determined it was not incompliance with SFAS No. 133 for hedge accounting and, accordingly,recorded a reduction of rent expense, which is included in Costs of Merchandiseand Costs of Service Revenues, for the cumulative fair value change of $4,150.This change in fair value had previously been recorded in Accumulated OtherComprehensive Income (Loss) on the consolidated balance sheets. The Companyevaluated the impact of this error, along with three other errors discussed inthe next sentence, on an annual and quarterly basis and concluded there was nomaterial impact on the fourth quarter of fiscal 2006 or any historical periods,on an individual or aggregate basis. The three other errors consisted of: (i)$3,700 of amortization expense on leasehold improvements classified in land andtherefore not depreciated, (ii) $500 of understated closed store reserves and(iii) $400 of an overstated accrual for non-qualified defined contributions. TheCompany corrected these errors in the fourth quarter of fiscal 2006, resultingin no material impact to the consolidated financial statements. The Company hasremoved its designation as a cash flow hedge on this transaction and recordsthe change in fair value through its operating statement until the date oftermination.

On November 2, 2006,the Company entered into an interest rate swap for a notional amount of$200,000. The Company has designated the swap a cash flow hedge on the first$200,000 of the Company’s 

71

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

$320,000senior secured notes. The interest rate swap converts the variable LIBORportion of the interest payments to a fixed rate of 5.036% and terminates inOctober 2013. The Company did not meet the documentation requirements ofSFAS No. 133, at inception or as of February 3, 2007 and,accordingly, recorded the increase in the fair value of the interest rate swapof $1,490 as a reduction to Interest Expense. The Company intends to meet thedocumentation requirements of SFAS No. 133 for hedge accounting in thefirst quarter of fiscal 2007 and will then record the effective portion of thechange in fair value through Accumulated Other Comprehensive Income (Loss). 

**NOTE 16—FAIR VALUEOF FINANCIAL INSTRUMENTS**

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

| ** **                                  | ** ** | **February 3, 2007** | ** ** | **January 28, 2006**       | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **Carrying   Amount**     | ** ** | **Estimated   Fair Value** | ** ** | **Carrying   Amount** | ** ** | **Estimated   Fair Value** | ** ** |
| Assets:                                     |       |                           |       |                                 |       |   |   |   |   |
| Cash and cash equivalents                   |       | $ 21,884                  |       | $ 21,884                        |       | $ 48,281 |   | $ 48,281 |   |
| Accounts receivable                         |       | 29,582                         |       | 29,582                               |       | 36,434 |   | 36,434 |   |
| Interest rate swap derivatives              |       | 5,522                          |       | 5,522                                |       | 5,790 |   | 5,790 |   |
| Liabilities:                                |       |                           |       |                                 |       |   |   |   |   |
| Accounts payable                            |       | 265,489                        |       | 265,489                              |       | 261,940 |   | 261,940 |   |
| Long-term debt including current maturities |       | 538,521                        |       | 530,721                              |       | 468,496 |   | 444,585 |   |
| Senior  convertible notes                   |       | —                         |       | —                               |       | 119,000 |   | 114,835 |   |

 

**CASH AND CASHEQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE**

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

**INTEREST RATE SWAPDERIVATIVES**

The fair value of theinterest rate swap derivatives are obtained from dealer quotes. This valuerepresents the estimated amount the Company would receive or pay to terminateagreements, taking into consideration current interest rates and thecreditworthiness of the counterparties.

**LONG-TERM DEBTINCLUDING CURRENT MATURITIES AND SENIOR CONVERTIBLE NOTES**

Interest rates that are currently available to theCompany for issuance of debt with similar terms and remaining maturities areused to estimate fair value for debt issues that are not quoted on an exchange.

The fair value estimatespresented herein are based on pertinent information available to management asof February 3, 2007 and January 28, 2006. Although management is notaware of any factors that would significantly affect the estimated fair valueamounts, such amounts have not been comprehensively revalued for purposes ofthese financial statements since those dates, and current estimates of fairvalue may differ significantly from amounts presented herein.

72

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**THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended February 3, 2007, January 28, 2006 and January 29, 2005(dollar amounts in thousands, except share data)**

**NOTE 17—QUARTERLY FINANCIAL DATA (UNAUDITED)**

| ** **                            | ** ** | **Total**    | ** **     | **Gross**  | ** ** | **Operating  (Loss)** | ** ** | **Net  (Loss)  Earnings  From  Continuing  Operations  Before  Cumulative  Effect of  Change in  Accounting** | ** **     | **Net  (Loss)** | ** ** | **Net  (Loss)  Earnings Per  Share  From  Continuing  Operations  Before  Cumulative  Effect of  Change in  Accounting  Principle** | ** **               | **Net  (Loss)  Earnings  Per Share** | ** ** | **Cash  Dividends** | ** **               | **Market  Price Per  Share** | ** ** |
|---------------------------------------|------------|--------------|----------------|------------|------------|-----------------------|------------|-------------------------------------------------------------------------------------------------------------------------|----------------|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|-------------------------------------------|------------|---------------------|--------------------------|-----------------------------------|------------|
| ** **                            | ** ** | **Revenues** | ** **     | **Profit** | ** ** | **Profit**            | ** ** | **Principle**                                                                                                           | ** **     | **Earnings**    | ** ** | **Basic**                                                                                                                                          | ** **               | **Diluted**                               | ** ** | **Basic**           | ** **               | **Diluted**                       | ** ** | **Per Share** | ** ** | **High** | ** ** | **Low** | ** ** |
| **Year Ended February 3,  2007** | ** ** |         | ** **     | ** ** |       | ** **            | ** ** |                                                                                                                    | ** **     | ** **      |       |                                                                                                                                               | ** **               | ** **                                |       |                | ** **               | ** **                        |       | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   |
| 4th Quarter                           |       |         | $ 586,146 | ** ** |       | $ 150,083        |       |                                                                                                                    | $ 18,140  |            |       |                                                                                                                                               | $   8,110 |                                      |       |                | $   7,716 |                              |       | $ 0.15 |   |   | $ 0.15 |   |   | $ 0.14 |   |   | $ 0.14 |   |   |   | $ 0.0675 | ** ** |   | $ 16.05 |   | $ 12.48 |   |   |
| 3rd Quarter                           |       |         | 550,849        | ** ** |       | 137,693               |       |                                                                                                                    | (1,349         | )               |       |                                                                                                                                               | (10,713                  | )                                         |       |                | (10,914                  | )                                 |       | (0.20 | ) |   | (0.20 | ) |   | (0.20 | ) |   | (0.20 | ) |   |   | 0.0675 | ** ** |   | 14.58 |   | 9.33 |   |   |
| 2nd Quarter                           |       |         | 578,565        | ** ** |       | 145,102               |       |                                                                                                                    | 11,989         |            |       |                                                                                                                                               | 1,470                    |                                      |       |                | 1,352                    |                              |       | 0.03 |   |   | 0.03 |   |   | 0.03 |   |   | 0.03 |   |   |   | 0.0675 | ** ** |   | 14.96 |   | 10.66 |   |   |
| 1st Quarter                           |       |         | 556,601        | ** ** |       | 138,878               |       |                                                                                                                    | 7,242          |            |       |                                                                                                                                               | (867                     | )                                         |       |                | (703                     | )                                 |       | (0.02 | ) |   | (0.02 | ) |   | (0.01 | ) |   | (0.01 | ) |   |   | 0.0675 | ** ** |   | 16.55 |   | 14.05 |   |   |
| **Year Ended January 28,  2006** | ** ** |         | ** **     | ** ** |       | ** **            | ** ** |                                                                                                                    | ** **     | ** **      |       |                                                                                                                                               | ** **               | ** **                                |       |                | ** **               | ** **                        |       | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |   |
| 4th Quarter(1)                        |       |         | $ 550,481 | ** ** |       | $ 110,412        |       |                                                                                                                    | $ (15,690 | )               |       |                                                                                                                                               | $ (22,869           | )                                         |       |                | $ (24,601           | )                                 |       | $ (0.42 | ) |   | $ (0.42 | ) |   | $ (0.46 | ) |   | $ (0.46 | ) |   |   | $ 0.0675 | ** ** |   | $ 15.99 |   | $ 12.54 |   |   |
| 3rd Quarter                           |       |         | 545,904        | ** ** |       | 119,113               |       |                                                                                                                    | (8,553         | )               |       |                                                                                                                                               | (11,376                  | )                                         |       |                | (11,196                  | )                                 |       | (0.21 | ) |   | (0.21 | ) |   | (0.20 | ) |   | (0.20 | ) |   |   | 0.0675 | ** ** |   | 14.84 |   | 11.75 |   |   |
| 2nd Quarter                           |       |         | 577,418        | ** ** |       | 138,228               |       |                                                                                                                    | 9,659          |            |       |                                                                                                                                               | 2,264                    |                                      |       |                | 1,043                    |                              |       | 0.01 |   |   | 0.01 |   |   | 0.02 |   |   | 0.02 |   |   |   | 0.0675 | ** ** |   | 15.24 |   | 12.54 |   |   |
| 1st Quarter                           |       |         | 564,226        | ** ** |       | 139,514               |       |                                                                                                                    | 3,359          |            |       |                                                                                                                                               | (3,818                   | )                                         |       |                | (2,774                   | )                                 |       | (0.04 | ) |   | (0.04 | ) |   | (0.05 | ) |   | (0.05 | ) |   |   | 0.0675 | ** ** |   | 18.80 |   | 14.06 |   |   |

