Table of Contents

** **

 

** **

**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 October 31, 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’stelephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities and Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports); and(2) has been subject to such filing requirements for the past 90days.  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

 

Indicate by checkmarkwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes  o  No  x

 

As of November 27, 2009, there were52,349,520 shares of the registrant’s Common Stock outstanding.

 

 

 

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Table of Contents

 

Index

 
| ** **                          | ** **                                                                                                                                                      | **Page** |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION |                                                                                                                                                            |
|                                |                                                                                                                                                            |     |
| Item 1.                             | Condensed Consolidated  Financial Statements                                                                                                                    | 3        |
|                                |                                                                                                                                                            |     |
|                                | Condensed  Consolidated Balance Sheets - October 31, 2009 and January 31, 2009                                                                                  | 3        |
|                                |                                                                                                                                                            |     |
|                                | Condensed  Consolidated Statements of Operations and Changes in Retained Earnings -  Thirteen and Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008 | 4        |
|                                |                                                                                                                                                            |     |
|                                | Condensed  Consolidated Statements of Cash Flows - Thirty-Nine Weeks Ended October 31,  2009 and November 1, 2008                                               | 5        |
|                                |                                                                                                                                                            |     |
|                                | Notes to the Condensed Consolidated Financial  Statements                                                                                                       | 6 - 18   |
|                                |                                                                                                                                                            |     |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                     | 19       |
|                                |                                                                                                                                                            |     |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                     | 25       |
|                                |                                                                                                                                                            |     |
| Item 4.                             | Controls and  Procedures                                                                                                                                        | 25       |
|                                |                                                                                                                                                            |     |
| Item 5.                             | Other Information                                                                                                                                               | 25       |
|                                |                                                                                                                                                            |     |
| PART II  - OTHER INFORMATION   | 26                                                                                                                                                              |
|                                |                                                                                                                                                            |     |
| Item 1.                             | Legal Proceedings                                                                                                                                               | 26       |
|                                |                                                                                                                                                            |     |
| 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                                                                                                                                                        | 27       |
|                                |                                                                                                                                                            |     |
| SIGNATURES                          | 28                                                                                                                                                              |
|                                |                                                                                                                                                            |     |
| INDEX TO EXHIBITS                   | 29                                                                                                                                                              |

 

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Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated FinancialStatements

 

THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(dollar amounts in thousands, exceptshare data)

UNAUDITED

 
| ** **                                                                                    | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                    |       |                       |       |                       |       |
| Current  Assets:                                                                              |       |                       |       |                       |       |
| Cash  and cash equivalents                                                                    |       | $                          | 40,843     |                       | $          | 21,332 |   |
| Accounts  receivable, less allowance for uncollectible accounts of $1,853 and $1,912          |       | 20,461                     |       | 28,831                     |       |
| Merchandise  inventories                                                                      |       | 571,789                    |       | 564,931                    |       |
| Prepaid  expenses                                                                             |       | 14,946                     |       | 25,390                     |       |
| Other                                                                                         |       | 50,205                     |       | 62,421                     |       |
| Assets  held for disposal                                                                     |       | 6,616                      |       | 12,653                     |       |
| Total  Current Assets                                                                         |       | 704,860                    |       | 715,558                    |       |
|                                                                                          |       |                       |       |                       |       |
| Property  and Equipment - net                                                                 |       | 708,972                    |       | 740,331                    |       |
| Deferred  income taxes                                                                        |       | 72,970                     |       | 77,708                     |       |
| Other                                                                                         |       | 20,118                     |       | 18,792                     |       |
| Total  Assets                                                                                 |       | $                          | 1,506,920  |                       | $          | 1,552,389 |   |
|                                                                                          |       |                       |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                 |       |                       |       |                       |       |
| Current  Liabilities:                                                                         |       |                       |       |                       |       |
| Accounts  payable                                                                             |       | $                          | 219,205    |                       | $          | 212,340 |   |
| Trade  payable program liability                                                              |       | 26,459                     |       | 31,930                     |       |
| Accrued  expenses                                                                             |       | 231,468                    |       | 254,754                    |       |
| Deferred  income taxes                                                                        |       | 39,170                     |       | 35,848                     |       |
| Current  maturities of long-term debt and obligations under capital leases                    |       | 1,079                      |       | 1,453                      |       |
| Total  Current Liabilities                                                                    |       | 517,381                    |       | 536,325                    |       |
|                                                                                          |       |                       |       |                       |       |
| Long-term  debt and obligations under capital leases, less current maturities                 |       | 306,471                    |       | 352,382                    |       |
| Other  long-term liabilities                                                                  |       | 72,164                     |       | 70,322                     |       |
| Deferred  gain from asset sales                                                               |       | 168,243                    |       | 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                                                                   |       | 293,330                    |       | 292,728                    |       |
| Retained  earnings                                                                            |       | 374,461                    |       | 358,670                    |       |
| Accumulated  other comprehensive loss                                                         |       | (16,739                    | )          | (18,075                    | )          |
| Less  cost of shares in treasury — 14,014,018 shares and 14,124,021 shares               |       | 217,684                    |       | 219,460                    |       |
| Less  cost of shares in benefits trust — 2,195,270 shares                                |       | 59,264                     |       | 59,264                     |       |
| Total  Stockholders’ Equity                                                              |       | 442,661                    |       | 423,156                    |       |
| Total  Liabilities and Stockholders’ Equity                                              |       | $                          | 1,506,920  |                       | $          | 1,552,389 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONSAND CHANGES IN RETAINED EARNINGS

