Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                               | ** ** | **Quarterly Report Pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934**  |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                |       |                                                                                                    |
| **For the quarterly period ended May 2, 2009** |
|                                                |       |                                                                                                    |
| **OR**                                              |
|                                                |       |                                                                                                    |
| **o**                                               | ** ** | **Transition Report Pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from            to           **

 

**CommissionFile No. 1-3381**

 

**The PepBoys - Manny, Moe & Jack**

(Exact name of registrant as specified inits charter)

 

| **Pennsylvania**                            | ** ** | **23-0962915**              |
|---------------------------------------------|------------|-----------------------------|
| (State or other jurisdiction of             |       | (I.R.S. Employer ID number) |
| incorporation or organization)              |       |                        |
|                                        |       |                        |
| **3111 W. Allegheny Ave. Philadelphia, PA** | ** ** | **19132**                   |
| (Address of principal executive offices)    |       | (Zip code)                  |

 

**215-430-9000**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities and Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports); and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o No o

 

Indicateby checkmark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o |   | Accelerated filer x         |
|----------------------------|--------|----------------------------------|
|                       |   |                             |
| Non-accelerated filer o    |   | Smaller reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o  No  x

 

As of May 29, 2009 there were 52,302,443shares of the registrant’s Common Stock outstanding.

 

 

 

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Table ofContents

 

Index

 
| ** **                          | ** ** | ** **                                                                                                                                      | **Page** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION |       |
|                                |       |                                                                                                                                            |     |
| Item 1.                             |       | Condensed Consolidated  Financial Statements (Unaudited)                                                                                        |     |
|                                |       |                                                                                                                                            |     |
|                                |       | Condensed Consolidated  Balance Sheets — May 2, 2009 and January 31, 2009                                                        | 2        |
|                                |       |                                                                                                                                            |     |
|                                |       | Condensed Consolidated  Statements of Operations and Changes in Retained Earnings - Thirteen Weeks  Ended May 2, 2009 and May 3, 2008 | 3        |
|                                |       |                                                                                                                                            |     |
|                                |       | Condensed Consolidated  Statements of Cash Flows — Thirteen Weeks Ended May 2, 2009 and  May 3, 2008                             | 4        |
|                                |       |                                                                                                                                            |     |
|                                |       | Notes to  Condensed Consolidated Financial Statements                                                                                           | 5-18     |
|                                |       |                                                                                                                                            |     |
| Item 2.                             |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                     | 19-23    |
|                                |       |                                                                                                                                            |     |
| Item 3.                             |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                     | 23       |
|                                |       |                                                                                                                                            |     |
| Item 4.                             |       | Controls and  Procedures                                                                                                                        | 25       |
|                                |       |                                                                                                                                            |     |
| Item 5.                             |       | Other Information                                                                                                                               | 25       |
|                                |       |                                                                                                                                            |     |
| PART II - OTHER  INFORMATION   |       |
|                                |       |                                                                                                                                            |     |
| Item 1.                             |       | Legal Proceedings                                                                                                                               | 25       |
|                                |       |                                                                                                                                            |     |
| Item 1A.                            |       | Risk Factors                                                                                                                                    | 26       |
|                                |       |                                                                                                                                            |     |
| Item 2.                             |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                    | 26       |
|                                |       |                                                                                                                                            |     |
| Item 3.                             |       | Defaults Upon  Senior Securities                                                                                                                | 26       |
|                                |       |                                                                                                                                            |     |
| Item 4.                             |       | Submission of  Matters to a Vote of Security Holders                                                                                            | 26       |
|                                |       |                                                                                                                                            |     |
| Item 5.                             |       | Other Information                                                                                                                               | 26       |
|                                |       |                                                                                                                                            |     |
| Item 6.                             |       | Exhibits                                                                                                                                        | 26       |
|                                |       |                                                                                                                                            |     |
| SIGNATURES                          | 27         |
|                                |       |                                                                                                                                            |     |
| INDEX TO EXHIBITS                   | 28         |

 

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Table of Contents

 

PART I- FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated FinancialStatements (Unaudited)

 

THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(dollar amounts in thousands, exceptshare data)

UNAUDITED

 
| ** **                                                                           | ** ** | **May 2, 2009** | ** ** | **January 31, 2009** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|
| **ASSETS**                                                                           |       |                 |       |                      |       |
| Current Assets:                                                                      |       |                 |       |                      |       |
| Cash and cash equivalents                                                            |       | $                    | 21,313     |                      | $          | 21,332 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $1,701 and $1,912 |       | 22,680               |       | 28,831                    |       |
| Merchandise inventories                                                              |       | 556,564              |       | 564,931                   |       |
| Prepaid expenses                                                                     |       | 21,661               |       | 25,390                    |       |
| Other                                                                                |       | 58,757               |       | 62,421                    |       |
| Assets held for disposal                                                             |       | 11,004               |       | 12,653                    |       |
| Total Current Assets                                                                 |       | 691,979              |       | 715,558                   |       |
|                                                                                 |       |                 |       |                      |       |
| Property and Equipment - net                                                         |       | 724,698              |       | 740,331                   |       |
| Deferred income taxes                                                                |       | 77,606               |       | 77,708                    |       |
| Other                                                                                |       | 17,477               |       | 18,792                    |       |
| Total Assets                                                                         |       | $                    | 1,511,760  |                      | $          | 1,552,389 |   |
|                                                                                 |       |                 |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                       |       |                 |       |                      |       |
| Current Liabilities:                                                                 |       |                 |       |                      |       |
| Accounts payable                                                                     |       | $                    | 193,894    |                      | $          | 212,340 |   |
| Trade payable program liability                                                      |       | 28,464               |       | 31,930                    |       |
| Accrued expenses                                                                     |       | 244,764              |       | 254,754                   |       |
| Deferred income taxes                                                                |       | 38,540               |       | 35,848                    |       |
| Current maturities of long-term debt and  obligations under capital lease            |       | 1,150                |       | 1,453                     |       |
| Total Current Liabilities                                                            |       | 506,812              |       | 536,325                   |       |
|                                                                                 |       |                 |       |                      |       |
| Long-term debt and obligations under capital  lease, less current maturities         |       | 332,848              |       | 352,382                   |       |
| Other long-term liabilities                                                          |       | 70,745               |       | 70,322                    |       |
| Deferred gain from asset sales                                                       |       | 167,984              |       | 170,204                   |       |
| 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                                                           |       | 292,434              |       | 292,728                   |       |
| Retained earnings                                                                    |       | 367,882              |       | 358,670                   |       |
| Accumulated other comprehensive loss                                                 |       | (17,823              | )          | (18,075                   | )          |
| Less cost of shares in treasury — 14,059,333  shares and 14,124,021 shares      |       | 218,415              |       | 219,460                   |       |
| Less cost of shares in benefits trust - 2,195,270  shares                            |       | 59,264               |       | 59,264                    |       |
| Total Stockholders’ Equity                                                      |       | 433,371              |       | 423,156                   |       |
| Total Liabilities and Stockholders’ Equity                                      |       | $                    | 1,511,760  |                      | $          | 1,552,389 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

AND CHANGES IN RETAINEDEARNINGS

(dollar amounts in thousands, except pershare amounts)

UNAUDITED

 
| **Thirteen weeks ended**                                   | ** ** | **May 2, 2009** | ** ** | **May 3, 2008** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Merchandise Sales                                                    |       | $                         | 398,177    |                      | $          | 403,334 |   |
| Service Revenue                                                      |       | 98,311                    |       | 94,709                    |       |
| Total Revenues                                                       |       | 496,488                   |       | 498,043                   |       |
| Costs of Merchandise Sales                                           |       | 281,035                   |       | 285,923                   |       |
| Costs of Service Revenue                                             |       | 85,852                    |       | 84,154                    |       |
| Total Costs of Revenues                                              |       | 366,887                   |       | 370,077                   |       |
| Gross Profit from Merchandise Sales                                  |       | 117,142                   |       | 117,411                   |       |
| Gross Profit from Service Revenue                                    |       | 12,459                    |       | 10,555                    |       |
| Total Gross Profit                                                   |       | 129,601                   |       | 127,966                   |       |
| Selling, General and Administrative Expenses                         |       | 108,053                   |       | 119,015                   |       |
| Net Gain from Dispositions of Assets                                 |       | 3                         |       | 5,531                     |       |
| Operating Profit                                                     |       | 21,551                    |       | 14,482                    |       |
| Non-operating Income                                                 |       | 403                       |       | 330                       |       |
| Interest Expense                                                     |       | 1,936                     |       | 5,427                     |       |
| Earnings From Continuing Operations Before Income  Taxes             |       | 20,018                    |       | 9,385                     |       |
| Income Tax Expense                                                   |       | 8,955                     |       | 4,094                     |       |
| Net Earnings From Continuing Operations                              |       | 11,063                    |       | 5,291                     |       |
| Loss From Discontinued Operations, Net of Tax                        |       | (154                      | )          | (619                      | )          |
| Net Earnings                                                         |       | 10,909                    |       | 4,672                     |       |
|                                                                 |       |                      |       |                      |       |
| Retained Earnings, beginning of period                               |       | 358,670                   |       | 406,819                   |       |
| Cumulative effect adjustment for adoption of EITF  06-10, net of tax |       | —                    |       | (1,165                    | )          |
| Cash Dividends                                                       |       | (1,575                    | )          | (3,495                    | )          |
| Effect of Stock Options                                              |       | —                    |       | (12                       | )          |
| Dividend Reinvestment Plan                                           |       | (122                      | )          | —                    |       |
| Retained Earnings, end of period                                     |       | $                         | 367,882    |                      | $          | 406,819 |   |
|                                                                 |       |                      |       |                      |       |
| Basic Earnings Per Share:                                            |       |                      |       |                      |       |
|                                                                 |       |                      |       |                      |       |
| Net Earnings from Continuing Operations                              |       | $                         | 0.21       |                      | $          | 0.10 |   |
| Discontinued Operations, Net of Tax                                  |       | —                    |       | (0.01                     | )          |
| Basic Earnings Per Share                                             |       | $                         | 0.21       |                      | $          | 0.09 |   |
|                                                                 |       |                      |       |                      |       |
| Diluted Earnings Per Share:                                          |       |                      |       |                      |       |
|                                                                 |       |                      |       |                      |       |
| Net Earnings from Continuing Operations                              |       | $                         | 0.21       |                      | $          | 0.10 |   |
| Discontinued Operations, Net of Tax                                  |       | —                    |       | (0.01                     | )          |
| Diluted Earnings Per Share                                           |       | $                         | 0.21       |                      | $          | 0.09 |   |
|                                                                 |       |                      |       |                      |       |
| Cash Dividends Per Share                                             |       | $                         | 0.03       |                      | $          | 0.0675 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts inthousands)