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(1)                Includes a pretax charge of $4,200 related to an assetimpairment charge reflecting the remaining value of a commercial sales softwareasset, which was included in selling, general and administrative expenses.

Under the Company’s present accounting system, actualgross profit from merchandise sales can be determined only at the time of physicalinventory, which is taken at the end of the fiscal year. In fiscal year 2006,these physical inventories were taken at different times during the course ofthe fourth quarter resulting in the Company recording an estimate for inventoryshrinkage from the time of the physical inventory to the end of the fiscalyear. Gross profit from merchandise sales for the first, second and thirdquarters is estimated by the Company based upon recent historical gross profitexperience and other appropriate factors. Any variation between estimated andactual gross profit from merchandise sales for the first three quarters isreflected in the fourth quarter’s results.

Certain reclassificationshave been made to the prior years’ consolidated financial statements to providecomparability with the current year’s presentation of Net Gain from Sales ofAssets from Cost of Merchandise Sales and the change in classification of astore from discontinued operations to continuing operations.

73

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**NOTE 18—RESTATEMENT OF PREVIOUSLY ISSUED FINANCIALSTATEMENTS**

Subsequent to theissuance of the Company’s consolidated financial statements for the fiscal yearended February 3, 2007, the Company determined that certain informationpresented in the condensed consolidating balance sheets as of February 3,2007 and January 28, 2006 and the related condensed consolidatingstatements of operations and cash flows for each of three years in the periodended February 3, 2007, presented in the supplemental guarantorinformation note (Note 8) contained errors. The errors resulted from(i) the failure to correctly record consolidating intercompany journalentries between Pep Boys and the Subsidiary Guarantors (ii) the failure tocorrectly record certain reclassification entries to intercompany receivablesand liabilities and (iii) the failure to consolidate PBY Corporation’swholly owned subsidiary, The Pep Boys—Manny Moe & Jack of California,in the Subsidiary Guarantors column. The Company has corrected the errors andrestated the condensed consolidating balance sheets as of February 3, 2007and January 28, 2006 and the related condensed consolidating statements ofoperations and cash flows for each of three years in the period endedFebruary 3, 2007. The cumulative impact on beginning stockholders’ equityfor fiscal year ended January 29, 2005 for the Subsidiary Guarantors ofcorrecting for these errors was a decrease of $1,163,420 which was related tothe failure to consolidate PBY Corporation’s wholly owned subsidiary, The PepBoys—Manny Moe & Jack of California. The corrections did not affectthe Company’s previously reported consolidated balance sheets, statements ofoperations, statements of stockholders’ equity, or statements of cash flows.

Additionally, theCompany incorrectly presented borrowings and payments under its line of creditagreement and vendor financing trade payable program on a net rather than grossbasis in its consolidated statements of cash flows for each of the three yearsin the period ended February 3, 2007 and incorrectly classified $7,237 ofborrowings under the vendor financing trade payable program within operatingactivities instead of financing activities for the fiscal year endedJanuary 29, 2005.

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The following table reflects the effects of therestatement on the condensed consolidating financial statements as ofFebruary 3, 2007 and January 28, 2006 and the related condensedconsolidating statements of operations and cash flows for each of three yearsin the period ended February 3, 2007, contained in Note 8—SupplementalGuarantor Information:

| ** **                                      | ** ** | **Pep Boys**        | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **Previously  Reported** | ** ** | **Restated**                   | ** ** | **Previously  Reported**                  | ** ** | **Restated** | ** ** | ** Previously  Reported ** | ** ** | **   Restated   ** | ** ** |
| **Condensed Consolidated Balance Sheet**        | ** ** | ** **               | ** ** | ** **                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| **As of  February 3, 2007**                |       |                     |       |                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Investment in subsidiaries                      |       | $                        | 1,567,674  |                           | $          | 1,589,279                                 |       | $ | 1,384,492 |   | $ | — |   | $ | (2,952,166 | ) |   | $ | (1,589,279 | ) |   |
| Intercompany receivable                         |       | —                   |       | —                         |       | 726,297                                   |       | 684,520 |   | (807,457 | ) |   | (765,680 | ) |   |
| Total Assets                                    |       | 2,222,014                |       | 2,243,619                      |       | 3,140,778                                 |       | 1,714,509 |   | (3,805,783 | ) |   | (2,401,119 | ) |   |
| Accrued expenses                                |       | 22,512                   |       | 43,815                         |       | 136,073                                   |       | 72,692 |   | (61,626 | ) |   | (19,548 | ) |   |
| Total Current Liabilities                       |       | 311,816                  |       | 333,119                        |       | 164,806                                   |       | 101,425 |   | (67,763 | ) |   | (25,685 | ) |   |
| Other long-term liabilities                     |       | 32,855                   |       | 53,330                         |       | —                                    |       | — |   | — |   |   | (20,475 | ) |   |
| Intercompany liabilities                        |       | 807,457                  |       | 765,680                        |       | —                                    |       | — |   | (807,457 | ) |   | (765,680 | ) |   |
| Common stock                                    |       | —                   |       | —                         |       | 1,502                                     |       | 2 |   | (1,602 | ) |   | (102 | ) |   |
| Additional paid-in capital                      |       | —                   |       | —                         |       | 436,857                                   |       | 386,857 |   | (440,757 | ) |   | (390,757 | ) |   |
| Retained earnings                               |       | 442,193                  |       | 463,797                        |       | 2,498,939                                 |       | 1,187,551 |   | (2,488,204 | ) |   | (1,198,420 | ) |   |
| Total Stockholders’ Equity                 |       | 546,151                  |       | 567,755                        |       | 2,937,298                                 |       | 1,574,410 |   | (2,930,563 | ) |   | (1,589,279 | ) |   |
| Total Liabilities and Stockholders’ Equity |       | 2,222,014                |       | 2,243,619                      |       | 3,140,778                                 |       | 1,714,509 |   | (3,805,783 | ) |   | (2,401,119 | ) |   |
| **As of January 28, 2006**                 | ** ** | ** **               | ** ** | ** **                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Investment in subsidiaries                      |       | $                        | 1,520,208  |                           | $          | 1,517,873                                 |       | $ | 1,290,063 |   | $ | — |   | $ | (2,810,271 | ) |   | $ | (1,517,873 | ) |   |
| Intercompany  receivable                        |       | —                   |       | —                         |       | 631,061                                   |       | 630,081 |   | (715,624 | ) |   | (714,644 | ) |   |
| Total Assets                                    |       | 2,176,406                |       | 2,174,071                      |       | 2,989,051                                 |       | 1,698,008 |   | (3,546,946 | ) |   | (2,253,568 | ) |   |
| Intercompany  liabilities                       |       | 716,978                  |       | 714,643                        |       | (1,353                                    | )          | — |   | (715,625 | ) |   | (714,643 | ) |   |
| Common stock                                    |       | —                   |       | —                         |       | 1,502                                     |       | 2 |   | (1,602 | ) |   | (102 | ) |   |
| Additional paid-in capital                      |       | —                   |       | —                         |       | 436,858                                   |       | 386,857 |   | (440,758 | ) |   | (390,757 | ) |   |
| Retained earnings                               |       | —                   |       | —                         |       | 2,357,802                                 |       | 1,116,907 |   | (2,367,909 | ) |   | (1,127,014 | ) |   |
| Total Stockholders’ Equity                 |       | —                   |       | —                         |       | 2,796,162                                 |       | 1,503,766 |   | (2,810,269 | ) |   | (1,517,873 | ) |   |
| Total Liabilities and Stockholders’ Equity |       | 2,176,406                |       | 2,174,071                      |       | 2,989,051                                 |       | 1,698,008 |   | (3,546,946 | ) |   | (2,253,568 | ) |   |

 

| ** **                                                                                                  | ** ** | ** ** | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                  | ** ** | ** ** | ** ** | ** **                     | ** ** | **Previously  Reported**                  | ** ** | **Restated** | ** ** | ** Previously  Reported ** | ** ** | **   Restated   ** | ** ** |
| **Condensed Consolidating Statement of Operations**                                                         | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| **Year Ended February 3, 2007**                                                                        |       |       |       |                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Equity in Earnings  of Subsidiaries                                                                         |       |       |       |                           |       | $                                         | 95,270     |   | $ | — |   | $ | (167,202 | ) |   | $ | (71,932 | ) |   |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle |       |       |       |                           |       | 166,603                                   |       | 71,333 |   | (167,202 | ) |   | (71,932 | ) |   |
| Net (Loss)  Earnings                                                                                        |       |       |       |                           |       | 165,914                                   |       | 70,644 |   | (167,202 | ) |   | (71,932 | ) |   |
| **Year Ended January 28, 2006**                                                                        | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Equity in Earnings  of Subsidiaries                                                                         |       |       |       |                           |       | $                                         | 64,018     |   | $ | — |   | $ | (94,811 | ) |   | $ | (30,793 | ) |   |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle |       |       |       |                           |       | 96,364                                    |       | 32,346 |   | (94,811 | ) |   | (30,793 | ) |   |
| Net (Loss)  Earnings                                                                                        |       |       |       |                           |       | 95,165                                    |       | 31,147 |   | (94,811 | ) |   | (30,793 | ) |   |
| **Year Ended January 29, 2005**                                                                        | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Equity in Earnings  of Subsidiaries                                                                         |       |       |       |                           |       | $                                         | 64,958     |   | $ | — |   | $ | (127,080 | ) |   | $ | (62,122 | ) |   |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle |       |       |       |                           |       | 131,470                                   |       | 66,512 |   | (127,080 | ) |   | (62,122 | ) |   |
| Net (Loss) Earnings                                                                                         |       |       |       |                           |       | 129,770                                   |       | 64,812 |   | (127,080 | ) |   | (62,122 | ) |   |

 