(dollar amounts in thousands, except pershare amounts)

UNAUDITED

 
| ** **                                                                                        | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                        | ** ** | **October 31,  2009**         | ** ** | **November 1,  2008**            | ** ** | **October 31,  2009** | ** ** | **November 1,  2008** | ** ** |
| Merchandise  Sales                                                                                |       | $                                  | 378,860    |                                  | $          | 378,461 |   | $ | 1,169,108 |   | $ | 1,189,872 |   |
| Service  Revenue                                                                                  |       | 93,783                             |       | 85,705                                |       | 288,934 |   | 272,380 |   |
| Total  Revenues                                                                                   |       | 472,643                            |       | 464,166                               |       | 1,458,042 |   | 1,462,252 |   |
| Costs  of Merchandise Sales                                                                       |       | 269,604                            |       | 268,235                               |       | 826,429 |   | 838,574 |   |
| Costs  of Service Revenue                                                                         |       | 84,770                             |       | 81,087                                |       | 255,553 |   | 250,434 |   |
| Total  Costs of Revenues                                                                          |       | 354,374                            |       | 349,322                               |       | 1,081,982 |   | 1,089,008 |   |
| Gross  Profit from Merchandise Sales                                                              |       | 109,256                            |       | 110,226                               |       | 342,679 |   | 351,298 |   |
| Gross  Profit from Service Revenue                                                                |       | 9,013                              |       | 4,618                                 |       | 33,381 |   | 21,946 |   |
| Total  Gross Profit                                                                               |       | 118,269                            |       | 114,844                               |       | 376,060 |   | 373,244 |   |
| Selling,  General and Administrative Expenses                                                     |       | 109,545                            |       | 119,827                               |       | 327,080 |   | 361,445 |   |
| Net Gain  (Loss) from Dispositions of Assets                                                      |       | 1,332                              |       | (53                                   | )          | 1,319 |   | 9,555 |   |
| Operating  Profit (Loss)                                                                          |       | 10,056                             |       | (5,036                                | )          | 50,299 |   | 21,354 |   |
| Non-operating  Income                                                                             |       | 724                                |       | 305                                   |       | 1,666 |   | 1,797 |   |
| Interest  Expense                                                                                 |       | 6,922                              |       | 7,098                                 |       | 15,324 |   | 18,977 |   |
| Earnings  (Loss) From Continuing Operations Before Income Taxes                                   |       | 3,858                              |       | (11,829                               | )          | 36,641 |   | 4,174 |   |
| Income  Tax Expense (Benefit)                                                                     |       | 1,501                              |       | (4,775                                | )          | 15,363 |   | 185 |   |
| Net  Earnings (Loss)From Continuing Operations                                                    |       | 2,357                              |       | (7,054                                | )          | 21,278 |   | 3,989 |   |
| Discontinued  Operations, Net of Tax                                                              |       | (233                               | )          | (228                                  | )          | (510 | ) | (1,151 | ) |
| Net  Earnings (Loss)                                                                              |       | 2,124                              |       | (7,282                                | )          | 20,768 |   | 2,838 |   |
|                                                                                              |       |                               |       |                                  |       |   |   |   |   |
| Retained  Earnings, beginning of period                                                           |       | 373,963                            |       | 408,351                               |       | 358,670 |   | 406,819 |   |
| Cumulative  effect of change in method of accounting for split dollar life insurance, net  of tax |       | —                             |       | —                                |       | — |   | (1,165 | ) |
| Cash  Dividends                                                                                   |       | (1,557                             | )          | (3,523                                | )          | (4,709 | ) | (10,551 | ) |
| Dividend  Reinvested and Other                                                                    |       | (69                                | )          | (849                                  | )          | (268 | ) | (1,244 | ) |
| Retained  Earnings, end of period                                                                 |       | $                                  | 374,461    |                                  | $          | 396,697 |   | $ | 374,461 |   | $ | 396,697 |   |
|                                                                                              |       |                               |       |                                  |       |   |   |   |   |
| Basic  Earnings (Loss) Per Share:                                                                 |       |                               |       |                                  |       |   |   |   |   |
|                                                                                              |       |                               |       |                                  |       |   |   |   |   |
| Net  Earnings (Loss) from Continuing Operations                                                   |       | $                                  | 0.05       |                                  | $          | (0.13 | ) | $ | 0.41 |   | $ | 0.08 |   |
| Discontinued  Operations, Net of Tax                                                              |       | (0.01                              | )          | (0.01                                 | )          | (0.01 | ) | (0.03 | ) |
| Basic  Earnings (Loss) Per Share                                                                  |       | $                                  | 0.04       |                                  | $          | (0.14 | ) | $ | 0.40 |   | $ | 0.05 |   |
|                                                                                              |       |                               |       |                                  |       |   |   |   |   |
| Diluted  Earnings (Loss) Per Share:                                                               |       |                               |       |                                  |       |   |   |   |   |
|                                                                                              |       |                               |       |                                  |       |   |   |   |   |
| Net  Earnings (Loss) from Continuing Operations                                                   |       | $                                  | 0.04       |                                  | $          | (0.13 | ) | $ | 0.40 |   | $ | 0.08 |   |
| Discontinued  Operations, Net of Tax                                                              |       | —                             |       | (0.01                                 | )          | — |   | (0.03 | ) |
| Diluted  Earnings (Loss) Per Share                                                                |       | $                                  | 0.04       |                                  | $          | (0.14 | ) | $ | 0.40 |   | $ | 0.05 |   |
|                                                                                              |       |                               |       |                                  |       |   |   |   |   |
| Cash  Dividends Per Share                                                                         |       | $                                  | 0.0300     |                                  | $          | 0.0675 |   | $ | 0.0900 |   | $ | 0.2025 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS -MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amountsin thousands)