UNAUDITED

 
| **Thirteen weeks ended**                                                | ** ** | **May 2, 2009** | ** ** | **May 3, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Cash Flows from Operating Activities:                                             |       |                      |       |                      |       |
| Net Earnings                                                                      |       | $                         | 10,909     |                      | $          | 4,672 |   |
| Adjustments to reconcile net earnings to net cash  used in continuing operations: |       |                      |       |                      |       |
| Net loss from discontinued operations                                             |       | 154                       |       | 619                       |       |
| Depreciation and amortization                                                     |       | 17,373                    |       | 19,019                    |       |
| Amortization of deferred gain from asset sales                                    |       | (3,049                    | )          | (1,825                    | )          |
| Stock compensation expense                                                        |       | 568                       |       | 1,322                     |       |
| Gain on debt retirement                                                           |       | (6,248                    | )          | (2,883                    | )          |
| Deferred income taxes                                                             |       | 2,646                     |       | 1,437                     |       |
| Gain from dispositions of assets                                                  |       | (3                        | )          | (5,531                    | )          |
| Other                                                                             |       | 181                       |       | 1,511                     |       |
| Changes in Operating Assets and Liabilities:                                      |       |                      |       |                      |       |
| Decrease in accounts receivable, prepaid expenses  and other                      |       | 14,603                    |       | 7,586                     |       |
| Decrease (increase) in merchandise inventories                                    |       | 8,366                     |       | (287                      | )          |
| Decrease in accounts payable                                                      |       | (18,446                   | )          | (15,238                   | )          |
| Decrease in accrued expenses                                                      |       | (9,442                    | )          | (12,281                   | )          |
| Increase (decrease) in other long-term liabilities                                |       | 683                       |       | (2,394                    | )          |
| Net cash provided by (used in) continuing  operations                             |       | 18,295                    |       | (4,273                    | )          |
| Net cash used in discontinued operations                                          |       | (318                      | )          | (58                       | )          |
| Net Cash Provided by (Used in) Operating  Activities                              |       | 17,977                    |       | (4,331                    | )          |
|                                                                              |       |                      |       |                      |       |
| Cash Flows from Investing Activities:                                             |       |                      |       |                      |       |
| Cash paid for property and equipment                                              |       | (5,718                    | )          | (6,942                    | )          |
| Proceeds from dispositions of assets                                              |       | 10                        |       | 132,090                   |       |
| Net cash (used in) provided by continuing  operations                             |       | (5,708                    | )          | 125,148                   |       |
| Net cash provided by discontinued operations                                      |       | 1,758                     |       | —                    |       |
| Net Cash (Used in) Provided by Investing  Activities                              |       | (3,950                    | )          | 125,148                   |       |
|                                                                              |       |                      |       |                      |       |
| Cash Flows from Financing Activities:                                             |       |                      |       |                      |       |
| Borrowings under line of credit agreements                                        |       | 160,498                   |       | 97,909                    |       |
| Payments under line of credit agreements                                          |       | (158,522                  | )          | (139,332                  | )          |
| Borrowings on trade payable program liability                                     |       | 33,871                    |       | 27,222                    |       |
| Payments on trade payable program liability                                       |       | (37,337                   | )          | (22,456                   | )          |
| Payment for finance issuance cost                                                 |       | —                    |       | (93                       | )          |
| Proceeds from lease financing                                                     |       | —                    |       | 4,676                     |       |
| Long-term debt and capital lease obligations  payments                            |       | (11,110                   | )          | (18,905                   | )          |
| Dividends paid                                                                    |       | (1,575                    | )          | (3,495                    | )          |
| Other                                                                             |       | 129                       |       | 8                         |       |
| Net Cash Used in Financing Activities                                             |       | (14,046                   | )          | (54,466                   | )          |
| Net (Decrease) Increase in Cash and Cash  Equivalents                             |       | (19                       | )          | 66,351                    |       |
| Cash and Cash Equivalents at Beginning of Period                                  |       | 21,332                    |       | 20,926                    |       |
| Cash and Cash Equivalents at End of Period                                        |       | $                         | 21,313     |                      | $          | 87,277 |   |
|                                                                              |       |                      |       |                      |       |
| Supplemental Disclosure of Cash Flow Information:                                 |       |                      |       |                      |       |
| Cash paid for income taxes                                                        |       | $                         | 831        |                      | $          | — |   |
| Cash paid for interest, net of amounts capitalized                                |       | $                         | 3,830      |                      | $          | 3,994 |   |
| Accrued purchases of property and equipment                                       |       | $                         | 599        |                      | $          | 3,689 |   |

 

See notes to condensed consolidated financialstatements.

 

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THEPEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

 

(DollarAmounts in Thousands)

 

NOTE1. Condensed Consolidated Financial Statements

 

Thecondensed consolidated balance sheet as of May 2, 2009, the condensedconsolidated statements of operations and changes in retained earnings for thethirteen week periods ended May 2, 2009 and May 3, 2008 and thecondensed consolidated statements of cash flows for the thirteen week periodsended May 2, 2009 and May 3, 2008 are unaudited. In the opinion ofmanagement, all adjustments necessary to present fairly the financial position,results of operations and cash flows at May 2, 2009 and for all periodspresented have been made.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted, as permitted by Rule 10-01of the Securities and Exchange Commission’s Regulation S-X, “Interim FinancialStatements.” It is suggested that these condensed consolidated financialstatements be read in conjunction with the financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended January 31, 2009. The results of operations for thethirteen weeks ended May 2, 2009 are not necessarily indicative of theoperating results for the full fiscal year.

 

Our fiscal year ends on the Saturday nearest January 31.Accordingly, references to fiscal years 2008 and 2009 refer to the years ended January 31,2009 and January 30, 2010, respectively.

 

NOTE2. New Accounting Standards

 

EffectiveFebruary 1, 2009, the Company adopted Statement of Financial AccountingStandards (SFAS) No.161, “Disclosures about Derivative Instruments and HedgingActivities—an amendment of FASB Statement No.133” (SFAS No.161). SFAS No.161requires increased qualitative, quantitative, and credit-risk disclosures.Qualitative disclosures include how and why an entity uses derivatives orhedging activity, how the entity is accounting for these activities and how theinstruments affect the entity’s financial position, financial performance andcash flows. Quantitative disclosures include information (in a tabular format)about the fair value of the derivative instruments, including gains and losses,and should contain more detailed information about the location of the derivativeinstrument in the entity’s financial statements. Credit-risk disclosuresinclude information about the existence and nature of credit risk-relatedcontingent features included in derivative instruments. Credit-risk-relatedcontingent features can be defined as those that require entities, upon theoccurrence of a credit event (e.g., credit rating downgrade), to settlederivative instruments or to post collateral. See note 16 for additionalinformation related to our derivatives.

 

InApril 2009, the Financial Accounting Standards Board (FASB) jointly issuedFASB Staff Position No.107-1, “Interim Disclosures about Fair Value ofFinancial Instruments” (FSP No.107-1) and Accounting Practices Bulletin OpinionNo.28-1 (APB No.28-1). FSP No.107-1 and APB No.28-1 amend SFAS No.107 “Disclosuresabout Fair Value of Financial Instruments”, to require disclosures about fairvalue of financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements. FSP No.107-1 and APBNo.28-1 are effective for interim reporting periods ending after June 15,2009. The Company is currently evaluating the impact FSP No.107-1 and APBNo.28-1will have on its consolidated financial statements.

 

NOTE 3. Accounting for Stock-Based Compensation

 

The Company has stock-based compensation plans,under which it grants stock options and restricted stock units to key employeesand members of its Board of Directors.

 

In accordance with FASB Statement No.123(R), “Share-BasedPayment” (SFAS No.123(R)), the Company generally recognizes compensationexpense on a straight-line basis over the vesting period. A summary of totalcompensation expense and associated income benefit recognized related tostock-based compensation follows:

 
| ** **                                      | ** ** | **Thirteen Weeks Ended** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| **(dollar amount in thousands)** | ** ** | **May 2, 2009**          | ** ** | **May 3, 2008** | ** ** |
| Compensation expense                            |       | $                                  | 568        |   | $ | 1,322 |   |
| Income tax benefit                              |       | $                                  | 211        |   | $ | 491 |   |

 

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Stock Options

 

The following table summarizes the options underthe Company’s plan:

 
| ** **                               | ** ** | **Number of Shares** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| Outstanding — January 31, 2009 |       | 915,711                        |       |
| Granted                                  |       | 736,000                        |       |
| Expired                                  |       | (59,350                        | )          |
| Outstanding — May 2, 2009      |       | 1,592,361                      |       |

 

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 actual experience method during the quarters ended May 2,2009, and May 3, 2008, respectively. The risk-free rate is based on theU.S. treasury yield curve for issues with a remaining term equal to theexpected term. The fair value of each option granted is estimated on the dateof the grant using the Black-Scholes option-pricing model and, in certainsituations where the grant includes both a market and a service condition asdescribed more fully below, the Monte Carlo simulation model is used. Thefollowing are the weighted-average assumptions:

 
| ** **                        | ** ** | **May 2, 2009** | ** ** | **May 3, 2008** | ** ** |
|-----------------------------------|------------|----------------------|------------|----------------------|------------|
| Dividend yield                    |       | 1.76                 | %          | 2.90                 | %          |
| Expected volatility               |       | 65.10                | %          | 45.43                | %          |
| Risk-free interest rate range:    |       |                 |       |                 |       |
| High                              |       | 2.30                 | %          | 2.86                 | %          |
| Low                               |       | 2.30                 | %          | 2.69                 | %          |
| Ranges of expected lives in years |       | 4 - 5                |       | 4 - 5                |       |

 

In the first quarter of fiscal year 2009, theCompany granted 736,000 stock options with a weighted average grant date fairvalue of $1.69. These options have a seven year term and include both a serviceand a market appreciation vesting requirement. These options vest over a threeyear period with a third vesting on each of the three grant date anniversariesprovided the market price of the Company’s stock has appreciated by a certainamount. From the date of grant, the market price of the Company’s stock musthave appreciated, for at least 15 consecutive trading days, by $2.00 abovegrant price or more for 536,000 options and by $6.88 above grant price or morefor 200,000 options in order to vest. The Company used a Monte Carlo simulationmodel to estimate the expected term and is recording the compensation expenseover the service period for each separately vesting portion of the optionsgranted. At May 2, 2009, the $2.00 market appreciation vesting requirementwas satisfied.

 

Restricted Stock Units

 

TheCompany did not grant any restricted stock units (RSUs) during the firstquarter ended May 2, 2009. In the prior year first fiscal quarter, theCompany issued 237,021 RSUs with a weighted average grant fair value of $11.50.

 

NOTE4. Merchandise Inventories

 

Merchandise inventories are valued at the lowerof cost or market. Cost is determined by using the last-in, first-out (LIFO)method. An actual valuation of inventory under the LIFO method can be made onlyat the end of each fiscal year based on inventory and costs at that time.Accordingly, interim LIFO calculations must be based on management’s estimatesof expected fiscal year-end inventory levels and costs. If the first-in,first-out (FIFO) method of costing inventory had been used by the Company,inventory would have been $485,513 and $493,886 as of May 2, 2009 and January 31,2009, respectively.

 

TheCompany provides estimates for inventory shrinkage based upon historical levelsand the results of its cycle counting program.

 

TheCompany also provides for potentially excess and obsolete inventories based oncurrent inventory levels, the historical analysis of product sales and currentmarket conditions. The nature of the Company’s inventory is such that the riskof obsolescence is minimal and excess inventory has historically been returnedto the Company’s vendors for credit. The Company records a provision when lessthan full credit is expected from a vendor or when market is lower thanrecorded costs. These provisions are revised, if necessary, on a quarterlybasis for adequacy. The Company’s inventory is recorded net of provisions forthese matters which were $16,755 and $15,874 at May 2, 2009 and January 31,2009, respectively.

 

NOTE5. Property and Equipment

 

TheCompany’s property and equipment as of May 2, 2009 and January 31,2009 was as follows:

 

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| **(dollar amounts in thousands)** | ** ** | **May 2,  2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
|                                             |       |                  |       |                       |       |
| Property  and Equipment - at cost:               |       |                  |       |                       |       |
| Land                                             |       | $                     | 205,749    |                       | $          | 207,608 |   |
| Buildings  and improvements                      |       | 823,392               |       | 822,950                    |       |
| Furniture,  fixtures and equipment               |       | 686,626               |       | 685,707                    |       |
| Construction  in progress                        |       | 2,858                 |       | 2,576                      |       |
| Accumulated  depreciation and amortization       |       | (993,927              | )          | (978,510                   | )          |
| Property  and Equipment - net                    |       | $                     | 724,698    |                       | $          | 740,331 |   |

 

NOTE6. Income Taxes

 

TheCompany accounts for income taxes in accordance with Statement of FinancialAccounting Standards No.109, “Accounting for Income Taxes” (SFAS No.109) andFinancial Accounting Standard Board Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48).