75

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| ** **                                                | ** ** | **Pep Boys**             | ** ** | **Subsidiary  Guarantors** | ** ** | **Consolidation / Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                | ** ** | **Previously  Reported** | ** ** | **Restated**               | ** ** | **Previously  Reported**        | ** ** | **Restated**     | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed Consolidating  Statement of Cash Flows** | ** ** |                     | ** ** | ** **                 |       | ** **                      | ** ** |             | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| **Year Ended February 3, 2007**                           | ** ** |                     | ** ** | ** **                 |       | ** **                      | ** ** |             | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Net (Loss) Earnings                                       |       |                     | $          | —                     |       |                            | $          | —           |       |   | $ | 165,914 |   |   | $ | 70,644 |   |   | $ | (167,202 | ) |   |   | $ | (71,932 | ) |   |   | $ | — |   |   | $ | — |   |
| Equity in earnings of subsidiaries                        |       |                     | 28,039     |                       |       | (71,932                         | )          |             | (163,669   | ) |   | — |   |   | 135,630 |   |   |   | 71,932 |   |   |   | — |   |   | — |   |
| (Decrease) increase in accrued expenses                   |       |                     | (49,057    | )                          |       | (7,301                          | )          |             | 45,645     |   |   | (18,154 | ) |   | (602 | ) |   |   | 21,441 |   |   |   | — |   |   | — |   |
| Increase (decrease) in other long-term liabilities        |       |                     | 3,074      |                       |       | 23,195                          |       |             | (981       | ) |   | (1,844 | ) |   | — |   |   |   | (19,258 | ) |   |   | — |   |   | — |   |
| Dividends received from Subsidiary                        |       |                     | —     |                       |       | 527                             |       |             | —     |   |   | — |   |   | — |   |   |   | (527 | ) |   |   | — |   |   | — |   |
| Net cash (used in) provided by continuing operations      |       |                     | 21,193     |                       |       | (16,374                         | )          |             | 104,850    |   |   | 108,587 |   |   | (34,357 | ) |   |   | (527 | ) |   |   | — |   |   | — |   |
| Net Cash (Used in) Provided by Operating Activities       |       |                     | 19,935     |                       |       | (17,632                         | )          |             | 104,850    |   |   | 108,587 |   |   | (34,357 | ) |   |   | (527 | ) |   |   | — |   |   | — |   |
| Proceeds from asset sales                                 |       |                     | 1,097      |                       |       | 34,927                          |       |             | —     |   |   | — |   |   | — |   |   |   | (33,830 | ) |   |   | — |   |   | — |   |
| Net Cash Used in Investing Activities                     |       |                     | (47,365    | )                          |       | (13,535                         | )          |             | —     |   |   | — |   |   | 33,830 |   |   |   | — |   |   |   | — |   |   | — |   |
| Net borrowings under line of credit agreements            |       |                     | (48,569    | )                          |       | —                          |       |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | (48,569 | ) |   | — |   |
| Borrowings under line of credit agreements                |       |                     | —     |                       |       | 195,762                         |       |             | —     |   |   | 391,231 |   |   | — |   |   |   | — |   |   |   | — |   |   | 586,993 |   |
| Payments under line of credit agreements                  |       |                     | —     |                       |       | (211,960                        | )          |             | —     |   |   | (423,602 | ) |   | — |   |   |   | — |   |   |   | — |   |   | (635,562 | ) |
| Net borrowings on trade payable program liability         |       |                     | 2,834      |                       |       | —                          |       |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | 2,834 |   |   | — |   |
| Borrowings on trade payable program liability             |       |                     | —     |                       |       | 76,713                          |       |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   | 76,713 |   |
| Payments on trade payable program   liability             |       |                     | —     |                       |       | (73,879                         | )          |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   | (73,879 | ) |
| Intercompany borrowings (payments)                        |       |                     | 90,480     |                       |       | 61,846                          |       |             | (93,883    | ) |   | (65,249 | ) |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Net Cash Provided by (Used in) Financing Activities       |       |                     | 28,992     |                       |       | 32,729                          |       |             | (93,883    | ) |   | (97,620 | ) |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| **Year  Ended January 28, 2006**                          | ** ** |                     | ** ** | ** **                 |       | ** **                      | ** ** |             | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Net (Loss) Earnings                                       |       |                     | $          | —                     |       |                            | $          | —           |       |   | $ | 95,165 |   |   | $ | 31,147 |   |   | $ | (94,811 | ) |   |   | $ | (30,793 | ) |   |   | $ | — |   |   | $ | — |   |
| Equity in earnings of subsidiaries                        |       |                     | 65,004     |                       |       | (30,793                         | )          |             | (159,815   | ) |   | — |   |   | 94,811 |   |   |   | 30,793 |   |   |   | — |   |   | — |   |
| Net cash (used in) provided by continuing operations      |       |                     | (25,592    | )                          |       | (121,389                        | )          |             | (24,035    | ) |   | 71,762 |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Net Cash (Used in) Provided by Operating Activities       |       |                     | (25,813    | )                          |       | (121,610                        | )          |             | (25,314    | ) |   | 70,483 |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Net borrowings under line of credit agreements            |       |                     | 19,685     |                       |       | —                          |       |             | 38,300     |   |   | — |   |   | — |   |   |   | — |   |   |   | 57,985 |   |   | — |   |
| Borrowings under line of credit agreements                |       |                     | —     |                       |       | 213,228                         |       |             | —     |   |   | 414,838 |   |   | — |   |   |   | — |   |   |   | — |   |   | 628,066 |   |
| Payments under line of credit agreements                  |       |                     | —     |                       |       | (193,543                        | )          |             | —     |   |   | (376,538 | ) |   | — |   |   |   | — |   |   |   | — |   |   | (570,081 | ) |
| Net borrowings on trade payable program liability         |       |                     | 11,156     |                       |       | —                          |       |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | 11,156 |   |   | — |   |
| Borrowings on trade payable program liability             |       |                     | —     |                       |       | 107,618                         |       |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   | 107,618 |   |
| Payments on trade payable program   liability             |       |                     | —     |                       |       | (96,462                         | )          |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   | (96,462 | ) |
| Intercompany borrowings (payments)                        |       |                     | (46,322    | )                          |       | 49,475                          |       |             | 45,005     |   |   | (50,792 | ) |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Net Cash (Used in) Provided by Financing Activities       |       |                     | (30,689    | )                          |       | 65,108                          |       |             | 83,305     |   |   | (12,492 | ) |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| **Year  Ended January 29, 2005**                          |       |                     |       |                       |       |                            |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Earnings (Loss)                                       |       |                     | $          | —                     |       |                            | $          | —           |       |   | $ | 129,770 |   |   | $ | 64,812 |   |   | $ | (127,080 | ) |   |   | $ | (62,122 | ) |   |   | $ | — |   |   | $ | — |   |
| Equity in earnings of subsidiaries                        |       |                     | (144,798   | )                          |       | (62,122                         | )          |             | 32,718     |   |   | — |   |   | 112,080 |   |   |   | 62,122 |   |   |   | — |   |   | — |   |
| Decrease in accounts payable                              |       |                     | (24,387    | )                          |       | (31,624                         | )          |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | (24,387 | ) |   | (31,624 | ) |
| Dividends received from subsidiary                        |       |                     | —     |                       |       | 15,000                          |       |             | —     |   |   | — |   |   | — |   |   |   | (15,000 | ) |   |   | — |   |   | — |   |
| Net cash (used in) provided by continuing operations      |       |                     | (137,521   | )                          |       | (47,082                         | )          |             | 191,188    |   |   | 93,512 |   |   | — |   |   |   | — |   |   |   | 48,183 |   |   | 40,946 |   |
| Net Cash (Used in) Provided by Operating Activities       |       |                     | (138,000   | )                          |       | (47,561                         | )          |             | 188,935    |   |   | 91,259 |   |   | — |   |   |   | — |   |   |   | 45,451 |   |   | 38,214 |   |
| Net borrowings under line of credit agreements            |       |                     | 2,768      |                       |       | —                          |       |             | 5,334      |   |   | — |   |   | — |   |   |   | — |   |   |   | 8,102 |   |   | — |   |
| Borrowings under line of credit agreements                |       |                     | —     |                       |       | 228,155                         |       |             | —     |   |   | 438,966 |   |   | — |   |   |   | — |   |   |   | — |   |   | 667,121 |   |
| Payments under line of credit agreements                  |       |                     | —     |                       |       | (225,387                        | )          |             | —     |   |   | (433,632 | ) |   | — |   |   |   | — |   |   |   | — |   |   | (659,019 | ) |
| Net payments on trade payable program liability           |       |                     | (7,216     | )                          |       | —                          |       |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | (7,216 | ) |   | — |   |
| Borrowings on trade payable program liability             |       |                     | —     |                       |       | 7,237                           |       |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   | 7,237 |   |
| Payments on trade payable program   liability             |       |                     | —     |                       |       | (7,216                          | )          |             | —     |   |   | — |   |   | — |   |   |   | — |   |   |   | — |   |   | (7,216 | ) |
| Intercompany borrowings (payments)                        |       |                     | 161,212    |                       |       | 63,536                          |       |             | (173,965   | ) |   | (76,289 | ) |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Net Cash Provided (Used in) by Financing Activities       |       |                     | 190,699    |                       |       | 100,260                         |       |             | (168,631   | ) |   | (70,955 | ) |   | — |   |   |   | — |   |   |   | 34,281 |   |   | 42,058 |   |

 

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The following table reflects the effects of restatingthe presentation of our borrowings and payments to gross borrowings andpayments versus a net presentation under the line of credit agreements and ourvendor financing trade payable program in our consolidated statements of cash flowsfor years ended February 3, 2007, January 28, 2006 and January 29, 2005, and correctingthe classification of the borrowings under the vendor financing trade payableprogram for the fiscal year ended January 29, 2005, which resulted in a decreasein cash flows provided by operating activities and a corresponding increase incash flows provided by financing activities in the amount of $7,237.