UNAUDITED

 
| **Thirty-Nine Weeks Ended**                                                            | ** ** | **October 31,  2009** | ** ** | **November 1,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                       | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Cash  Flows from Operating Activities:                                                           |       |                       |       |                       |       |
| Net  Earnings                                                                                    |       | $                          | 20,768     |                       | $          | 2,838 |   |
| Adjustments  to reconcile net earnings to net cash provided by (used in) continuing  operations: |       |                       |       |                       |       |
| Net  loss from discontinued operations                                                           |       | 510                        |       | 1,151                      |       |
| Depreciation  and amortization                                                                   |       | 53,248                     |       | 55,109                     |       |
| Amortization  of deferred gain from asset sales                                                  |       | (9,186                     | )          | (7,305                     | )          |
| Stock  compensation expense                                                                      |       | 1,930                      |       | 2,314                      |       |
| Gain  from debt retirement                                                                       |       | (6,248                     | )          | (3,460                     | )          |
| Deferred  income taxes                                                                           |       | 7,270                      |       | (3,603                     | )          |
| Gain  from dispositions of assets                                                                |       | (1,319                     | )          | (9,555                     | )          |
| Loss  from asset impairment                                                                      |       | 3,117                      |       | 370                        |       |
| Other                                                                                            |       | 267                        |       | 441                        |       |
| Changes  in Operating Assets and Liabilities:                                                    |       |                       |       |                       |       |
| Decrease  in accounts receivable, prepaid expenses and other                                     |       | 33,241                     |       | 39,759                     |       |
| Increase  in merchandise inventories                                                             |       | (5,806                     | )          | (23,548                    | )          |
| Increase  (decrease) in accounts payable                                                         |       | 6,455                      |       | (23,560                    | )          |
| Decrease  in accrued expenses                                                                    |       | (23,922                    | )          | (37,077                    | )          |
| Increase  (decrease) in other long-term liabilities                                              |       | 2,230                      |       | (3,818                     | )          |
| Net  cash provided by (used in) continuing operations                                            |       | 82,555                     |       | (9,944                     | )          |
| Net  cash used in discontinued operations                                                        |       | (594                       | )          | (880                       | )          |
| Net  Cash Provided by (Used in) Operating Activities                                             |       | 81,961                     |       | (10,824                    | )          |
|                                                                                             |       |                       |       |                       |       |
| Cash  Flows from Investing Activities:                                                           |       |                       |       |                       |       |
| Cash  paid for master lease properties                                                           |       | —                     |       | (117,121                   | )          |
| Cash  paid for property and equipment                                                            |       | (27,775                    | )          | (22,653                    | )          |
| Proceeds  from dispositions of assets                                                            |       | 12,093                     |       | 209,085                    |       |
| Acquisition  of Florida Tire Inc.                                                                |       | (2,610                     | )          | —                     |       |
| Other                                                                                            |       | (500                       | )          | —                     |       |
| Net  cash (used in) provided by continuing operations                                            |       | (18,792                    | )          | 69,311                     |       |
| Net  cash provided by discontinued operations                                                    |       | 1,762                      |       | 2,558                      |       |
| Net  Cash (Used in) Provided by Investing Activities                                             |       | (17,030                    | )          | 71,869                     |       |
|                                                                                             |       |                       |       |                       |       |
| Cash  Flows from Financing Activities:                                                           |       |                       |       |                       |       |
| Borrowings  under line of credit agreements                                                      |       | 244,011                    |       | 99,888                     |       |
| Payments  under line of credit agreements                                                        |       | (267,873                   | )          | (141,413                   | )          |
| Borrowings  on trade payable program liability                                                   |       | 122,914                    |       | 154,886                    |       |
| Payments  on trade payable program liability                                                     |       | (128,385                   | )          | (130,824                   | )          |
| Payment  for finance issuance cost                                                               |       | —                     |       | (182                       | )          |
| Proceeds  from lease financing                                                                   |       | —                     |       | 8,661                      |       |
| Long-term  debt and capital lease obligations payments                                           |       | (11,720                    | )          | (24,696                    | )          |
| Dividends  paid                                                                                  |       | (4,709                     | )          | (10,551                    | )          |
| Other                                                                                            |       | 342                        |       | 631                        |       |
| Net  Cash Used in Financing Activities                                                           |       | (45,420                    | )          | (43,600                    | )          |
| Net  Increase in Cash and Cash Equivalents                                                       |       | 19,511                     |       | 17,445                     |       |
| Cash  and Cash Equivalents at Beginning of Period                                                |       | 21,332                     |       | 20,926                     |       |
| Cash  and Cash Equivalents at End of Period                                                      |       | $                          | 40,843     |                       | $          | 38,371 |   |
|                                                                                             |       |                       |       |                       |       |
| Supplemental  Disclosure of Cash Flow Information:                                               |       |                       |       |                       |       |
| Cash  paid for income taxes                                                                      |       | $                          | 4,046      |                       | $          | 1,070 |   |
| Cash  paid for interest                                                                          |       | $                          | 15,492     |                       | $          | 17,043 |   |
| Accrued  purchases of property and equipment                                                     |       | $                          | 1,575      |                       | $          | 1,435 |   |