 

UnderSFAS No.109, the temporary differences between the book and tax treatment ofincome and expenses result in deferred tax assets and liabilities, which areincluded within the consolidated balance sheets. The Company must assess thelikelihood that any recorded deferred tax assets will be recovered againstfuture taxable income. To the extent the Company believes it is more likelythan not that the asset will not be recoverable,  a valuation allowance must be established.Cumulative losses in recent years constitute “negative evidence” that arecovery is not more likely than not, which must be rebutted by “positiveevidence” to avoid establishing a valuation allowance. To establish this positiveevidence, the Company considers various tax planning strategies for generatingincome sufficient to utilize the deferred tax assets, including the potentialsale of real estate and the conversion of the Company’s accounting policy forits inventory from LIFO to FIFO. After considering all this evidence, theCompany did not have any material change to its valuation allowance for thethirteen weeks ended May 2, 2009.

 

FIN48 prescribes a recognition threshold and a measurement attribute for the financialstatement recognition and measurement of tax positions taken or expected to betaken in a tax return. For those benefits to be recognized, a tax position mustbe more-likely-than-not to be sustained upon examination by taxing authorities.The amount recognized is measured as the largest amount of benefit that isgreater than 50 percent likely of being realized upon ultimate settlement.During the thirteen weeks ended May 2, 2009, the Company recognized nomaterial adjustment in the liability for unrecognized income tax benefits.

 

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NOTE7. Discontinued Operations

 

Inaccordance with FASB Statement No.144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (SFAS No.144), the Company’s discontinuedoperations reflect the operating results for 11 of the 31 low-return storesclosed as part of the Company’s long term strategic plan adopted in 2007. Theremaining stores are reflected in continuing operations, as the Companybelieves its remaining stores will retain the cash flows from the 20 closedlocations. For the thirteen weeks ended May 2, 2009 and May 3, 2008the discontinued stores had pre-tax losses of $237 and $988, respectively.

 

A store location is classified as “held for sale”when (i) the Company has committed to a plan to sell the store location, (ii) thestore location is vacant and is available for sale, (iii) the Company isactively marketing the store location for sale, (iv) the sale price isreasonable in relation to its current fair value and (v) the Companyexpects to complete the sale within one year from the date the store locationis first classified as held for sale. No depreciation expense is recognizedduring the period the asset is held for sale.

 

The Company has classified certain closed storeproperties as assets held for disposal on its balance sheets. The carryingvalues of these assets follow:

 
| **(dollar amounts in thousands)** | ** ** | **May 2,  2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
|                                             |       |                  |       |                       |       |
| Land                                             |       | $                     | 5,914      |                       | $          | 7,332 |   |
| Buildings  and improvements                      |       | 9,628                 |       | 11,265                     |       |
| Accumulated  depreciation and amortization       |       | (4,538                | )          | (5,944                     | )          |
| Assets  held for disposal                        |       | $                     | 11,004     |                       | $          | 12,653 |   |

 

Duringthe first quarter of fiscal year 2009, the Company sold two properties thatwere classified as held for sale for net proceeds of $1,758 and recognized a$109 net gain which was reported in discontinued operations. The Company had 11and 13 properties held for sale at May 2, 2009 and January 31, 2009,respectively.

 

The following details the first quarter offiscal year 2009 activity, principally related to lease commitments, in thereserve for closed stores:

 
| **(dollar amount in thousands)** | ** ** | **Lease  Expenses** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|
| Balance  at January 31, 2009               | ** ** | **$**               | 2,112      | ** ** |
| Provision  for present value of liabilities     |       | 121                 |       |
| Other                                           |       | 224                 |       |
| Cash  payments                                  |       | (312                | )          |
| Balance  at May 2, 2009                    | ** ** | **$**               | 2,145      | ** ** |

 

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NOTE8. Pension and Savings Plan

 

Pensionexpense includes the following:

 
| ** **                                       | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **May 2, 2009**          | ** ** | **May 3, 2008** | ** ** |
|                                             |       |                               |       |   |   |
| Service cost                                     |       | $                                  | —     |   | $ | 43 |   |
| Interest cost                                    |       | 621                                |       | 885 |   |
| Expected return on plan assets                   |       | (537                               | )          | (615 | ) |
| Amortization of transitional obligation          |       | —                             |       | 41 |   |
| Amortization of prior service cost               |       | —                             |       | 92 |   |
| Amortization of net loss                         |       | 325                                |       | 303 |   |
| Net periodic benefit cost                        |       | $                                  | 409        |   | $ | 749 |   |

 

OnDecember 31, 2008, the Company terminated the defined benefit portion ofthe SERP. Since that date, the Company now only has a non-qualifiedSupplemental Executive Retirement Plan (SERP) defined contribution plan for keyemployees designated by the Board of Directors. The Company’s contributionexpense to this plan was approximately $263 and $105 for the thirteen weeksended May 2, 2009 and May 3, 2008, respectively.

 

TheCompany has two qualified savings plans, which cover all full-time employeeswho are at least 21 years of age with one or more years of service. Generally,the Company contributes the lesser of 50% of the first 6% of a participant’scontributions or 3% of the participant’s compensation. In the first quarter of2009, the Company’s contribution to this plan became contingent upon meetingcertain fiscal year 2009 performance metrics. The Company’s savings plans’contribution expense was approximately $1,078 and $1,052 for the thirteen weeksended May 2, 2009 and May 3, 2008, respectively.

 

NOTE 9. Sale-Leaseback Transactions

 

Duringthe first quarter of fiscal year 2008, the Company sold 41 owned properties toindependent third parties. Net proceeds from these sales were $135,519.Concurrent with the sale, the Company entered into agreements to lease theproperties back from the purchaser over a minimum lease term of 15 years. TheCompany classified 40 of these leases as operating leases in accordance withSFAS No.13 as amended by FASB Statement No.98. The Company actively uses theseproperties and considers the leases as normal leasebacks. A $5,531 gain on thesale of these properties was recognized immediately upon execution of the saleand a $61,292 gain was deferred. The deferred gain is being recognized over theminimum term of these leases. The Company initially had continuing involvementin one property relating to an environmental indemnity and, accordingly,recorded $4,583 of the transaction’s total net proceeds as a borrowing and as afinancing activity in the Statement of Cash Flows. During the second quarter offiscal year 2008, the Company provided the necessary documentation to satisfyits indemnity and remove its continuing involvement with this property. TheCompany then recorded the sale of this property as a sale-leasebacktransaction, removing the asset and related lease financing and recorded a$1,515 deferred gain which is being recognized over the remaining minimum termof this lease.

 

Of the 563 store locations operated by theCompany at May 2, 2009, 235 are owned and 328 are leased.

 

NOTE10. Debt and Financing Arrangements

 
| **(dollar amounts in thousands)**                              | ** ** | **May 2, 2009** | ** ** | **January 31, 2009** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|
| 7.50% Senior Subordinated Notes, due  December 2014                      |       | $                    | 157,565    |                      | $          | 174,535 |   |
| Senior Secured Term Loan, due October 2013                               |       | 150,524              |       | 150,794                   |       |
| Lease financing obligations, payable through  October 2022               |       | —               |       | 4,515                     |       |
| Capital lease obligations payable through  October 2009                  |       | 71                   |       | 129                       |       |
| Line of credit agreement, expiring  January 2014                         |       | 25,838               |       | 23,862                    |       |
|                                                                          |       | 333,998              |       | 353,835                   |       |
| Less current maturities                                                       |       | 1,150                |       | 1,453                     |       |
| Long-term debt and obligations under capital  leases, less current maturities |       | $                    | 332,848    |                      | $          | 352,382 |   |

 

OnJanuary 16, 2009, the Company entered into a new revolving creditagreement with available borrowings up to $300,000. Our ability to borrow underthe revolving credit agreement is based on a specific borrowing base consistingof inventory and accounts receivable. The interest rate on this credit line isLIBOR or Prime plus 2.75% to 3.25% based upon the then current availabilityunder the facility.

 

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Duringthe first quarter of fiscal 2009 and 2008 , the Company repurchased $16,970 and$20,965, respectively of its outstanding 7.5% Senior Subordinated Notes for$10,722 and $18,082, respectively resulting in a gain of $6,248 and $2,833,respectively and are  reflected ininterest expense on the accompanying Condensed Consolidated Statement ofOperations and Changes in Retained Earnings.

 

Aspart of the November 27, 2007 sale leaseback transaction, the Companydetermined that it had continuing involvement in one property and recorded the$4,742 proceeds, net of execution costs, as a borrowing in accordance withStatement of Financial Accounting Standards No.13, “Accounting for Leases,”(SFAS No.13). During the first quarter of 2009, the Company determined it nolonger had continuing involvement with this property. Accordingly, the Companyrecorded this property as a sale leaseback, retired the asset and related leasefinancing and recorded an $829 deferred gain which is being amortized over theremaining minimum term of the lease.

 

Severalof the Company’s debt agreements require compliance with covenants. The mostrestrictive of these requirements is contained in the Company’s revolvingcredit agreement. During any period that the Company’s availability under itsrevolving credit agreement drops below $52,500 the Company is required tomaintain a consolidated fixed charge coverage ratio, of at least 1.1:1.0,calculated as the ratio of (a) EBITDA (net income plus interest charges,provision for taxes, depreciation and amortization expense, non-cash stockcompensation expenses and other non-recurring, non-cash items) minus capitalexpenditures and  income taxes paid to (b) thesum of debt service charges and restricted payments made. The failure tosatisfy this covenant would constitute an event of default under the Company’srevolving credit agreement, which would result in a cross-default under theCompany’s 7.5% Senior Subordinated Notes and Senior Secured Term Loan.

 

Asof May 2, 2009, the Company had additional availability under therevolving credit agreement of approximately $171,704 and was in compliance withits financial covenants.

 

NOTE11. Warranty Reserve

 

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

 

Thereserve for warranty costs activity follows:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **May 2, 2009**          | ** ** | **May 3, 2008** | ** ** |
| Beginning Balance                                |       | $                                  | 797        |   | $ | 247 |   |
|                                             |       |                               |       |   |   |
| Additions related to current period sales        |       | 4,104                              |       | 2,230 |   |
|                                             |       |                               |       |   |   |
| Warranty costs incurred in current period        |       | (4,207                             | )          | (2,013 | ) |
|                                             |       |                               |       |   |   |
| Ending Balance                                   |       | $                                  | 694        |   | $ | 464 |   |

 

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NOTE12. Earnings Per Share

 