| ** **                                                            | ** ** | **February 3, 2007**     | ** ** | **January 28, 2006** | ** ** | **January 29, 2005**     | ** ** |         |
|-----------------------------------------------------------------------|------------|--------------------------|------------|----------------------|------------|--------------------------|------------|--------------|
| ** **                                                            | ** ** | **Previously  Reported** | ** ** | **Restated**         | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |   |
| **Consolidated Statement of Cash Flows**                              | ** ** |                     | ** ** | ** **           |       | ** **               | ** ** |         | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| Increase (decrease) in accounts   payable                             |       |                     | $          | —               |       |                     | $          | —       |   |   | $ | — | ** ** |   | $ | — |   |   | $ | (24,387 | ) |   | $ | (31,624 | ) |
| Net Cash Provided by (Used in) Continuing Operations                  |       |                     | —     |                 |       | —                   |       |         | — | ** ** |   | — |   |   | 48,183 |   |   | 40,946 |   |
| Net Cash Provided by (Used in) Operating Activities                   |       |                     | —     |                 |       | —                   |       |         | — | ** ** |   | — |   |   | 45,451 |   |   | 38,214 |   |
| Net (payments) borrowings under line of credit agreement              |       |                     | (48,569    | )                    |       | —                   |       |         | 57,985 | ** ** |   | — |   |   | 8,102 |   |   | — |   |
| Borrowings under  line of credit agreements                           |       |                     | —     |                 |       | 586,993                  |       |         | — | ** ** |   | 628,066 |   |   | — |   |   | 667,121 |   |
| Payments under line of credit agreements                              |       |                     | —     |                 |       | (635,562                 | )          |         | — | ** ** |   | (570,081 | ) |   | — |   |   | (659,019 | ) |
| Net borrowings (payments) under trade payable  program liability |       |                     | 2,834      |                 |       | —                   |       |         | 11,156 | ** ** |   | — |   |   | (7,216 | ) |   | — |   |
| Borrowings under trade payable program liability                      |       |                     | —     |                 |       | 76,713                   |       |         | — | ** ** |   | 107,618 |   |   | — |   |   | 7,237 |   |
| Payments under trade payable program liability                   |       |                     | —     |                 |       | (73,879                  | )          |         | — | ** ** |   | (96,462 | ) |   | — |   |   | (7,216 | ) |
| Net Cash  Provided by (Used in) Financing Activities                  |       |                     | —     |                 |       | —                   |       |         | — | ** ** |   | — |   |   | 34,821 |   |   | 42,058 |   |
|                                                                       |            |                          |            |                      |            |                          |            |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 9**                   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A**           CONTROLSAND PROCEDURES

*DisclosureControls and Procedures**  *The Company’s management re-evaluated, with theparticipation of its principal executive officer and principal financialofficer, the effectiveness of its disclosure controls and procedures as of theend of the period covered by this report. Disclosure controls and proceduresmean the Company’s controls and other procedures that are designed to ensurethat information required to be disclosed by the Company in its reports thatthe Company files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by the Company in its reports that the Companycommunicated to its management, including its principal executive officer andprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure. The Company’s management recognizes that any controls andprocedures, no matter how well designed and operated, can only providereasonable assurance of achieving their objectives and management necessarilyapplies its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. Based upon the re-evaluation of the Company’sdisclosure controls and procedures, as of the end of the period covered by thisreport, the Company’s principal executive officer and principal financialofficer concluded that, as of such date, the Company’s disclosure controls andprocedures were not effective at the reasonable assurance level, solely due tothe fact that there was a material weakness in our internal control overfinancial reporting (which is a subset of disclosure controls and procedures)related to preparation and review of the Company’s supplemental guarantorinformation note and consolidated statements of cash flows presentation whichresulted in the errors described in Note 18.

The identification of the material weakness discussedabove during the quarter ended February 3, 2007 is a change that materiallyaffected the Company’s internal control over financial reporting. Additionally,the Company made the following change that materially affected its internal controlover financial reporting.

Through fiscal 2005, actual gross profit frommerchandise sales was determined once a year following a physical inventorycount taken the last day of the fiscal year. In the fourth quarter of fiscal2006, the Company introduced a new process for counting its inventory, wherebyphysical counts were taken throughout the fourth quarter and an estimate forinventory shrinkage was recorded for the period between the actual physicalcount date and fiscal year end. Other than this change, the Company made noother changes to its internal controls over financial reporting for the quarterended February 3, 2007.

Other than these changes,the Company made no other changes to its internal control over financialreporting for the quarter ended February 3, 2007.

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING AS REVISED**

Management of The Pep Boys-Manny, Moe and Jack (theCompany) is responsible for establishing and maintaining adequate internalcontrol over financial reporting. The Company’s internal control over financialreporting is a process designed under the supervision of the Company’sprincipal executive officer and principal financial officer to providereasonable assurance regarding the reliability of financial reporting and thepreparation of the Company’s financial statements for external purposes inaccordance with accounting principles generally accepted in the United Statesof America.

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The Company’s internal control over financialreporting includes policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company;(2) provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of theCompany are being made only in accordance with authorizations of management anddirectors of the Company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the Company’s assets that could have a material effect on the financialstatements.

As a result of the restatement discussed in Note 18 tothe consolidated financial statements, management reassessed the effectivenessof the Company’s internal control over financial reporting as ofFebruary 3, 2007 based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Based on this reassessment, management determined that theCompany’s internal control over financial reporting as of February 3, 2007was not effective due to a material weakness related to the preparation andreview of the Company’s supplemental guarantor note and the consolidated statementsof cash flows presentation. A material weakness is a deficiency, or acombination of deficiencies, in internal control over financial reporting, suchthat there is a reasonable possibility that a material misstatement of theCompany’s annual or interim financial statements will not be prevented ordetected on a timely basis. Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Deloitte & Touche LLP, the Company’sindependent registered public accounting firm, has issued an attestationreport, which is included on page 80 herein, on management’s revisedassessment of the Company’s internal control over financial reporting as ofFebruary 3, 2007.

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofThe Pep Boys—Manny, Moe & JackPhiladelphia, Pennsylvania

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control over Financial Reporting (as revised), that The Pep Boys—Manny,Moe & Jack and subsidiaries (the “Company”) did not maintain effectiveinternal control over financial reporting as of February 3, 2007 because of theeffects of the material weakness identified in management’s assessment, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similar functions,and effected by the company’s board of directors, management, and otherpersonnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

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In our report datedApril 18, 2007, we expressed an unqualified opinion on management’sassessment that the Company maintained effective internal control overfinancial reporting and an unqualified opinion on the effectiveness of internalcontrol over financial reporting. As described in the following paragraph, theCompany subsequently identified a material weakness, which caused the annualand interim consolidated financial statements to be restated, as described inNote 18. Accordingly, management subsequently revised its assessment about theeffectiveness of the Company’s internal control over financial reporting andour present opinion on the effectiveness of the Company’s internal control overfinancial reporting as of February 3, 2007 expressed herein is differentfrom that expressed in our previous report.