 

See notes to condensed consolidated financialstatements.

 

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THE PEP BOYS - MANNY, MOE & JACK ANDSUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(dollar amounts in thousands)

 

NOTE 1. Condensed Consolidated FinancialStatements

 

The condensed consolidated balance sheet as of October 31,2009, the condensed consolidated statements of operations and changes inretained earnings for the thirteen and thirty-nine week periods ended October 31,2009 and November 1, 2008 and the condensed consolidated statements ofcash flows for the thirty-nine week periods ended October 31, 2009 and November 1,2008 are unaudited. In the opinion of management, all adjustments necessary topresent fairly the financial position, results of operations and cash flows at October 31,2009 and for all periods presented have been made.

 

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted, as permitted by Rule 10-01 of the Securitiesand Exchange Commission’s Regulation S-X, “Interim Financial Statements.” It issuggested that these condensed consolidated financial statements be read inconjunction with the financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended January 31,2009. The results of operations for the thirteen and thirty-nine week periodsended October 31, 2009 are not necessarily indicative of the operatingresults for the full fiscal year.

 

The Company’s fiscal year ends on the Saturdaynearest January 31. Accordingly, references to fiscal years 2008 and 2009refer to the years ended January 31, 2009 and January 30, 2010,respectively.

 

The Company has evaluated subsequent events andtransactions for recognition or disclosure that occurred after the balancesheet date of October 31, 2009, through the filing of these financialstatements, which occurred on December 9, 2009.

 

NOTE 2. New Accounting Standards

 

On December 30, 2008 the Financial AccountingStandards Board (FASB) issued FASB Staff Position No. 132(R)-1, “Employers’Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1). This pronouncementprovides additional guidance on an employer’s disclosures about plan assets ofa defined benefit pension or other postretirement plan and is effective forfiscal years ending after December 15, 2009. The Company does not expectthe adoption of FSP FAS 132(R)-1 to have a material impact on its consolidatedfinancial statements.

 

In October 2009, theFASB issued Accounting Standards Update 2009-13 “Revenue Recognition (Topic605) – Multiple-Deliverable Revenue Arrangements a consensus of the FASBEmerging Issues Task Force,” (ASU 2009-13). This update eliminates the residualmethod of allocation and requires that consideration be allocated to alldeliverables using the relative selling price method. ASU 2009-13 is effectivefor material revenue arrangements entered into or materially modified in fiscalyears beginning on or after June 15, 2010. The Company is currentlyevaluating the impact ASU 2009-13 will have on its consolidated financialstatements.

 

NOTE 3. Business Combinations

 

On October 31, 2009the Company acquired substantially all of the assets (other than real property)of Florida Tire, Inc. (“Florida Tire”), a privately held automotiveservice and tire business located in the Orlando Florida area consisting of 10service locations. The Company agreed to pay up to $4,350 for Florida Tire andassume certain liabilities. The Company has completed the preliminary purchaseaccounting for the Florida Tire acquisition and has recorded net assets of$4,198, including goodwill of $2,565 and contingent consideration of $1,660which could result in future payments through November 2013.

 

NOTE 4. 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 $508,637 and $493,886 as of October 31, 2009 andJanuary 31, 2009, respectively.

 

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The Company provides for estimated inventoryshrinkage based upon historical levels and the results of its cycle countingprogram.

 

The Company also provides for potentially excessand obsolete inventories based on current inventory levels, the historicalanalysis of product sales and current market conditions. The nature of theCompany’s inventory is such that the risk of obsolescence is minimal and excessinventory has historically been returned to the Company’s vendors for credit.The Company records a provision when less than full credit is expected from avendor or when market is lower than recorded costs. These provisions arereviewed on a quarterly basis for adequacy. The Company’s inventory is recordednet of provisions for these matters, which were $16,424 and $15,874 at October 31,2009 and January 31, 2009, respectively.