(inthousands, except per share amounts)

 
| ** **                                                  | ** **                                                                                                                     | **Thirteen Weeks Ended** | ** **   |
|-------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|------------------------------------|--------------|
| **(dollar amounts in thousands, except per share amounts)** | ** **                                                                                                                     | **May 2,********2009**        | ** **   | **May 3,********2008** | ** ** |
| *** ***                                                | *** ***                                                                                                                   | *** ***                       | *** *** | *** *** | *** *** | *** *** |
| (a)                                                         | Net  Earnings From Continuing Operations                                                                                       |                               | $            | 11,063 |   | $ | 5,291 |   |
|                                                        |                                                                                                                           |                               |         |   |   |   |
|                                                        | Discontinued Operations, Net of Tax                                                                                            |                               | (154         | ) | (619 | ) |
|                                                        |                                                                                                                           |                               |         |   |   |   |
|                                                        | Net Income                                                                                                                     |                               | $            | 10,909 |   | $ | 4,672 |   |
|                                                        |                                                                                                                           |                               |         |   |   |   |
| (b)                                                         | Basic  average number of common shares outstanding during period                                                               |                               | 52,333       |   | 52,063 |   |
|                                                        |                                                                                                                           |                               |         |   |   |   |
|                                                        | Common shares assumed issued upon exercise of  dilutive stock options, net of assumed repurchase, at the average market  price |                               | 43           |   | 107 |   |
|                                                        |                                                                                                                           |                               |         |   |   |   |
| (c)                                                         | Diluted  average number of common shares assumed outstanding during period                                                     |                               | 52,376       |   | 52,170 |   |
|                                                        |                                                                                                                           |                               |         |   |   |   |
| ** **                                                  | **Basic Earnings per Share:**                                                                                                  | ** **                         | ** **   | ** ** | ** ** | ** ** |
|                                                        | Net Earnings From Continuing Operations (a/b)                                                                                  |                               | $            | 0.21 |   | $ | 0.10 |   |
|                                                        | Discontinued Operations, Net of Tax                                                                                            |                               | —       |   | (0.01 | ) |
|                                                        | Basic Earnings per Share                                                                                                       |                               | $            | 0.21 |   | $ | 0.09 |   |
| ** **                                                  | ** **                                                                                                                     | ** **                         | ** **   | ** ** | ** ** | ** ** |
| ** **                                                  | **Diluted Earnings per Share:**                                                                                                | ** **                         | ** **   | ** ** | ** ** | ** ** |
|                                                        | Net Earnings From Continuing Operations (a/c)                                                                                  |                               | $            | 0.21 |   | $ | 0.10 |   |
|                                                        | Discontinued Operations, Net of Tax                                                                                            |                               | —       |   | (0.01 | ) |
|                                                        | Diluted Earnings per Share                                                                                                     |                               | $            | 0.21 |   | $ | 0.09 |   |
|                                                             |                                                                                                                                |                                    |              |  |  |  |  |  |  |  |  |

 

Asof May 2, 2009 and May 3, 2008, respectively, there were 1,885,000and 2,210,000 outstanding options and nonvested restricted stock units. Certainstock options were excluded from the calculation of diluted earnings per sharebecause their exercise prices were greater than the average market price of thecommon shares for the periods then ended and therefore would be anti-dilutive.The total numbers of such shares excluded from the diluted earnings per sharecalculation are 1,691,000 and 1,729,000 for the thirteen weeks ended May 2,2009 and May 3, 2008, respectively.

 

NOTE13. Supplemental Guarantor Information

 

The Company’s 7.50%Senior Subordinated Notes (the “Notes”) are fully and unconditionally and jointand severally guaranteed by certain of the Company’s direct and indirectlywholly-owned subsidiaries - namely, The Pep Boys Manny Moe & Jack ofCalifornia, Pep Boys - Manny Moe & Jack of Delaware, Inc., PepBoys — Manny Moe & Jack of Puerto Rico, Inc. and PBY Corporation,(collectively, the “Subsidiary Guarantors”). The Notes are not guaranteed by theCompany’s wholly owned subsidiary, Colchester Insurance Company.

 

The following condensedconsolidating information presents, in separate columns, the condensedconsolidating balance sheets as of May 3, 2009 and January 31, 2009and the related condensed consolidating statements of operations for thethirteen weeks ended May 2, 2009 and May 3, 2008 and condensedconsolidating statements of cash flows for the thirteen weeks ended May 2,2009 and May 3, 2008 for (i) the Company (“Pep Boys”) on a parent onlybasis, with its investment in subsidiaries recorded under the equity method, (ii) theSubsidiary Guarantors on a combined basis including the consolidation by PBYCorporation of its wholly owned subsidiary, Pep Boys Manny Moe & Jackof California, (iii) the subsidiary of the Company that does not guaranteethe Notes, and (iv) the Company on a consolidated basis.

 

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CONDENSEDCONSOLIDATING BALANCE SHEET

(dollars inthousands)

 
| **As of May 2, 2009**                                          | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|----------------------------|------------|---------------------------------|------------|----------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |         |       |                       |       |                            |       |                             |       |             |       |
| Current Assets:                                                               |       |         |       |                       |       |                            |       |                             |       |             |       |
| Cash and cash equivalents                                                     |       | $            | 10,929     |                       | $          | 7,450                           |       | $                                | 2,934      |             | $          | — |   | $ | 21,313 |   |
| Accounts receivable, net                                                      |       | 10,297       |       | 12,383                     |       | —                          |       | —                           |       | 22,680           |       |
| Merchandise inventories                                                       |       | 195,194      |       | 361,370                    |       | —                          |       | —                           |       | 556,564          |       |
| Prepaid expenses                                                              |       | 9,871        |       | 12,879                     |       | 10,136                          |       | (11,225                          | )          | 21,661           |       |
| Other                                                                         |       | 759          |       | 7                          |       | 63,622                          |       | (5,631                           | )          | 58,757           |       |
| Assets held for disposal                                                      |       | 1,830        |       | 9,174                      |       | —                          |       | —                           |       | 11,004           |       |
| Total Current Assets                                                          |       | 228,880      |       | 403,263                    |       | 76,692                          |       | (16,856                          | )          | 691,979          |       |
|                                                                          |       |         |       |                       |       |                            |       |                             |       |             |       |
| Property and Equipment— net                                              |       | 236,436      |       | 475,824                    |       | 32,055                          |       | (19,617                          | )          | 724,698          |       |
| Investment in subsidiaries                                                    |       | 1,713,751    |       | —                     |       | —                          |       | (1,713,751                       | )          | —           |       |
| Intercompany receivable                                                       |       | —       |       | 1,006,139                  |       | 78,276                          |       | (1,084,415                       | )          | —           |       |
| Deferred income taxes                                                         |       | 24,865       |       | 52,741                     |       | —                          |       | —                           |       | 77,606           |       |
| Other                                                                         |       | 16,611       |       | 866                        |       | —                          |       | —                           |       | 17,477           |       |
| Total Assets                                                                  |       | $            | 2,220,543  |                       | $          | 1,938,833                       |       | $                                | 187,023    |             | $          | (2,834,639 | ) | $ | 1,511,760 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                |       |         |       |                       |       |                            |       |                             |       |             |       |
| Current Liabilities:                                                          |       |         |       |                       |       |                            |       |                             |       |             |       |
| Accounts payable                                                              |       | $            | 193,884    |                       | $          | 10                              |       | $                                | —     |             | $          | — |   | $ | 193,894 |   |
| Trade payable program liability                                               |       | 28,464       |       | —                     |       | —                          |       | —                           |       | 28,464           |       |
| Accrued expenses                                                              |       | 41,561       |       | 51,066                     |       | 163,362                         |       | (11,225                          | )          | 244,764          |       |
| Deferred income taxes                                                         |       | 16,684       |       | 27,487                     |       | —                          |       | (5,631                           | )          | 38,540           |       |
| Current maturities of long-term debt and  obligations under capital leases    |       | 1,150        |       | —                     |       | —                          |       | —                           |       | 1,150            |       |
| Total Current Liabilities                                                     |       | 281,743      |       | 78,563                     |       | 163,362                         |       | (16,856                          | )          | 506,812          |       |
| Long-term debt and obligations under capital  leases, less current maturities |       | 316,072      |       | 16,776                     |       | —                          |       | —                           |       | 332,848          |       |
| Other long-term liabilities                                                   |       | 35,132       |       | 35,613                     |       | —                          |       | —                           |       | 70,745           |       |
| Deferred gain from asset sales                                                |       | 69,810       |       | 117,791                    |       | —                          |       | (19,617                          | )          | 167,984          |       |
| Intercompany liabilities                                                      |       | 1,084,415    |       | —                     |       | —                          |       | (1,084,415                       | )          | —           |       |
| Stockholders’ Equity                                                     |       | 433,371      |       | 1,690,090                  |       | 23,661                          |       | (1,713,751                       | )          | 433,371          |       |
| Total Liabilities and Stockholders’ Equity                               |       | $            | 2,220,543  |                       | $          | 1,938,833                       |       | $                                | 187,023    |             | $          | (2,834,639 | ) | $ | 1,511,760 |   |

 

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| **As of January 31, 2009**                                               | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |         |       |                       |       |                            |       |                            |       |             |       |
| Current Assets:                                                               |       |         |       |                       |       |                            |       |                            |       |             |       |
| Cash and cash equivalents                                                     |       | $            | 12,753     |                       | $          | 6,393                           |       | $                               | 2,186      |             | $          | — |   | $ | 21,332 |   |
| Accounts receivable, net                                                      |       | 16,571       |       | 12,260                     |       | —                          |       | —                          |       | 28,831           |       |
| Merchandise inventories                                                       |       | 199,304      |       | 365,627                    |       | —                          |       | —                          |       | 564,931          |       |
| Prepaid expenses                                                              |       | 13,597       |       | 15,820                     |       | 13,919                          |       | (17,946                         | )          | 25,390           |       |
| Other                                                                         |       | 1,193        |       | 11                         |       | 66,797                          |       | (5,580                          | )          | 62,421           |       |
| Assets held for disposal                                                      |       | 1,830        |       | 10,823                     |       | —                          |       | —                          |       | 12,653           |       |
| Total Current Assets                                                          |       | 245,248      |       | 410,934                    |       | 82,902                          |       | (23,526                         | )          | 715,558          |       |
| Property and Equipment—Net                                               |       | 239,859      |       | 487,956                    |       | 32,226                          |       | (19,710                         | )          | 740,331          |       |
| Investment in subsidiaries                                                    |       | 1,699,568    |       | —                     |       | —                          |       | (1,699,568                      | )          | —           |       |
| Intercompany receivable                                                       |       | —       |       | 989,077                    |       | 85,145                          |       | (1,074,222                      | )          | —           |       |
| Deferred income taxes                                                         |       | 24,075       |       | 53,633                     |       | —                          |       | —                          |       | 77,708           |       |
| Other                                                                         |       | 17,614       |       | 1,178                      |       | —                          |       | —                          |       | 18,792           |       |
| Total Assets                                                                  |       | $            | 2,226,364  |                       | $          | 1,942,778                       |       | $                               | 200,273    |             | $          | (2,817,026 | ) | $ | 1,552,389 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                |       |         |       |                       |       |                            |       |                            |       |             |       |
| Current Liabilities:                                                          |       |         |       |                       |       |                            |       |                            |       |             |       |
| Accounts payable                                                              |       | $            | 212,331    |                       | $          | 9                               |       | $                               | —     |             | $          | — |   | $ | 212,340 |   |
| Trade payable program liability                                               |       | 31,930       |       | —                     |       | —                          |       | —                          |       | 31,930           |       |
| Accrued expenses                                                              |       | 28,802       |       | 67,748                     |       | 175,985                         |       | (17,781                         | )          | 254,754          |       |
| Deferred income taxes                                                         |       | 16,355       |       | 25,238                     |       | —                          |       | (5,745                          | )          | 35,848           |       |
| Current maturities of long-term debt and  obligations under capital leases    |       | 1,208        |       | 245                        |       | —                          |       | —                          |       | 1,453            |       |
| Total Current Liabilities                                                     |       | 290,626      |       | 93,240                     |       | 175,985                         |       | (23,526                         | )          | 536,325          |       |
| Long-term debt and obligations under capital  leases, less current maturities |       | 332,682      |       | 19,700                     |       | —                          |       | —                          |       | 352,382          |       |
| Other long-term liabilities                                                   |       | 34,868       |       | 35,454                     |       | —                          |       | —                          |       | 70,322           |       |
| Deferred gain from asset sales                                                |       | 70,810       |       | 119,104                    |       | —                          |       | (19,710                         | )          | 170,204          |       |
| Intercompany liabilities                                                      |       | 1,074,222    |       | —                     |       | —                          |       | (1,074,222                      | )          | —           |       |
| Stockholders’ Equity                                                     |       | 423,156      |       | 1,675,280                  |       | 24,288                          |       | (1,699,568                      | )          | 423,156          |       |
| Total Liabilities and Stockholders’ Equity                               |       | $            | 2,226,364  |                       | $          | 1,942,778                       |       | $                               | 200,273    |             | $          | (2,817,026 | ) | $ | 1,552,389 |   |