A material weakness is adeficiency, or a combination of deficiencies, in internal control overfinancial reporting, such that there is a reasonable possibility that amaterial misstatement of the Company’s annual or interim financial statementswill not be prevented or detected on a timely basis. The following materialweakness has been identified and included in management’s revised assessment:

·       There were ineffectivecontrols regarding the preparation and review of the Company’s supplementalguarantor note and the consolidated statements of cash flows presentation. As aresult, the Company failed to detect errors in the recorded amounts in suchnote and consolidated statements of cash flows, as discussed in Note 18, whichwere material to the consolidated financial statements.

This material weakness wasconsidered in determining the nature, timing, and extent of audit tests appliedin our audit of the consolidated financial statements as of and for the yearended February 3, 2007, of the Company and this report does not affect ourreport on such financial statements and financial statement schedule.

In our opinion,management’s revised assessment that the Company did not maintain effectiveinternal control over financial reporting as of February 3, 2007, isfairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, because of theeffects of the material weakness discussed above on the achievement of thecontrol objectives of the control criteria, the Company has not maintainedeffective internal control over financial reporting as of February 3,2007, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements andfinancial statement schedule as of and for the year ended February 3, 2007of the Company and our report, dated April 18, 2007 (October 29, 2007as to the effects of the restatement discussed in Note 18), expressed anunqualified opinion on those consolidated financial statements and financialstatement schedule and included explanatory paragraphs relating to therestatement discussed in Note 18 and the Company’s adoption of Statement ofFinancial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, SFAS No. 123(revised 2004), Share-Based Payment, and Financial Accounting Standards BoardInterpretation No. 47, Accounting for Conditional Asset RetirementObligations, as of February 3, 2007, January 29, 2006, andJanuary 28, 2006, respectively.

Deloitte &Touche LLP

Philadelphia,PennsylvaniaApril 18, 2007 (October 29, 2007 as to the effects of the material weaknessdiscussed in Management’s Report on Internal Control Over Financial Reporting,as revised)

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**ITEM 9B**          OTHERINFORMATION

None.

**PART III**

**ITEM 10**            DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The material contained in the registrant’s definitiveproxy statement, which will be filed pursuant to Regulation 14A not later than120 days after the end of the Company’s fiscal year (the “Proxy Statement”),under the captions “—Nominees for Election”, “—Corporate Governance” and“SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” is herebyincorporated herein by reference.

The information regarding executive officers calledfor by Item 401 of Regulation S-K is included in Part I of thisForm 10-K, in accordance with General Instruction G (3).

The Company had adopted a Code of Ethics applicable toall of its associates including its executive officers. The Code of Ethics,together with any amendments thereto or waivers thereof, are posted on theCompany’s website www.pepboys.com under the “About Pep Boys—CorporateGovernance” section.

In addition, the Board ofDirectors Code of Conduct and the charters of our audit, human resources andnominating and governance committees may also be found under the “About PepBoys—Corporate Governance” section of our website. As required by the New YorkStock Exchange (NYSE), promptly following our 2006 Annual Meeting, our theninterim CEO certified to the NYSE that he was not aware of any violation by PepBoys of NYSE corporate governance listing standards. Copies of our corporategovernance materials are available free of charge from our investor relationsdepartment. Please call 215-430-9720 or write Pep Boys, InvestorRelations, 3111 West Allegheny Avenue, Philadelphia, PA 19132.

**ITEM 11**            EXECUTIVECOMPENSATION

The material in the Proxy Statement under the captions“—How are Directors Compensated?”,“—Director Compensation Table” and “EXECUTIVE COMPENSATION” other than thematerial under “—Compensation Committee Report” is hereby incorporated hereinby reference.

The information regardingequity compensation plans called for by Item 201(d) of Regulation S-K isincluded in Item 5 of this Form 10-K.

**ITEM 12**            SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The material in the ProxyStatement under the caption “SHARE OWNERSHIP” is hereby incorporated herein byreference.

**ITEM 13**            CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The material in the ProxyStatement under the caption “—Certain Relationships and Related Transactions”and “—Corporate Governance” is hereby incorporated herein by reference.

**ITEM 14**            PRINCIPALACCOUNTANT FEES AND SERVICES

The material in the Proxy Statement under the caption“—Registered Public Accounting Firm’s Fees” is hereby incorporated herein byreference.

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**PART IV**

**ITEM 15**            EXHIBITS,FINANCIAL STATEMENT SCHEDULES

(a)           Thefollowing documents are filed as part of this report:
|        | ** ** | ** **                                                                                                                                                                                      | ** ** | Page   |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|
| 1.     |       | The following  consolidated financial statements of The Pep Boys—Manny, Moe & Jack  are included in Item 8                                                                   |       |   |   |   |
|   |       | Report  of Independent Registered Public Accounting Firm                                                                                                                                        |       |   | 31 |   |
|   |       | Consolidated  Balance Sheets—February 3, 2007 and January 28, 2006                                                                                                               |       |   | 32 |   |
|   |       | Consolidated  Statements of Operations—Years ended February 3, 2007, January 28,  2006 and January 29, 2005                                                            |       |   | 33 |   |
|   |       | Consolidated  Statements of Stockholders’ Equity—Years ended February 3, 2007,  January 28, 2006 and January 29, 2005                                                  |       |   | 34 |   |
|   |       | Consolidated  Statements of Cash Flows (Restated)—Years ended February 3, 2007,  January 28, 2006 and January 29, 2005                                                 |       |   | 35 |   |
|   |       | Notes  to Consolidated Financial Statements                                                                                                                                                     |       |   | 36 |   |
| 2.     |       | The following  consolidated financial statement schedule of                                                                                                                                     |       |   |   |   |
|   |       | The Pep Boys—Manny, Moe & Jack is included                                                                                                                                        |       |   |   |   |
|   |       | Schedule  II Valuation and Qualifying Accounts and Reserves                                                                                                                                     |       |   | 90 |   |
|   |       | 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                                                                                                                                                                                        |       |   |   |   |

p

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| (3.1)   |   | Articles of Incorporation, as amended                                                                                                           |   | Incorporated by reference from the Company’s  Form 10-K for the fiscal year ended January 30, 1988.                        |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
| (3.2)   |   | By-Laws, as amended                                                                                                                             |   | Incorporated by  reference from the Registration Statement on Form S-3 (File  No. 33-39225).                                    |
| (3.3)   |   | Amendment to By-Laws  (Declassification of Board of Directors)                                                                                  |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  January 29, 2000.                       |
| (4.1)   |   | Indenture dated  May 21, 2002, between the Company and Wachovia Bank, National  Association, as Trustee, including form of security.  |   | Incorporated by  reference from the Registration Statement on Form S-3 (File  No. 333-98255).                                   |
| (4.2)   |   | Indenture, dated  December 14, 2004, between the Company and Wachovia Bank, National  Association, as trustee, including form of security. |   | Incorporated by  reference from the Company’s Form 8-K dated December 15,  2004.                                           |
| (4.3)   |   | Supplemental Indenture,  dated December 14, 2004, between the Company and Wachovia Bank, National  Association, as trustee.                |   | Incorporated by  reference from the Company’s Form 8-K dated December 15,  2004.                                           |
| (4.4)   |   | Rights Agreement dated  as of December 5, 1997 between the Company and First Union National  Bank                                     |   | Incorporated by reference  from the Company’s Form 8-K dated December 8, 1997.                                             |
| (4.5)   |   | Amendment to Rights  Agreement dated as of August 18, 2006 between the Company and the Rights  Agent                                       |   | Incorporated by  reference from the Company’s Registration Statement on form 8-A/A  (Amendment No. 2) filed on august 21, 2006. |
| (4.6)   |   | Dividend Reinvestment  and Stock Purchase Plan dated January 4, 1990                                                                       |   | Incorporated by  reference from the Registration Statement on Form S-3 (File  No. 33-32857).                                    |
| (10.1)* |   | Medical Reimbursement  Plan of the Company                                                                                                      |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  January 31, 1982.                       |
| (10.2)* |   | Directors’ Deferred  Compensation Plan, as amended                                                                                         |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  January 30, 1988.                       |
| (10.3)* |   | Form of Employment  Agreement (Change of Control) between the Company and certain officers of the  Company.                                |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  October 31, 1998.                           |
| (10.4)* |   | Change of Control  Agreement dated as of February 10, 2006 between the Company and Harry F.  Yanowitz.                                     |   | Incorporated by  reference from the Company’s Form 8-K filed on February 13,  2006.                                        |