 

NOTE 5. Property and Equipment

 

The Company’s property and equipment as of October 31,2009 and January 31, 2009, respectively, was as follows:

 
| **(dollar amounts in thousands)** | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                             |       |                       |       |                       |       |
| Property  and Equipment - at cost:               |       |                       |       |                       |       |
| Land                                             |       | $                          | 204,762    |                       | $          | 207,608 |   |
| Buildings  and improvements                      |       | 822,955                    |       | 822,950                    |       |
| Furniture,  fixtures and equipment               |       | 704,446                    |       | 685,707                    |       |
| Construction  in progress                        |       | 1,795                      |       | 2,576                      |       |
| Accumulated  depreciation and amortization       |       | (1,024,986                 | )          | (978,510                   | )          |
| Property  and Equipment – net               |       | $                          | 708,972    |                       | $          | 740,331 |   |

 

The Company has classified certain closed storeproperties as assets held for disposal on its balance sheets. A store locationis classified as “held for disposal” when (i) the Company has committed toa plan to sell the store location, (ii) the store location is vacant andis available for sale, (iii) the Company is actively marketing the storelocation for sale, (iv) the sale price is reasonable in relation to itscurrent fair value and (v) the Company expects to complete the sale withinone year. No depreciation expense is recognized during the period the asset isheld for disposal.

 

The carrying values ofthese assets follow:

 
| **(dollar amounts in thousands)** | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                             |       |                       |       |                       |       |
| Land                                             |       | $                          | 4,331      |                       | $          | 7,332 |   |
| Buildings  and improvements                      |       | 6,878                      |       | 11,265                     |       |
| Accumulated  depreciation and amortization       |       | (4,593                     | )          | (5,944                     | )          |
| Assets  held for disposal                        |       | $                          | 6,616      |                       | $          | 12,653 |   |

 

The Company held thirteen properties that wereclassified as held for disposal on January 31, 2009. During thethirty-nine week period ended October 31, 2009, the Company sold three ofthese properties for net proceeds of $2,783 and recognized a net gain of $89.Of the remaining ten properties held for disposal on October 31, 2009,three of the properties were then under contract. The Company recorded a losson these three properties of $204 in the third quarter of 2009. The Companytook an additional asset impairment charge of $3,139 on the remainingproperties reflecting further declines in the commercial real estate market forvacant properties. Of the entire $3,343 impairment, $2,454 was charged tomerchandise cost of sales, $663 was charged to service cost of sales and $226was charged to discontinued operations.

 

NOTE 6. Income Taxes

 

The Company recognizes taxes payable for thecurrent year, as well as deferred tax assets and liabilities for the future taxconsequences of events that have been recognized in the Company’s financialstatements or tax returns. The Company must assess the likelihood that anyrecorded deferred tax assets will be recovered against future taxable income.To the extent the Company believes it is more likely than not that the assetwill not be recoverable, a valuation allowance must be established. Cumulativelosses in recent 

 

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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 thispositive evidence, the Company considers various tax planning strategies forgenerating income sufficient to utilize the deferred tax assets, including thepotential sale of real estate and the conversion of the Company’s accountingpolicy for its inventory from LIFO to FIFO. After considering all thisevidence, the Company did not have any material change to its valuationallowance for the thirteen weeks ending October 31, 2009.

 

For income tax benefits related to uncertain taxpositions to be recognized, a tax position must be more-likely-than-not to besustained upon examination by taxing authorities. The amount recognized ismeasured as the largest amount of benefit that is greater than 50 percentlikely of being realized upon ultimate settlement. 

 

During the thirteen weeks ended October 31,2009, the Company reduced its gross unrecognized income tax benefits byapproximately $572, of which $242 was interest, due to settlement of apreviously established liability with the applicable taxing authority.

 

NOTE 7. Pension and Savings Plan

 

Pension expense includes the following:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **October  31, 2009**              | ** ** | **November  1, 2008**                 | ** ** | **October  31, 2009** | ** ** | **November  1, 2008** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Service cost                                     |       | $                                  | —     |                                  | $          | 30 |   | $ | — |   | $ | 90 |   |
| Interest cost                                    |       | 635                                |       | 858                                   |       | 1,904 |   | 2,602 |   |
| Expected return on plan assets                   |       | (451                               | )          | (612                                  | )          | (1,353 | ) | (1,837 | ) |
| Amortization of transition obligation            |       | —                             |       | 40                                    |       | — |   | 122 |   |
| Amortization of prior service cost               |       | 3                                  |       | 92                                    |       | 10 |   | 277 |   |
| Amortization of net loss                         |       | 442                                |       | 255                                   |       | 1,326 |   | 763 |   |
| Net periodic benefit cost                        |       | $                                  | 629        |                                  | $          | 663 |   | $ | 1,887 |   | $ | 2,017 |   |

 

The Company’s expense for its Account Plan(Defined Contribution SERP) was approximately $168 for the thirteen weeks endedOctober 31, 2009, whereas the Company recorded a benefit of $248 for thethirteen weeks ended November 1, 2008. The Company’s expense wasapproximately $695 and $59 for the thirty-nine weeks ended October 31,2009 and November 1, 2008, respectively.

 

The Company has two qualified savings plans thatcover all full-time employees who are at least 21 years of age with one or moreyears of service. Generally, the Company contributes the lesser of 50% of thefirst 6% of a participant’s contributions or 3% of the participant’s compensation.The Company’s savings plans’ expense was approximately $645 and $927 for thethirteen weeks ended October 31, 2009 and November 1, 2008,respectively, and approximately $2,442 and $2,971 for the thirty-nine weeksended October 31, 2009 and November 1, 2008, respectively. TheCompany’s contribution to these plans for fiscal year 2009 is contingent uponmeeting certain performance metrics. The company currently estimates that theseperformance metrics will be achieved and has recorded expense accordingly.