 

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CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS

(dollars in thousands)

 
| **Thirteen Weeks Ended May 2, 2009**                       | ** ** | **Pep  Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation  /  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|----------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------|------------|
|                                                            |       |          |       |                       |       |                             |       |                              |       |             |       |
| Merchandise Sales                                               |       | $             | 136,328    |                       | $          | 261,849                          |       | $                                 | —     |             | $          | — |   | $ | 398,177 |   |
| Service Revenue                                                 |       | 34,813        |       | 63,498                     |       | —                           |       | —                            |       | 98,311           |       |
| Other Revenue                                                   |       | —        |       | —                     |       | 5,723                            |       | (5,723                            | )          | —           |       |
| Total Revenues                                                  |       | 171,141       |       | 325,347                    |       | 5,723                            |       | (5,723                            | )          | 496,488          |       |
| Costs of Merchandise Sales                                      |       | 96,018        |       | 185,424                    |       | —                           |       | (407                              | )          | 281,035          |       |
| Costs of Service Revenue                                        |       | 28,813        |       | 57,077                     |       | —                           |       | (38                               | )          | 85,852           |       |
| Costs of Other Revenue                                          |       | —        |       | —                     |       | 6,805                            |       | (6,805                            | )          | —           |       |
| Total Costs of Revenues                                         |       | 124,831       |       | 242,501                    |       | 6,805                            |       | (7,250                            | )          | 366,887          |       |
| Gross Profit from Merchandise Sales                             |       | 40,310        |       | 76,425                     |       | —                           |       | 407                               |       | 117,142          |       |
| Gross Profit from Service Revenue                               |       | 6,000         |       | 6,421                      |       | —                           |       | 38                                |       | 12,459           |       |
| Gross Gain from Other Revenue                                   |       | —        |       | —                     |       | (1,082                           | )          | 1,082                             |       | —           |       |
| Total Gross Profit (Loss)                                       |       | 46,310        |       | 82,846                     |       | (1,082                           | )          | 1,527                             |       | 129,601          |       |
| Selling, General and Administrative Expenses                    |       | 37,982        |       | 69,082                     |       | 78                               |       | 911                               |       | 108,053          |       |
| Net Gain from Disposition of Assets                             |       | 1             |       | 2                          |       | —                           |       | —                            |       | 3                |       |
| Operating Profit (Loss)                                         |       | 8,329         |       | 13,766                     |       | (1,160                           | )          | 616                               |       | 21,551           |       |
| Non-Operating (Expense) Income                                  |       | (4,011        | )          | 21,271                     |       | 619                              |       | (17,476                           | )          | 403              |       |
| Interest Expense (Income)                                       |       | 11,384        |       | 7,934                      |       | (522                             | )          | (16,860                           | )          | 1,936            |       |
| (Loss) Earnings from Continuing Operations Before  Income Taxes |       | (7,066        | )          | 27,103                     |       | (19                              | )          | —                            |       | 20,018           |       |
| Income Tax (Benefit) Expense                                    |       | (3,165        | )          | 12,129                     |       | (9                               | )          |                              |       | 8,955            |       |
| Equity in Earnings of Subsidiaries                              |       | 14,800        |       | —                     |       | —                           |       | (14,800                           | )          | —           |       |
| Net Earnings (Loss) from Continuing Operations                  |       | 10,899        |       | 14,974                     |       | (10                              | )          | (14,800                           | )          | 11,063           |       |
| Discontinued Operations, Net of Tax                             |       | 10            |       | (164                       | )          | —                           |       | —                            |       | (154             | )          |
| Net Earnings (Loss)                                             |       | $             | 10,909     |                       | $          | 14,810                           |       | $                                 | (10        | )                | $          | (14,800 | ) | $ | 10,909 |   |

 
| **Thirteen weeks  ended May 3, 2008**            | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------|------------|---------------------------------------|------------|------------------|------------|
|                                                            |       |              |       |                       |       |                           |       |                                  |       |             |       |
| Merchandise Sales                                               |       | $                 | 138,613    |                       | $          | 264,721                        |       | $                                     | —     |             | $          | — |   | $ | 403,334 |   |
| Service Revenue                                                 |       | 33,373            |       | 61,336                     |       | —                         |       | —                                |       | 94,709           |       |
| Other Revenue                                                   |       | —            |       | —                     |       | 5,667                          |       | (5,667                                | )          | —           |       |
| Total Revenues                                                  |       | 171,986           |       | 326,057                    |       | 5,667                          |       | (5,667                                | )          | 498,043          |       |
| Costs of Merchandise Sales                                      |       | 98,334            |       | 187,997                    |       | —                         |       | (408                                  | )          | 285,923          |       |
| Costs of Service Revenue                                        |       | 28,614            |       | 55,578                     |       | —                         |       | (38                                   | )          | 84,154           |       |
| Costs of Other Revenue                                          |       | —            |       | —                     |       | 5,806                          |       | (5,806                                | )          | —           |       |
| Total Costs of Revenues                                         |       | 126,948           |       | 243,575                    |       | 5,806                          |       | (6,252                                | )          | 370,077          |       |
| Gross Profit from Merchandise Sales                             |       | 40,279            |       | 76,724                     |       | —                         |       | 408                                   |       | 117,411          |       |
| Gross Profit from Service Revenue                               |       | 4,759             |       | 5,758                      |       | —                         |       | 38                                    |       | 10,555           |       |
| Gross Loss from Other Revenue                                   |       | —            |       | —                     |       | (139                           | )          | 139                                   |       | —           |       |
| Total Gross Profit (Loss)                                       |       | 45,038            |       | 82,482                     |       | (139                           | )          | 585                                   |       | 127,966          |       |
| Selling, General and Administrative Expenses                    |       | 42,453            |       | 76,504                     |       | 90                             |       | (32                                   | )          | 119,015          |       |
| Net Gain from Dispositions of Assets                            |       | 556               |       | 4,975                      |       | —                         |       | —                                |       | 5,531            |       |
| Operating Profit (Loss)                                         |       | 3,141             |       | 10,953                     |       | (229                           | )          | 617                                   |       | 14,482           |       |
| Non-Operating (Expense) Income                                  |       | (4,104            | )          | 28,475                     |       | 648                            |       | (24,689                               | )          | 330              |       |
| Interest Expense (Income)                                       |       | 23,836            |       | 6,710                      |       | (1,047                         | )          | (24,072                               | )          | 5,427            |       |
| (Loss) Earnings from Continuing Operations Before  Income Taxes |       | (24,799           | )          | 32,718                     |       | 1,466                          |       | —                                |       | 9,385            |       |
| Income Tax (Benefit) Expense                                    |       | (10,473           | )          | 13,917                     |       | 650                            |       |                                  |       | 4,094            |       |
| Equity in Earnings of Subsidiaries                              |       | 19,131            |       | —                     |       | —                         |       | (19,131                               | )          | —           |       |
| Net Earnings from Continuing Operations                         |       | 4,805             |       | 18,801                     |       | 816                            |       | (19,131                               | )          | 5,291            |       |
| Discontinued Operations, Net of Tax                             |       | (133              | )          | (486                       | )          | —                         |       | —                                |       | (619             | )          |
| Net Earnings                                                    |       | $                 | 4,672      |                       | $          | 18,315                         |       | $                                     | 816        |             | $          | (19,131 | ) | $ | 4,672 |   |

 

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CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS

(dollars in thousands)

 
| **Thirteen Weeks Ended May 2, 2009**                                  | ** ** | **Pep  Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation  /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|------------------|------------|
| **Cash Flows from Operating  Activities:**                                                     |       |          |       |                       |       |                                 |       |                              |       |             |       |
| Net Earnings (Loss)                                                                            |       | $             | 10,909     |                       | $          | 14,810                               |       | $                                 | (10        | )                | $          | (14,800 | ) | $ | 10,909 |   |
| Adjustments to Reconcile Net Earnings to Net Cash  (Used In) Provided By Continuing Operations |       | (15,396       | )          | 12,550                     |       | 285                                  |       | 14,183                            |       | 11,622           |       |
| Changes in operating assets and liabilities                                                    |       | 10,498        |       | (8,955                     | )          | (5,779                               | )          | —                            |       | (4,236           | )          |
| Net cash provided by (used in) continuing operations                                           |       | 6,011         |       | 18,405                     |       | (5,504                               | )          | (617                              | )          | 18,295           |       |
| Net cash provided by (used in) discontinued  operations                                        |       | 10            |       | (328                       | )          | —                               |       | —                            |       | (318             | )          |
| Net Cash Provided by (Used in) Operating Activities                                            |       | 6,021         |       | 18,077                     |       | (5,504                               | )          | (617                              | )          | 17,977           |       |
|                                                                                           |       |          |       |                       |       |                                 |       |                              |       |             |       |
| Net cash used in continuing operations                                                         |       | (2,706        | )          | (3,002                     | )          | —                               |       | —                            |       | (5,708           | )          |
| Net cash provided by discontinued operations                                                   |       | —        |       | 1,758                      |       | —                               |       | —                            |       | 1,758            |       |
| Net Cash Used in Investing Activities                                                          |       | (2,706        | )          | (1,244                     | )          | —                               |       | —                            |       | (3,950           | )          |
|                                                                                           |       |          |       |                       |       |                                 |       |                              |       |             |       |
| Net Cash (Used in) Provided by Financing Activities                                            |       | (5,139        | )          | (15,776                    | )          | 6,252                                |       | 617                               |       | (14,046          | )          |
|                                                                                           |       |          |       |                       |       |                                 |       |                              |       |             |       |
| Net (Decrease) Increase in Cash                                                                |       | (1,824        | )          | 1,057                      |       | 748                                  |       | —                            |       | (19              | )          |
| Cash and Cash Equivalents at Beginning of Period                                               |       | 12,753        |       | 6,393                      |       | 2,186                                |       | —                            |       | 21,332           |       |
| Cash and Cash Equivalents at End of Period                                                     |       | $             | 10,929     |                       | $          | 7,450                                |       | $                                 | 2,934      |             | $          | — |   | $ | 21,313 |   |

 
| **Thirteen Weeks Ended May 3, 2008**                                  | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash Flows from Operating Activities:**                                                      |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Earnings                                                                                   |       | $                 | 4,672      |                       | $          | 18,315                           |       | $                                     | 816        |             | $          | (19,131 | ) | $ | 4,672 |   |
| Adjustments to Reconcile Net Earnings to Net Cash  (Used in) Provided By Continuing Operations |       | (12,417           | )          | 7,291                      |       | 281                              |       | 18,514                                |       | 13,669           |       |
| Changes in operating assets and liabilities                                                    |       | (16,535           | )          | (1,306                     | )          | (4,773                           | )          | —                                |       | (22,614          | )          |
| Net cash (used in) provided by continuing  operations                                          |       | (24,280           | )          | 24,300                     |       | (3,676                           | )          | (617                                  | )          | (4,273           | )          |
| Net  cash (used in) provided by discontinued operations                                        |       | (70               | )          | 12                         |       | —                           |       | —                                |       | (58              | )          |
| Net  Cash (Used in) Provided by Operating Activities                                           |       | (24,350           | )          | 24,312                     |       | (3,676                           | )          | (617                                  | )          | (4,331           | )          |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net  cash Provided by Investing activities                                                     |       | 39,255            |       | 85,893                     |       | —                           |       | —                                |       | 125,148          |       |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net  Cash Provided by (Used in) Financing Activities                                           |       | 50,455            |       | (109,449                   | )          | 3,911                            |       | 617                                   |       | (54,466          | )          |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net  Increase in Cash and Cash Equivalents                                                     |       | 65,360            |       | 756                        |       | 235                              |       | —                                |       | 66,351           |       |
| Cash  and Cash Equivalents at Beginning of Period                                              |       | 12,208            |       | 6,655                      |       | 2,063                            |       | —                                |       | 20,926           |       |
| Cash  and Cash Equivalents at End of Period                                                    |       | $                 | 77,568     |                       | $          | 7,411                            |       | $                                     | 2,298      |             | $          | — |   | $ | 87,277 |   |

 

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NOTE14. Commitments and Contingencies

 

InSeptember 2006, the United States Environmental Protection Agency (“EPA”)requested certain information from the Company as part of an investigation todetermine whether the Company had violated, and is in violation of, the CleanAir Act and its non-road engine regulations. The information requestedconcerned certain generator and personal transportation merchandise offered forsale by the Company. In the fourth quarter of fiscal year 2008, the EPAinformed the Company that it believed that the Company had violated the CleanAir Act by virtue of the fact that certain of this merchandise did not conformto their corresponding EPA Certificates of Conformity and that unless the EPAand the Company were able to reach a settlement, the EPA was prepared tocommence a civil action. The Company is currently engaged in settlementdiscussions with the EPA that would call for the payment of a civil penalty andcertain injunctive relief. As a result of these discussions, the Company hasaccrued an amount equal to its estimate of the civil penalty that the Companyis prepared to pay to settle the matter and has temporarily restricted fromsale, and taken a partial asset impairment against certain inventory. If theCompany is not able to reach a settlement with the EPA on mutually acceptableterms, the Company is prepared to vigorously defend any civil action filed.