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| (10.5)*  |   | Form of Non-Competition Agreement between the  Company and certain officers of the Company.                           |   | Incorporated by reference from the Company’s  Form 8-K filed on February 10, 2006.                   |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
| (10.6)*  |   | Employment Agreement  dated March 13, 2007 between the Company and Jeffrey C. Rachor.                                 |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended February 3,  2007. |
| (10.7)*  |   | The Pep Boys—Manny, Moe  and Jack 1990 Stock Incentive Plan—Amended and Restated as of March 26,  2001.     |   | Incorporated by  reference from the Company’s Form 10-K for the year ended  February 1, 2003.        |
| (10.8)*  |   | The Pep Boys—Manny, Moe and  Jack 1999 Stock Incentive Plan—amended and restated as of September 15,  2005. |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  October 29, 2005.     |
| (10.9)*  |   | The Pep Boys—Manny,  Moe & Jack Pension Plan—Amended and Restated as of  September 10, 2001.       |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  February 1, 2003  |
| (10.10)* |   | The Pep Boys-Manny,  Moe & Jack Pension Plan Amendment 2005-1                                                     |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  February 3, 2007. |
| (10.11)* |   | Long-Term Disability  Salary Continuation Plan amended and restated as of March 26, 2002.                             |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  February 1, 2003. |
| (10.12)* |   | Amendment and  restatement as of September 3, 2002 of The Pep Boys Savings Plan.                                      |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  November 2, 2002.     |
| (10.13)* |   | The Pep Boys Savings  Plan Amendment 2004-1                                                                                |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  January 31, 2004. |
| (10.14)* |   | The Pep Boys Savings  Plan Amendment 2005-1                                                                                |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  February 3, 2007. |
| (10.15)* |   | Amendment and restatement  as of September 3, 2002 of The Pep Boys Savings Plan—Puerto Rico.                     |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  November 2, 2002.     |
| (10.16)* |   | The Pep Boys Deferred  Compensation Plan                                                                                   |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  January 31, 2004. |

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| (10.17)* |   | The Pep Boys Annual Incentive Bonus Plan (amended  and restated as of December 9, 2003)                                                                                                                                                                                                                         |   | Incorporated by reference from the Company’s  Form 10-K for the fiscal year ended January 31, 2004.  |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
| (10.18)* |   | Amendment to and  Restatement of the Executive Supplemental Pension Plan, effective as of  January 31, 2004.                                                                                                                                                                                               |   | Incorporated by  reference from The Company’s Form 10-Q for the quarter ended  May 1, 2004.          |
| (10.19)  |   | Flexible Employee  Benefits Trust                                                                                                                                                                                                                                                                                    |   | Incorporated by  reference from the Company’s Form 8-K filed May 6, 1994.                            |
| (10.20)  |   | The Pep Boys Grantor  Trust Agreement                                                                                                                                                                                                                                                                                |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  February 3, 2007. |
| (10.21)  |   | Amended and Restated  Loan and Security Agreement, dated August 1, 2003, by and among the  Company, Congress Financial Corporation, as Agent, The CIT Group/Business  Credit, Inc. and General Electric Capital Corporation, as  Co-Documentation Agents, and the Lenders from time to time party thereto. |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  August 2, 2003.       |
| (10.22)  |   | Amendment No. 1,  dated October 24, 2003, to the Amended and Restated Loan and Security  Agreement, by and among the Company, Congress Financial Corporation, as  Agent, and the other parties thereto.                                                                                                    |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  November 1, 2003.     |
| (10.23)  |   | Amendment No. 2,  dated October 15, 2004, to the Amended and Restated Loan and Security  Agreement, by and among the Company, Congress Financial Corporation, as  Agent, and the other parties thereto.                                                                                                    |   | Incorporated by  reference from the Company’s Form 8-K filed December 3, 2004.                       |
| (10.24)  |   | Amendment No. 3,  dated December 2, 2004, to the Amended and Restated Loan and Security  Agreement, by and among the Company, Congress Financial Corporation, as  Agent, and the other parties thereto.                                                                                                    |   | Incorporated by  reference from the Company’s Form 8-K filed December 3, 2004.                       |
| (10.25)  |   | Amendment No. 4,  dated November 16, 2005, to the Amended and Restated Loan and Security  Agreement, by and among the Company, Congress Financial Corporation, as  Agent, and the other parties thereto.                                                                                                   |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  February 3, 2007. |
| (10.26)  |   | Amendment No. 5,  dated January 27, 2006, to the Amended and Restated Loan and Security  Agreement, by and among the Company, Congress Financial Corporation, as  Agent, and the other parties thereto.                                                                                                    |   | Incorporated by  reference from the Company’s Form 8-K filed January 30, 2006.                       |
| (10.27)  |   | Amendment No. 6,  dated September 22, 2006, to the Amended and Restated Loan and Security  Agreement, by and among the Company, Wachovia Bank, National Association,  successor-in-interest to Congress Financial Corporation, as Agent, and the  other parties thereto.                                   |   | Incorporated by  reference from the Company’s Form 8-K filed October 30, 2006.                       |

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| (10.28) |   | Participation Agreement, dated as of August 1,  2003, among the Company, Wachovia Development Corporation, as the Borrower  and the Lessor, the Lenders and Wachovia Bank, National Association, as Agent  for the Lenders and the Secured Parties. |   | Incorporated by reference from the Company’s  Form 10-Q for the quarter ended August 2, 2003.        |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
| (10.29) |   | Amended and Restated  Lease Agreement, dated as of August 1, 2003, between Wachovia  Development Corporation, as Lessor, and the Company.                                                                                                           |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  August 2, 2003.       |
| (10.30) |   | Trade Agreement, dated  October 18, 2004, between the Company and GMAC Commercial Finance, LLC.                                                                                                                                                     |   | Incorporated by  reference from the Company’s Form 8-K dated October 19, 2004.                       |
| (10.31) |   | Master Lease Agreement,  dated October 18, 2004, between the Company and with RBS  Lombard, Inc.                                                                                                                                               |   | Incorporated by reference  from the Company’s Form 8-K dated October 19, 2004.                       |
| (10.32) |   | Amended and Restated  Credit Agreement, dated October 27, 2006, among the Company, Wachovia  Bank, National Association, as Administrative Agent, and the other parties  thereto.                                                                   |   | Incorporated by  reference from the Company’s Form 8-K filed October 30, 2006.                       |
| (10.33) |   | First Amendment dated  February 15, 2007 to Amended and Restated Credit Agreement, dated  October 27, 2006, among the Company, Wachovia Bank, National  Association, as Administrative Agent, and the other parties thereto.                   |   | Incorporated by  reference from the Company’s Form 8-K filed February 16,  2007.                     |
| (12.00) |   | Computation of Ratio of  Earnings to Fixed Charges                                                                                                                                                                                                       |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  February 3, 2007. |
| (21.00) |   | Subsidiaries of the  Company                                                                                                                                                                                                                             |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  February 3, 2007. |
| (23.00) |   | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                |   |                                                                                                                |
| (31.1)  |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                |   |                                                                                                                |
| (31.2)  |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                |   |                                                                                                                |
| (32.1)  |   | Chief Executive Officer  Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                          |   |                                                                                                                |
| (32.2)  |   | Chief Financial Officer  Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                          |   |                                                                                                                |
| (b)     |   | None                                                                                                                                                                                                                                                     |   |                                                                                                                |