 

NOTE 8. Sale-Leaseback Transactions

 

During the third quarter of fiscal year 2009,the Company sold three properties to unrelated third parties. Net proceeds fromthese sales were $10,986. Concurrent with these sales, the Company entered intoagreements to lease the properties back from the purchasers over minimum leaseterms of 15 years. The Company classified these leases as operatingleases. The Company actively uses these properties and considers the leases asnormal leasebacks. A $1,365 gain on the sale of these properties was recognizedimmediately upon execution of the sale and a $6,483 gain was deferred. Thedeferred gain is being recognized over the minimum term of these leases.

 

During the first half of fiscal year 2008, theCompany sold 63 owned properties to unrelated third parties. Net proceeds fromthese sales were $211,470. Concurrent with the sale, the Company entered intoagreements to lease the properties back from the purchaser over a minimum leaseterm of 15 years. The Company classified 61 of these leases as operatingleases. The Company actively uses these properties and considers the leases asnormal leasebacks. A $7,655 gain on the sale of these properties was recognized

 

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immediately upon execution of the sale and an$89,930 gain was deferred. The deferred gain is being recognized over theminimum term of these leases. The Company initially had continuing involvementin two properties and, accordingly, recorded $8,479 of the transaction’s totalnet proceeds as a borrowing and as a financing activity in the CondensedConsolidated Statement of Cash Flows. The Company provided the necessarydocumentation to satisfy its indemnity and remove its continuing involvementwith these properties by the end of the third quarter 2008. The Company thenrecorded the sale of these properties as a sale-leaseback transaction, removingthe assets and related lease financing and recorded a $3,963 deferred gain thatis being recognized over the remaining minimum term of these leases.

 

Of the 581 store locations operated by theCompany at October 31, 2009, 232 are owned and 349 are leased.

 

NOTE 9. Debt and Financing Arrangements

 
| **(dollar amounts in thousands)**                              | ** ** | **October 31,  2009** | ** ** | **January 31,  2009** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| 7.50% Senior Subordinated Notes, due  December 2014                      |       | $                          | 157,565    |                       | $          | 174,535 |   |
| Senior Secured Term Loan, due October 2013                               |       | 149,985                    |       | 150,794                    |       |
| Lease financing obligations                                                   |       | —                     |       | 4,515                      |       |
| Capital lease obligations                                                     |       | —                     |       | 129                        |       |
| Revolving Credit Agreement, expiring  January 2014                       |       | —                     |       | 23,862                     |       |
|                                                                          |       | 307,550                    |       | 353,835                    |       |
| Less current maturities                                                       |       | 1,079                      |       | 1,453                      |       |
| Long-term debt and obligations under capital leases,  less current maturities |       | $                          | 306,471    |                       | $          | 352,382 |   |

 

On January 16, 2009, the Company enteredinto a new Revolving Credit Agreement with available borrowings up to $300,000.The Company’s ability to borrow under the Revolving Credit Agreement is basedon a specific borrowing base consisting of inventory and accounts receivable.The interest rate on this credit line is LIBOR or Prime plus 2.75% to 3.25%based upon the then current availability under the facility.

 

During the thirty-nine week periods ending October 31,2009 and November 1, 2008, the Company repurchased $16,970 and $25,465,respectively of its outstanding 7.5% Senior Subordinated Notes for $10,722 and$22,005, respectively resulting in a pre-tax gain of $6,248 and $3,460,respectively. The gain is reflected in interest expense on the accompanyingCondensed Consolidated Statement of Operations and Changes in RetainedEarnings.

 

As of October 31, 2009, 126 of the 232owned stores are used as collateral under our Senior Secured Term Loanagreement due October 2013. The estimated fair market value of thesecollateralized properties was $300,965 as of the end of the second quarter2009, based on an appraisal which is conducted every twenty months inaccordance with the agreement.

 

Several of the Company’s debt agreements requirecompliance with covenants. The most restrictive of which is contained in theCompany’s Revolving Credit Agreement. During any period that the Company’savailability under its Revolving Credit Agreement drops below $50,000, theCompany is required to maintain a consolidated fixed charge coverage ratio, ofat least 1.1:1.0, calculated as the ratio of (a) EBITDA (net income plusinterest charges, provision for taxes, depreciation and amortization expense,non-cash stock compensation expenses and other non-recurring, non-cash items)minus capital expenditures and income taxes paid to (b) the sum of debtservice charges and restricted payments made. The failure to satisfy thiscovenant would constitute an event of default under the Company’s RevolvingCredit Agreement, which would result in a cross-default under the Company’s7.5% Senior Subordinated Notes and Senior Secured Term Loan. As of October 31,2009, the Company had availability under the Revolving Credit Agreement ofapproximately $133,693 and was in compliance with its financial covenants.

 

The Company determines fair value on its fixedrate debt by using quoted market prices and current interest rates. For debtissues that are not quoted on an exchange, the Company determines fair value byreference to debt issues with similar terms and maturities. The estimated fairvalue of long-term debt including current maturities was $287,680 and $200,276as of October 31, 2009 and January 31, 2009, respectively.