 

The Company is also party to various other actions andclaims arising in the normal course of business.

 

TheCompany believes that amounts accrued for awards or assessments in connectionwith all such matters are adequate and that the ultimate resolution of thesematters will not have a material adverse effect on the Company’s financialposition. However, there exists a reasonable possibility of loss in excess ofthe amounts accrued, the amount of which cannot currently be estimated. Whilethe Company does not believe that the amount of such excess loss could bematerial to the Company’s financial position, any such loss could have amaterial adverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

NOTE15. Other Comprehensive Income

 

Thefollowing are the components of comprehensive income:

 
| ** **                                       | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **May 2, 2009**               | ** ** | **May 3, 2008** | ** ** |
|                                             |       |                               |       |   |   |
| Net earnings                                     |       | $                                  | 10,909     |   | $ | 4,672 |   |
| Other comprehensive income (loss), net of tax:   |       |                               |       |   |   |
| Defined benefit plan adjustment                  |       | 204                                |       | 274 |   |
| Derivative financial instrument adjustments      |       | 48                                 |       | 1,423 |   |
| Comprehensive income                             |       | $                                  | 11,161     |   | $ | 6,369 |   |

 

Thecomponents of accumulated other comprehensive loss are:

 
| **(dollar amounts in thousands)**        | ** ** | **May 2, 2009** | ** ** | **January 31, 2009** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|
|                                                    |       |                 |       |                      |       |
| Defined  benefit plan adjustment, net of tax            |       | $                    | (7,549     | )                         | $          | (7,753 | ) |
| Derivative  financial instrument adjustment, net of tax |       | (10,274              | )          | (10,322                   | )          |
| Accumulated other comprehensive loss                    |       | $                    | (17,823    | )                         | $          | (18,075 | ) |

 

NOTE 16. Fair ValueMeasurements

 

The Company adopted FASB Statement No.157, “Fair ValueMeasurement” (SFAS No.157), (as impacted by FSP Nos.157-1, 157-2, 157-3, 157-4and 157-e) effective February 3, 2008, with respect to fair valuemeasurements of (a) nonfinancial assets and liabilities that arerecognized or disclosed at fair value in the Company’s financial statements ona recurring basis (at least annually) and (b) all financial assets andliabilities. The Company adopted FSP No.157-2, “Effective Date of FASBStatement No.157” (FSP No.157-2), during the thirteen weeks ended May 2,2009. FSP No.157-2 which deferred the effective date of SFAS No.157 fornonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), to fiscal years and interim periods withinthose fiscal years, beginning after November 15, 2008.

 

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Under SFAS No.157, fair value is defined as the exitprice, or the amount that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants asof the measurement date. SFAS No.157 also establishes a hierarchy for inputsused in measuring fair value that maximizes the use of observable inputs andminimizes the use of unobservable inputs by requiring that the most observableinputs be used when available. Observable inputs are inputs market participantswould use in valuing the asset or liability developed based on market dataobtained from sources independent of the Company. Unobservable inputs areinputs that reflect the Company’s assumptions about the factors marketparticipants would use in valuing the asset or liability developed based uponthe best information available in the circumstances. The hierarchy is brokendown into three levels. Level 1 inputs are quoted prices (unadjusted) in activemarkets for identical assets or liabilities. Level 2 inputs include quotedprices for similar assets or liabilities in active markets. Level 3 inputs areunobservable inputs for the asset or liability.

 

Categorization within the valuation hierarchy is basedupon the lowest level of input that is significant to the fair valuemeasurement.

 

*Assets and Liabilities that areMeasured at Fair Value on a Recurring Basis:*

 

Effective February 3, 2008, the application offair value under SFAS No.157 (as amended by FSP Nos.157-1, 157-2, 157-3, 157-4and 157-e) related to the Company’s interest rate swap agreements. These itemswere previously, and will continue to be, recorded at fair value at eachbalance sheet date. The information in the following paragraphs and tables primarilyaddresses matters relative to these financial assets and liabilities.

 

Cash Equivalents:

 

Cash equivalents, other thancredit card receivables, include highly liquid investments with an originalmaturity of three months or less at acquisition. The Company carries theseinvestments at cost, which approximates fair value. As a result, the Companyhas determined that our cash equivalents in their entirety are classified as aLevel 1 within the fair value hierarchy.

 

Derivative liability:

 

The Company has an interest rate swap which is withinthe scope of SFAS No.133, “Accounting for Derivative Instruments and HedgingActivities.” The Company values this swap using observable market data todiscount projected cash flows and for credit risk adjustments. The inputs usedto value our derivative fall within Level 2 of the fair value hierarchy.

 

The following table provides information by level forassets and liabilities that are measured at fair value, as defined by SFASNo.157, on a recurring basis.

 
| **(dollar amounts in thousands)** | ** ** | **Fair Value  at**   | ** ** | **Fair Value Measurements  Using Inputs Considered as** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Description**                                  | ** ** | **May 2, 2009** | ** ** | **Level 1**                                                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:                                          |       |                      |       |                                                                             |       |   |   |   |   |
| Cash and Cash Equivalents                        |       | $                         | 21,313     |                                                                             | $          | 21,313 |   |   |   |   |   |
|                                             |       |                      |       |                                                                             |       |   |   |   |   |
| Liabilities:                                     |       |                      |       |                                                                             |       |   |   |   |   |
| Other long-term liabilities                      |       |                      |       |                                                                             |       |   |   |   |   |
| Derivative liability                             |       | $                         | 15,867     |                                                                             |       |   | $ | 15,867 |   |   |   |
|                                                  |            |                           |            |                                                                                  |            |  |  |  |  |  |  |  |

 

*Assets and Liabilities that areMeasured at Fair Value on a Nonrecurring Basis:*

 

The following tableprovides information by level for assets and liabilities that are measured atfair value, as defined by SFAS No.157, on a nonrecurring basis.

 
| **(dollar amounts in thousands)** | ** ** | **Fair Value  at**   | ** ** | **Fair Value Measurements  Using Inputs Considered as** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Description**                                  | ** ** | **May 2, 2009** | ** ** | **Level 1**                                                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:                                          |       |                      |       |                                                                             |       |   |   |   |   |
| Assets held for disposal                         |       | $                         | 11,004     |                                                                             |       |   | $ | 11,004 |   |   |   |
|                                                  |            |                           |            |                                                                                  |            |  |  |  |  |  |  |

 

Asof the end of the first quarter of fiscal 2009, the Company had one interestrate swap designated as a cash flow hedge on $145,000 of the Company’s $150,524Senior Secured Term Loan facility which expires on October, 2013. The swap isused to minimize interest rate exposure and overall interest costs byconverting the variable interest rate to a fixed rate of 5.036%. Since February 1,2008, this 

 

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swapwas deemed to be fully effective and pursuant to SFAS No.133, all adjustmentsin the interest rate swap’s fair value have been recorded to Accumulated OtherComprehensive Loss.

 

Thetable below shows the effect of derivative instruments on the Statement ofOperations for the thirteen weeks ended May 2, 2009:

 
| **(dollar amounts in thousands)** | ** ** | **Amount of  Gain/(Loss) in OCI  (Effective Portion)** | ** ** | **Location of Gain/(Loss)  Reclassified from Accumulated  OCI into Income (Effective  Portion)** | ** **       | **Amount of Gain/(Loss)  Reclassified from  Accumulated OCI into  Income (Effective Portion)** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------------|------------------------------------------------------------------------------------------------|------------|
| Cash Flow Hedge                                  |       |                                                   |       |                                                                                             |             |                                                                                           |       |
| Interest Rate swap                               |       | $                                                      | (37        | )                                                                                                | Interest expense |                                                                                           | $          | (657 | ) |
|                                                  |            |                                                        |            |                                                                                                  |                  |                                                                                                |            |  |  |

 

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Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

Thediscussion and analysis below should be read in conjunction with (i) thecondensed consolidated interim financial statements and the notes to suchfinancial statements included elsewhere in this Form 10-Q and (ii) theconsolidated financial statements and the notes to such financial statementsincluded in Item 8, “Financial Statements and Supplementary Data” of our AnnualReport on Form 10-K for the fiscal year ended January 31, 2009.

 

OVERVIEW

 

ThePep Boys-Manny, Moe & Jack is a leader in the automotive aftermarketwith 563 stores located throughout 35 states and Puerto Rico. All storesfeature the nationally-recognized Pep Boys brand name, established through morethan 85 years of providing high-quality automotive merchandise and services.The stores are all company-owned, ensuring chain-wide consistency for our customers.We are the only national chain offering automotive service, tires, accessoriesand parts under one roof, positioning us to achieve our goal of becoming theautomotive solutions provider of choice for the value-oriented customer. Inmost of our stores we also have a commercial sales program that providescommercial credit and prompt delivery of tires, parts and other products tolocal, regional and national repair garages and dealers.

 

Forthe thirteen weeks ended May 2, 2009, our comparable sales (salesgenerated by locations in operation during the same period) decreased by 0.3%compared to a decrease of 5.6% for the thirteen weeks ended May 3, 2008.This decrease in comparable sales was comprised of a 1.3% decrease incomparable merchandise sales offset by a 3.8% increase in comparable servicerevenue. The difficult macro environment continues to negatively impact salesin our discretionary product categories as consumers defer spending while salesof non discretionary service and hard parts have improved from recent trends.We believe that the steep decline in new car sales over the last year has andwill continue to generate additional service revenues and hard parts sales asconsumers will ultimately spend more maintaining and repairing their existingaging vehicles. In part offsetting this trend is miles driven which hasdeclined for the twelfth straight month in February. Miles driven affect wearitems such as tires. However, the decline in miles driven has moderated in thatthe recent monthly declines are at a lower rate than a year ago.

 

Tocapitalize on these trends, we continue to focus on refining and expanding ourparts assortment to improve our in stock position, improving execution and thecustomer experience and have developed new marketing promotions utilizingtelevision and radio advertising to communicate our value tire and serviceofferings. In the first quarter of fiscal 2009, we ran the first two of thesepromotions, which were successful in increasing customer traffic and sales in ourservice business.