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*                    Management contractor compensatory plan or arrangement.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this Amendment No. 1 to the Annual Report of Form 10-K/A to be signed onits behalf by the undersigned, thereunto duly authorized.
|                         | THE PEP BOYS—MANNY,  MOE & JACK |
|-------------------------|-----------------------------------------------|
|                    | (Registrant)                                  |
|                    | by:                                           | /s/  HARRY F. YANOWITZ |
| Dated: November 2, 2007 | ** **                                    | **Harry  F. Yanowitz** |
|                    | ** **                                    | ***Senior Vice President and  Chief Financial Officer*** |

 

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Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
|                           | **SIGNATURE** | ** **                                                   | ** ** | **CAPACITY**     | ** ** | ** ** | ** ** | **DATE** | ** ** | ** ** |
|---------------------------|---------------|--------------------------------------------------------------|------------|------------------|------------|------------|------------|----------|------------|------------|
| /s/ JEFFREY  C. RACHOR    |          | President &  Chief Executive Officer & Director |       | November 2, 2007 |
| Jeffrey C. Rachor         |          | (Principal Executive Officer)                                |       |             |
| /s/ HARRY  F. YANOWITZ    |          | Senior Vice President  and Chief Financial Officer           |       | November 2, 2007 |
| Harry F. Yanowitz         |          | (Principal Financial Officer)                                |       |             |
| /s/ BERNARD  K. MCELROY   |          | Chief Accounting Officer  and Treasurer                      |       | November 2, 2007 |
| Bernard K. McElroy        |          | (Principal Accounting Officer)                               |       |             |
| /s/  WILLIAM LEONARD      |          | Chairman of the Board                                        |       | November 2, 2007 |
| William Leonard           |          |                                                         |       |             |
| /s/ M. SHÂN  ATKINS  |          | Director                                                     |       | November 2, 2007 |
| M. Shân Atkins       |          |                                                         |       |             |
| /s/ PETER  A. BASSI       |          | Director                                                     |       | November 2, 2007 |
| Peter A. Bassi            |          |                                                         |       |             |
| /s/ ROBERT  H. HOTZ       |          | Director                                                     |       | November 2, 2007 |
| Robert H. Hotz            |          |                                                         |       |             |
| /s/ THOMAS  R. HUDSON Jr. |          | Director                                                     |       | November 2, 2007 |
| Thomas R. Hudson Jr.      |          |                                                         |       |             |
| /s/ JAMES  A. MITAROTONDA |          | Director                                                     |       | November 2, 2007 |
| James A. Mitarotonda      |          |                                                         |       |             |
| /s/ JANE  SCACCETTI       |          | Director                                                     |       | November 2, 2007 |
| Jane Scaccetti            |          |                                                         |       |             |
| /s/ JOHN  T. SWEETWOOD    |          | Director                                                     |       | November 2, 2007 |
| John T. Sweetwood         |          |                                                         |       |             |
| /s/ NICK  WHITE           |          | Director                                                     |       | November 2, 2007 |
| Nick White                |          |                                                         |       |             |
| /s/ JAMES  A. WILLIAMS    |          | Director                                                     |       | November 2, 2007 |
| James A. Williams         |          |                                                         |       |             |

 

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**FINANCIAL STATEMENTSCHEDULES FURNISHED PURSUANT TO THE REQUIREMENTS OF FORM 10-K**

**THE PEP BOYS—MANNY,MOE & JACK AND SUBSIDIARIES**

**SCHEDULEII—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

*** ***

| **Column A**                     | ** ** | ** **              | ** ** | **Column B**                              | ** ** | **Column C**                                        | ** ** | **Column D**                                     | ** ** | **Column E** | ** ** |
|---------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------|------------|
| **Description**                       | ** ** | ** **              | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Additions  Charged to  Other   Accounts** | ** ** | **Deductions(1)** | ** ** | **Balance at  End of  Period** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
| **ALLOWANCE FOR DOUBTFUL  ACCOUNTS:** |       |                    |       |                                           |       |                                                     |       |                                                  |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Year Ended  February 3, 2007     |       |                    | $          | 1,188                                          |       |                                                     |       | $                                                     | 2,317      |              |       |   | $ | — |   |   |   | $ | 2,000 |   |   |   | $ | 1,505 |   |   |
| Year Ended  January 28, 2006     |       |                    | $          | 1,030                                          |       |                                                     |       | $                                                     | 1,733      |              |       |   | $ | — |   |   |   | $ | 1,575 |   |   |   | $ | 1,188 |   |   |
| Year Ended  January 29, 2005     |       |                    | $          | 739                                            |       |                                                     |       | $                                                     | 1,831      |              |       |   | $ | — |   |   |   | $ | 1,540 |   |   |   | $ | 1,030 |   |   |
|                                       |            |                         |            |                                                |            |                                                          |            |                                                       |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)**         **Uncollectible accounts written off.

| **Column A**                 | ** ** | ** ** | ** ** | **Column B**                              | ** ** | **Column C**                                        | ** ** | **Column D**                                        | ** ** | **Column E** | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------|------------|
| **Description**                   | ** ** | ** ** | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Additions  Charged to  Other   Accounts(2)** | ** ** | **Deductions(3)** | ** ** | **Balance at  End of  Period** | ** ** |
| **SALES RETURNS AND ALLOWANCES:** |       |       |       |                                           |       |                                                     |       |                                                     |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Year Ended  February 3, 2007 |       |       | $          | 1,726                                          |       |                                                     |       | $                                                        | —     |              |       |   | $ | 91,644 |   |   |   | $ | 92,074 |   |   |   | $ | 1,296 |   |   |
| Year Ended  January 28, 2006 |       |       | $          | 1,459                                          |       |                                                     |       | $                                                        | —     |              |       |   | $ | 96,010 |   |   |   | $ | 95,743 |   |   |   | $ | 1,726 |   |   |
| Year Ended  January 29, 2005 |       |       | $          | 1,217                                          |       |                                                     |       | $                                                        | —     |              |       |   | $ | 104,767 |   |   |   | $ | 104,525 |   |   |   | $ | 1,459 |   |   |
|                                   |            |            |            |                                                |            |                                                          |            |                                                          |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(2)**         **Additions charged to merchandise sales.

(3)**         **Actual returns and allowance

90

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