 

NOTE 10. Warranty Reserve

 

The Company provides warranties for both itsmerchandise sales and service labor. Warranties for merchandise are generallycovered by the respective vendors, with the Company covering any costs abovethe vendor’s stipulated allowance. Service labor warranties are covered in fullby the Company on a limited lifetime basis. The Company establishes itswarranty reserves based on historical data of 

 

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warranty transactions.

 

The reserve for warranty cost activity follows:

 
| ** **                                       | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **October********31, 2009** | ** ** | **November  1, 2008** | ** ** |
| Beginning Balance                                |       | $                                | 797        |   | $ | 247 |   |
|                                             |       |                             |       |   |   |
| Additions related to current period sales        |       | 12,056                           |       | 9,188 |   |
|                                             |       |                             |       |   |   |
| Warranty costs incurred in current period        |       | (12,159                          | )          | (8,790 | ) |
|                                             |       |                             |       |   |   |
| Ending Balance                                   |       | $                                | 694        |   | $ | 645 |   |

 

NOTE 11. Earnings Per Share

 
| ** **                                                            | ** ** | ** **                                                                                                                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **October 31,  2009**                                                                                                     | ** ** | **November 1,  2008**         | ** ** | **October 31,  2009**            | ** ** | **November 1,  2008** | ** ** |
|                                                                  |       |                                                                                                                           |       |                               |       |                                  |       |   |   |   |   |
| (a)                                                                   |       | Net Earnings  (Loss) From Continuing Operations                                                                                |       | $                                  | 2,357      |                                  | $          | (7,054 | ) | $ | 21,278 |   | $ | 3,989 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                  |       |   |   |   |   |
|                                                                  |       | Discontinued Operations, Net of Tax                                                                                            |       | (233                               | )          | (228                                  | )     | (510 | ) | (1,151 | ) |
|                                                                  |       |                                                                                                                           |       |                               |       |                                  |       |   |   |   |   |
|                                                                  |       | Net Earnings (Loss)                                                                                                            |       | $                                  | 2,124      |                                  | $          | (7,282 | )  | $ | 20,768 |   | $ | 2,838 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                  |       |   |   |   |   |
| (b)                                                                   |       | Basic average number of common shares outstanding  during period                                                               |       | 52,419                             |       | 52,099                                |       | 52,379 |   | 52,106 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                  |       |   |   |   |   |
|                                                                  |       | Common shares assumed issued upon exercise of  dilutive stock options, net of assumed repurchase, at the average market  price |       | 367                                |       | —                                |       | 242 |   | 83 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                  |       |   |   |   |   |
| (c)                                                                   |       | Diluted average number of common shares assumed  outstanding during period                                                     |       | 52,786                             |       | 52,099                                |       | 52,621 |   | 52,189 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                  |       |   |   |   |   |
| ** **                                                            | ** ** | **Basic Earnings (Loss) per Share:**                                                                                           | ** ** | ** **                         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  |       | Net Earnings (Loss) From Continuing Operations (a/b)                                                                      |       | $                                  | 0.05       |                                  | $          | (0.13 | )  | $ | 0.41 |   | $ | 0.08 |   |
|                                                                  |       | Discontinued Operations, Net of Tax                                                                                            |       | (0.01                              | )          | (0.01                                 | )     | (0.01 | ) | (0.03 | ) |
|                                                                  |       | Basic Earnings (Loss) per Share                                                                                                |       | $                                  | 0.04       |                                  | $          | (0.14 | )  | $ | 0.40 |   | $ | 0.05 |   |
| ** **                                                            | ** ** | ** **                                                                                                                     | ** ** | ** **                         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  |       | **Diluted Earnings (Loss) per Share:**                                                                                         |       |                               |       |                                  |       |   |   |   |   |
|                                                                  |       | Net Earnings (Loss) From Continuing Operations (a/c)                                                                      |       | $                                  | 0.04       |                                  | $          | (0.13 | )  | $ | 0.40 |   | $ | 0.08 |   |
|                                                                  |       | Discontinued Operations, Net of Tax                                                                                            |       | —                             |       | (0.01                                 | )     | — |   | (0.03 | ) |
|                                                                  |       | Diluted Earnings (Loss) per Share                                                                                              |       | $                                  | 0.04       |                                  | $          | (0.14 | )  | $ | 0.40 |   | $ | 0.05 |   |

 

At October 31, 2009 and November 1,2008, respectively, there were 1,949,000 and 1,339,000 outstanding options andrestricted stock units. Certain stock options were excluded from thecalculation of diluted earnings per share because their exercise prices weregreater than the average market price of the common shares for the periods thenended and therefore would be anti-dilutive. The total number of such shares excludedfrom the diluted earnings per share calculation are 901,000 and 1,059,000 forthe thirteen weeks ended October 31, 2009 and November 1, 2008,respectively. The total number of such shares excluded from the dilutedearnings per share calculation are 1,203,000 and 1,059,000 for the thirty-nine weeksended October 31, 2009 and November 1, 2008, respectively.

 

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NOTE 12. Supplemental Guarantor Information

 

The Company’s 7.50% Senior Subordinated Notes(the “Notes”) are fully and unconditionally and joint and severally guaranteedby certain of the Company’s direct and indirectly wholly-owned subsidiaries -namely, The Pep Boys Manny Moe & Jack of California, Pep Boys — MannyMoe & Jack of Delaware, Inc., Pep Boys — Manny Moe &Jack of Puerto Rico, Inc. and PBY Corporation, (collectively, the “SubsidiaryGuarantors”). The Notes are not guaranteed by the Company’s wholly ownedsubsidiary, Colchester Insurance Company.