 

InApril 2009, we opened the first of our service-only “spokes” designed tocapture market share and leverage our existing supercenter and supportinfrastructure. The prototypical service spoke is expected to have between 4and 8 service bays, preferably 6. The capital investment for a prototypicalspoke, including inventory net of payables, is projected to be approximately$450,000 to $550,000 and a typical spoke is expected to generate approximately$1,000,000 to $1,500,000 in sales and $150,000 to $250,000 of EBITDA annually.We currently plan to lease spoke locations as we believe that there aresufficient existing available locations with attractive lease terms to enableour expansion. We are targeting 15 new service spokes in fiscal 2009 and 20 to40 in fiscal 2010 to prove the concept and economics.

 

Ournet earnings for the first quarter of 2009 were $10,909,000, a $6,237,000improvement over the net earnings of $4,672,000 reported in the first quarterof 2008. The increase in profitability resulted primarily from increased salesin our service business, higher gross profit margins, expense controlinitiatives that resulted in lower Selling, General and Administrativeexpenses, and a reduction in interest expense. These reductions were partiallyoffset by lower gains from the sale of assets and an increase in income taxexpense. Our net earnings per share for the first quarter of 2009 were $0.21per share, a $0.12 cent per share improvement over the $0.09 per share recordedin the first quarter of 2008 (See Results of Operations).

 

Thefollowing discussion explains the significant developments affecting ourfinancial condition and material changes in our results of operations for thethirteen weeks ended May 2, 2009. We recommend that you read the auditedconsolidated financial statements, footnotes and Management’s Discussion andAnalysis of Financial Condition and Results of Operations included in ourAnnual Report on Form 10-K for the fiscal year ended January 31,2009.

 

LIQUIDITYAND CAPITAL RESOURCES

 

Ourcash requirements arise principally from the purchase of inventory, capitalexpenditures related to existing and new stores, offices and distributioncenters, debt service and contractual obligations. Cash flows realized through thesale of automotive parts, accessories and services is our primary source ofliquidity. Net cash provided by operating activities was $17,977,000 in thefirst quarter of 2009 as compared to a use of $4,331,000 in the first quarterof 2008. The $22,308,000 improvement from the prior year was due to a$4,190,000 increase in our net income (net of non-cash adjustments) and an$18,378,000 favorable change in our operating assets and liabilities. Thechange in operating assets and liabilities was primarily due to favorablechanges in inventory of $8,653,000, accounts 

 

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receivable,prepaid expenses and other of $7,017,000 and other long-term liabilities of$3,077,000. The decline in inventory resulted from more disciplined inventorymanagement, including reduced seasonal inventory purchases, reduced lead timesand safety stocks.  Accounts receivable,prepaid expenses and other declined primarily due to the improved collection ofvendor support funds. The favorable change in other long-term liabilities wasdue to increases in various lease and related liabilities in the current yearas opposed to a decline in the prior year.

 

Cashused by investing activities was $3,950,000 in the first quarter of 2009 ascompared to net cash provided by investing activities of $125,148,000 in thefirst quarter of 2008. During the first quarter of 2008, we completed saleleaseback transactions for net proceeds of $135,519,000, of which $4,676,000was shown in financing activities due to our continuing involvement in certainof the sold properties. The proceeds from these transactions were used toreduce debt obligations. During the first quarter of 2009, we sold the twoproperties that were classified as held for sale for net proceeds of $1,758,000and recognized a $109,000 net gain which was reported in discontinuedoperations. Capital expenditures in the first quarter of the current year andprior year were $5,718,000 and $6,942,000, respectively. Capital expendituresfor the first quarter of 2009 were for the maintenance of our existing stores,offices and distribution centers, and for the new service only spoke location.

 

Ourfiscal year 2009 capital expenditures are expected to be approximately$50,000,000 which includes the addition of approximately 15 service only “spokes”and the general maintenance of our existing stores, offices and distributioncenters. These expenditures are expected to be funded by net cash generatedfrom operating activities and our existing line of credit.

 

Inthe first quarter of fiscal year 2009 and 2008, we used cash in financingactivities of $14,046,000 and $54,466,000, respectively. During the first quarterof 2009, we repurchased $16,970,000 of its outstanding 7.5% Senior SubordinatedNotes for $10,722,000. In the first quarter of 2008, we used the proceeds fromthe sale leaseback transactions discussed above to reduce debt obligations,including the amount then due under our revolving credit agreement of$49,915,000 and to repurchase $20,965,000 principal amount of our 7.5% SeniorSecured Notes.

 

Weanticipate that cash provided by operating activities, our existing line ofcredit and cash on hand will exceed our expected cash requirements in fiscalyear 2009. We expect to have excess availability under our existing line ofcredit during the entirety of fiscal year 2009. We also have substantial ownedreal estate which we believe we can monetize, if necessary, through additionalsale leaseback or other financing transactions. As of May 2, 2009, we hadundrawn availability under our revolving credit facility of $171,704,000.

 

Ourworking capital was $185,167,000 and $179,233,000 at May 2, 2009 and January 31,2009, respectively. Our long-term debt, as a percentage of our totalcapitalization, was 43% and 45% at May 2, 2009 and January 31, 2009,respectively.

 

Asof May 2, 2009, we had an outstanding balance of $28,464,000 (classifiedas trade payable program liability on the consolidated balance sheet) under ourthen current vendor financing program. Under this program, the factor makesaccelerated and discounted payments to our vendors and we, in turn, make ourregularly scheduled full vendor payments to the factor. We are currentlywinding down this program in favor of a new trade payable program, entered intoon April 6, 2009, which will be funded by various bank participants whowill have the ability, but not the obligation, to purchase directly from our vendorstheir account receivables owed by the Company. As of May 2, 2009, therewere no amounts outstanding under the new program.

 

DISCONTINUEDOPERATIONS

 

Inthe third quarter of fiscal year 2007, we adopted our long-term strategic plan.One of the initial steps in this plan was the identification of 31 low-returnstores for closure. We have accounted for these store closures in accordancewith the provisions of SFAS No.146 “Accounting for Costs Associated with Exitor Disposal Activities” and SFAS No.144, “Accounting for Impairment or Disposalof Long-Lived Assets” (SFAS No.144). In accordance with SFAS No.144, ourdiscontinued operations for all periods presented reflect the operating resultsfor 11 of the 31 closed stores because we do not believe that the customers ofthese stores are likely to become customers of other Pep Boys stores due togeographical considerations. The operating results for the other 20 closedstores are included in continuing operations because we believe that thecustomers of these stores are likely to become customers of other Pep Boysstores that are in close proximity.

 

Thefollowing analysis of our results of continuing operations excludes theoperating results of the above-referenced 11 stores which have been classifiedas discontinued operations for all periods presented.

 

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RESULTSOF OPERATIONS

 

ThirteenWeeks Ended May 2, 2009 vs. Thirteen Weeks Ended May 3, 2008

 

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**                | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|
| **Thirteen weeks ended**                       | ** ** | **May 2,  2009  (Fiscal 2009)**       | ** ** | **May 3,  2008  (Fiscal 2008)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                     |       |                                            |       |                                      |       |   |   |
| Merchandise Sales                                        |       | 80.2                                            | %          | 81.0                                      | %          | (1.3 | )% |
| Service Revenue (1)                                      |       | 19.8                                            |       | 19.0                                      |       | 3.8 |   |
| Total Revenue                                            |       | 100.0                                           |       | 100.0                                     |       | (0.3 | ) |
| Costs of Merchandise Sales (2)                           |       | 70.6                                            | (3)        | 70.9                                      | (3)        | 1.7 |   |
| Costs of Service Revenue (2)                             |       | 87.3                                            | (3)        | 88.9                                      | (3)        | (2.0 | ) |
| Total Costs of Revenue                                   |       | 73.9                                            |       | 74.3                                      |       | 0.9 |   |
| Gross Profit from Merchandise Sales                      |       | 29.4                                            | (3)        | 29.1                                      | (3)        | (0.2 | ) |
| Gross Profit from Service Revenue                        |       | 12.7                                            | (3)        | 11.1                                      | (3)        | 18.0 |   |
| Total Gross Profit                                       |       | 26.1                                            |       | 25.7                                      |       | 1.3 |   |
| Selling, General and Administrative Expenses             |       | 21.8                                            |       | 23.9                                      |       | 9.2 |   |
| Net Gain from Dispositions of Assets                     |       | —                                          |       | 1.1                                       |       | (99.9 | ) |
| Operating Profit                                         |       | 4.3                                             |       | 2.9                                       |       | 48.8 |   |
| Non-operating Income                                     |       | 0.1                                             |       | 0.1                                       |       | 22.1 |   |
| Interest Expense                                         |       | 0.4                                             |       | 1.1                                       |       | 64.3 |   |
| Earnings from Continuing Operations Before Income  Taxes |       | 4.0                                             |       | 1.9                                       |       | 113.3 |   |
| Income Tax Expense                                       |       | 44.7                                            | (4)        | 43.6                                      | (4)        | (118.7 | ) |
| Net Earnings from Continuing Operations                  |       | 2.2                                             |       | 1.1                                       |       | 109.1 |   |
| Discontinued Operations, Net of Tax                      |       | —                                          |       | (0.1                                      | )          | 75.1 |   |
| Net Earnings                                             |       | 2.2                                             |       | 0.9                                       |       | 133.5 |   |

 

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| (1) | Service  revenue consists of the labor charge for installing merchandise or  maintaining or repairing vehicles, excluding the sale of any installed parts  or materials.                                                                                                                                                                                                                  |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Costs  of merchandise sales include the cost of products sold, buying, warehousing  and store occupancy costs. Costs of service revenue include service center  payroll and related employee benefits and service center occupancy costs.  Occupancy costs include utilities, rents, real estate and property taxes,  repairs and maintenance and depreciation and amortization expenses. |
| (3) | As  a percentage of related sales or revenue, as applicable.                                                                                                                                                                                                                                                                                                                              |
| (4) | As  a percentage of Loss from Continuing Operations Before Income Taxes.                                                                                                                                                                                                                                                                                                                  |

 

Totalrevenue and comparable store revenue for the thirteen weeks ended May 2,2009 decreased 0.3%, compared to the thirteen weeks ended May 3, 2008.This decrease was primarily due to weaker sales in our retail business stemmingfrom lower customer counts and less discretionary spending by our customers.Comparable revenues declined by 0.3%, consisting of a 1.3% decrease incomparable merchandise sales which was mostly offset by an increase of 3.8% incomparable service revenue.

 

Inthe first quarter of 2009, customer traffic generated by two promotional eventsresulted in an increase in service and commercial customer count. However,total customer count declined in the first quarter of 2009 as a result of adecrease in Do-It-Yourself(DIY) retail customer count. We believe the decrease in retail customer countis a result of our competitors continuing to open new stores, the overallindustry decline in the DIY business and overall reduced spending due to thecurrent economic environment. In addition, we carry a large assortment of morediscretionary retail product which is more susceptible to consumer spendingdeferrals. We continue to believe that providing a better customer experience,value proposition and innovative marketing could stem the overall decline incustomer counts and sales over the long term.

 

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Grossprofit as a percentage of merchandise sales increased from 29.1% for the firstquarter of 2008 to 29.4% for the first quarter of 2009. Gross profit dollarsremained relatively flat year over year. Product gross profit margins declinedby 90 basis points as result of increased product promotions and an overallchange in product mix, offset by lower occupancy and warehousing costs whichimproved by 110 basis points.

 

Grossprofit from service revenue increased as a percentage of service revenue to12.7 % in the first quarter of 2009 from 11.1% in the first quarter of 2008. Indollars, gross profit from service sales in dollars increased 18.0% or$1,904,000. The increase in gross profit was primarily due to the increase inservice revenue. The increase in sales volume resulted in higher absorption offixed expenses such as occupancy costs and to a certain extent, labor costs.

 

Selling,General and Administrative expenses, as a percentage of total revenuesdecreased from 23.9% in the first quarter of 2008 to 21.8% in the first quarterof 2009. In dollars, selling, general and administrative expenses decreased$10,962,000 or 9.2%. This decrease in dollars was primarily due to $3,758,000in reduced payroll and related expenses, $5,466,000 of less media expense and $1,761,000of lower legal and professional services fees.

 

Interestexpense decreased to $1,936,000 in the first quarter of 2009 from $5,427,000 inthe first quarter of 2008. Both years included gain from the retirement of debtof $6,248,000 and $2,883,000, respectively. Excluding these gains, interestexpense remained relatively flat.

 

Ourincome tax expense for first quarter of 2009 was $8,955,000 or an effectiverate of 44.7% as compared to an expense of $4,094,000 or an effective rate of43.6% for the first quarter of 2008. The annual rate depends on a number offactors, including the amount and source of operating profit and the timing andnature of discrete items.

 

INDUSTRYCOMPARISON

 

Weoperate in the U.S. automotive aftermarket, which has two general lines ofbusiness: the Service Business defined as Do-It-For-Me (service labor,installed merchandise and tires) market and the Retail Business defined asDo-It-Yourself (retail merchandise) and commercial market. Generally,specialized automotive retailers focus on either the Retail or Service areas ofthe business. We believe that operation in both the Retail and Service areas ofthe business positively differentiates us from most of our competitors.Although we manage our store performance at a store level in aggregation, webelieve that the following presentation shows an accurate comparison againstcompetitors within the two sales arenas. We compete in the Retail area of thebusiness through our retail sales floor and commercial sales business. Our ServiceCenter business (labor and installed merchandise and tires) competes in theService area of the industry. The following table presents the revenues andgross profit for each area of the business.

 
| ** **                                       | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **May 2, 2009**               | ** ** | **May 3, 2008** | ** ** |
|                                             |       |                               |       |   |   |
| Retail Sales (1)                                 |       | $                                  | 264,411    |   | $ | 273,325 |   |
| Service Center Revenue (2)                       |       | 232,077                            |       | 224,718 |   |
| Total Revenues                                   |       | $                                  | 496,488    |   | $ | 498,043 |   |
|                                             |       |                               |       |   |   |
| Gross Profit from Retail Sales (3)               |       | $                                  | 73,555     |   | $ | 73,404 |   |
| Gross Profit from Service Center Revenue (4)     |       | 56,046                             |       | 54,562 |   |
| Total Gross Profit                               |       | $                                  | 129,601    |   | $ | 127,966 |   |

 

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| (1) | Excludes  revenues from installed products.                                                                                                                                                                                                                                                                                                             |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes  revenues from installed products.                                                                                                                                                                                                                                                                                                             |
| (3) | Gross  Profit from Retail Sales includes the cost of products sold, buying, warehousing  and store occupancy costs.                                                                                                                                                                                                                                     |
| (4) | Gross  Profit from Service Center Revenue includes the cost of installed products  sold, buying, warehousing, service center payroll and related employee  benefits and service center occupancy costs. Occupancy costs include  utilities, rents, real estate and property taxes, repairs and maintenance and  depreciation and amortization expenses. |

 

NEWACCOUNTING STANDARDS

 

EffectiveFebruary 1, 2009, we adopted Statement of Financial Accounting Standards(SFAS) No.161, “Disclosures about Derivative Instruments and HedgingActivities—an amendment of FASB Statement No.133” (SFAS No.161). SFAS No.161requires increased qualitative, quantitative, and credit-risk disclosures.Qualitative disclosures include how and why an entity uses derivatives orhedging 

 

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activity,how the entity is accounting for these activities and how the instrumentsaffect the entity’s financial position, financial performance and cash flows.Quantitative disclosures include information (in a tabular format) about thefair value of the derivative instruments, including gains and losses, andshould contain more detailed information about the location of the derivativeinstrument in the entity’s financial statements. Credit-risk disclosuresinclude information about the existence and nature of credit risk-relatedcontingent features included in derivative instruments. Credit-risk-relatedcontingent features can be defined as those that require entities, upon theoccurrence of a credit event (e.g., credit rating downgrade), to settlederivative instruments or to post collateral. See note 16 for additionalinformation related to our derivatives.

 

InApril 2009, the Financial Accounting Standards Board (FASB) jointly issuedFASB Staff Position No.107-1, “Interim Disclosures about Fair Value ofFinancial Instruments” (FSP No.107-1) and Accounting Practices Bulletin OpinionNo.28-1 (APB No.28-1). FSP No.107-1 and APB No.28-1 amend SFAS No.107 “Disclosuresabout Fair Value of Financial Instruments”, to require disclosures about fairvalue of financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements. FSP No.107-1 and APBNo.28-1 are effective for interim reporting periods ending after June 15,2009. We are currently evaluating the impact FSP No.107-1 and APB No.28-1willhave on our consolidated financial statements.

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the condensed consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period.Additionally, we estimate our interim product gross margins in accordance withAccounting Principles Bulletin No.28, “Interim Financial Reporting.”

 

Onan on-going basis, we evaluate our estimates and judgments, including thoserelated to customer incentives, product returns and warranty obligations, baddebts, inventories, income taxes, financing operations, restructuring costs,retirement benefits, risk participation agreements and contingencies andlitigation. We base our estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions. For a detailed discussion of significant accountingpolicies that may involve a higher degree of judgment or complexity, refer to “CriticalAccounting Policies and Estimates” as reported in our Form10-K for the fiscal year ended January 31, 2009, which disclosures arehereby incorporated by reference.

 

FORWARD-LOOKINGSTATEMENTS

 

Certainstatements contained herein constitute “forward-looking statements” within themeaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,”“expect,” “anticipate,” “estimates,” “forecasts” and similar expressions areintended to identify such forward-looking statements. Forward-lookingstatements include management’s expectations regarding implementation of itslong-term strategic plan, future financial performance, automotive aftermarkettrends, levels of competition, business development activities, future capitalexpenditures, financing sources and availability and the effects of regulationand litigation. Although we believe that the expectations reflected in suchforward-looking statements are based on reasonable assumptions, we can give noassurance that our expectations will be achieved. Our actual results may differmaterially from the results discussed in the forward-looking statements due to factorsbeyond our control, including the strength of the national and regionaleconomies, retail and commercial consumers’ ability to spend, the health of thevarious sectors of the automotive aftermarket, the weather in geographicalregions with a high concentration of our stores, competitive pricing, thelocation and number of competitors’ stores, product and labor costs and theadditional factors described in our filings with the Securities and ExchangeCommission (SEC). We assume no obligation to update or supplementforward-looking statements that become untrue because of subsequent events.

 

Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk

 

Ourprimary market risk exposure with regard to financial instruments is to changesin interest rates. Pursuant to the terms of our revolving credit agreement,changes in LIBOR or the Prime Rate could affect the rates at which we couldborrow funds thereunder. At May 2, 2009, we had borrowings of $25,838,000under this facility. Additionally, we have a $150,524,000 Senior Secured TermLoan facility that bears interest at three month LIBOR plus 2.0%.

 

Wehave an interest rate swap for a notional amount of $145,000,000, which isdesignated as a cash flow hedge on our Senior Secured Term Loan. We documentedthat this swap met the requirements of SFAS No.133 for hedge accounting on April 9,2007, and have since recorded the effective portion of the change in fair valuethrough Accumulated Other Comprehensive Loss.

 

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Thefair value of the interest rate swap was $15,867,000 and $15,808,000 payable atMay 2, 2009 and January 31, 2009, respectively. Of the net $59,000 increasein fair value during the thirteen weeks ended May 2, 2009, $37,000 net oftax was included in accumulated other comprehensive loss on the condensedconsolidated balance sheet.

 

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Item 4.  Controls andProcedures.

 

EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES

 

Ourdisclosure controls and procedures (as defined in Rule 13a-15 of theSecurities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensurethat information required to be disclosed is accumulated and communicated toour management, including our principal executive and principal financialofficers, as appropriate to allow timely decisions regarding requireddisclosure. The term disclosure controls and procedures means controls andother procedures of an issuer that are designed to ensure that informationrequired to be disclosed by the issuer in the reports that it files or submitsunder the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized andreported, within the time periods specified in the Commission’s rules andforms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byan issuer in the reports that it files or submits under the Act is accumulatedand communicated to the issuer’s management, including its principal executiveand principal financial officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure. TheCompany’s management, with the participation of the Company’s chief executiveofficer and chief financial officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. Based on that evaluation, the chief executive officer and chieffinancial officer concluded that our disclosure controls and procedures as ofthe end of the period covered by this report were functioning effectively andprovide reasonable assurance that the information required to be disclosed bythe Company in reports filed under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

 

CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Nochange in the Company’s internal control over financial reporting occurredduring the fiscal quarter covered by this report that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

Item 5.  OtherInformation

 

None.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

InSeptember 2006, the United States Environmental Protection Agency (“EPA”)requested certain information from the Company as part of an investigation todetermine whether the Company had violated, and is in violation of, the CleanAir Act and its non-road engine regulations. The information requestedconcerned certain generator and personal transportation merchandise offered forsale by the Company. In the fourth quarter of fiscal year 2008, the EPAinformed the Company that it believed that the Company had violated the CleanAir Act by virtue of the fact that certain of this merchandise did not conformto their corresponding EPA Certificates of Conformity and that unless the EPAand the Company were able to reach a settlement, the EPA was prepared tocommence a civil action. The Company is currently engaged in settlementdiscussions with the EPA that would call for the payment of a civil penalty andcertain injunctive relief. As a result of these discussions, the Company hasaccrued an amount equal to its estimate of the civil penalty that the Companyis prepared to pay to settle the matter and has temporarily restricted fromsale, and taken a partial asset impairment against certain inventory. If theCompany is not able to reach a settlement with the EPA on mutually acceptableterms, the Company is prepared to vigorously defend any civil action filed.

 

The Company is also party to various other actions andclaims arising in the normal course of business.

 

TheCompany believes that amounts accrued for awards or assessments in connectionwith all such matters are adequate and that the ultimate resolution of thesematters will not have a material adverse effect on the Company’s financialposition. However, there exists a reasonable possibility of loss in excess ofthe amounts accrued, the amount of which cannot currently be estimated. Whilethe Company does not believe that the amount of such excess loss could bematerial to the Company’s financial position, any such loss could have amaterial adverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

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Item 1A.  Risk Factors

 

Therehave been no changes to the risks described in the Company’s previously filedAnnual Report on Form 10-K for the fiscal year ended January 31,2009.

 
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
|---------|-------------------------------------------------------------|
|    |                                                        |
|    | None.                                                       |
|    |                                                        |
| Item 3. | Defaults Upon Senior Securities                             |
|    |                                                        |
|    | None.                                                       |
|    |                                                        |
| Item 4. | Submission of Matters to a Vote of Security Holders         |
|    |                                                        |
|    | None.                                                       |
|    |                                                        |
| Item 5. | Other Information                                           |
|    |                                                        |
|    | None.                                                       |

 

Item 6.  Exhibits

 
| (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 |

 

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SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|   |               |   | THE PEP BOYS - MANNY,  MOE & JACK                                                                            |
|--------|--------------------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |               |   | (Registrant)                                                                                                          |
|   |               |   |                                                                                                                  |
| Date:  | June 10, 2009 |   | by:                                                                                                                   | /s/ Raymond L. Arthur |
|   |               |   |                                                                                                                  |
|   |               |   | Raymond L. Arthur                                                                                                     |
|   |               |   | Executive Vice President  and Chief Financial Officer  (Principal Financial Officer and Principal Accounting Officer) |

 

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INDEX TO EXHIBITS

 
| (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 |

 

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