 

The following condensed consolidatinginformation presents, in separate columns, the condensed consolidating balancesheets as of October 31, 2009 and January 31, 2009 and the relatedcondensed consolidating statements of operations for the thirteen andthirty-nine weeks ended October 31, 2009 and November 1, 2008 andcondensed consolidating statements of cash flows for the thirty-nine weeksended October 31, 2009 and November 1, 2008 for (i) the Company(“Pep Boys”) on a parent only basis, with its investment in subsidiariesrecorded under the equity method, (ii) the Subsidiary Guarantors on acombined basis including the consolidation by PBY Corporation of its whollyowned subsidiary, The Pep Boys Manny Moe & Jack of California, (iii) thesubsidiary of the Company that does not guarantee the Notes, and (iv) theCompany on a consolidated basis.

 

CONDENSED CONSOLIDATING BALANCE SHEETS

(dollars in thousands)

(unaudited)

 
| **As of October 31, 2009**                                     | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Current Assets:                                                               |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Cash and cash equivalents                                                     |       | $                 | 26,035     |                       | $          | 8,734                            |       | $                                     | 6,074      |             | $          | — |   | $ | 40,843 |   |
| Accounts receivable, net                                                      |       | 8,956             |       | 11,505                     |       | —                           |       | —                                |       | 20,461           |       |
| Merchandise inventories                                                       |       | 200,095           |       | 371,694                    |       | —                           |       | —                                |       | 571,789          |       |
| Prepaid expenses                                                              |       | 7,410             |       | 7,395                      |       | 2,621                            |       | (2,480                                | )          | 14,946           |       |
| Other                                                                         |       | 886               |       | 8                          |       | 54,208                           |       | (4,897                                | )          | 50,205           |       |
| Assets held for disposal                                                      |       | 1,045             |       | 5,571                      |       | —                           |       |                                  |       | 6,616            |       |
| Total Current Assets                                                          |       | 244,427           |       | 404,907                    |       | 62,903                           |       | (7,377                                | )          | 704,860          |       |
| Property and Equipment—Net                                               |       | 233,016           |       | 463,672                    |       | 31,714                           |       | (19,430                               | )          | 708,972          |       |
| Investment in subsidiaries                                                    |       | 1,743,091         |       | —                     |       | —                           |       | (1,743,091                            | )          | —           |       |
| Intercompany receivables                                                      |       | —            |       | 1,041,684                  |       | 67,534                           |       | (1,109,218                            | )          | —           |       |
| Deferred income taxes                                                         |       | 20,948            |       | 52,022                     |       | —                           |       | —                                |       | 72,970           |       |
| Other                                                                         |       | 19,296            |       | 822                        |       | —                           |       | —                                |       | 20,118           |       |
| Total Assets                                                                  |       | $                 | 2,260,778  |                       | $          | 1,963,107                        |       | $                                     | 162,151    |             | $          | (2,879,116 | ) | $ | 1,506,920 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **                            | ** ** | ** **       | ** ** |
| Current Liabilities:                                                          |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Accounts payable                                                              |       | $                 | 219,196    |                       | $          | 9                                |       | $                                     | —     |             | $          | — |   | $ | 219,205 |   |
| Trade payable program liability                                               |       | 26,459            |       | —                     |       | —                           |       | —                                |       | 26,459           |       |
| Accrued expenses                                                              |       | 33,109            |       | 63,410                     |       | 137,429                          |       | (2,480                                | )          | 231,468          |       |
| Deferred income taxes                                                         |       | 14,894            |       | 29,173                     |       | —                           |       | (4,897                                | )          | 39,170           |       |
| Current maturities of long-term debt and obligations  under capital leases    |       | 1,079             |       | —                     |       | —                           |       | —                                |       | 1,079            |       |
| Total Current Liabilities                                                     |       | 294,737           |       | 92,592                     |       | 137,429                          |       | (7,377                                | )          | 517,381          |       |
| Long-term debt and obligations under capital leases, less  current maturities |       | 306,471           |       | —                     |       | —                           |       | —                                |       | 306,471          |       |
| Other long-term liabilities                                                   |       | 36,915            |       | 35,249                     |       | —                           |       | —                                |       | 72,164           |       |
| Deferred gain from asset sales                                                |       | 70,776            |       | 116,897                    |       | —                           |       | (19,430                               | )          | 168,243          |       |
| Intercompany liabilities                                                      |       | 1,109,218         |       | —                     |       | —                           |       | (1,109,218                            | )          | —           |       |
| Total Stockholders’ Equity                                               |       | 442,661           |       | 1,718,369                  |       | 24,722                           |       | (1,743,091                            | )          | 442,661          |       |
| Total Liabilities and Stockholders’ Equity                               |       | $                 | 2,260,778  |                       | $          | 1,963,107                        |       | $                                     | 162,151    |             | $          | (2,879,116 | ) | $ | 1,506,920 |   |

 

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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  receivables                                                     |       | —       |       | 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 CONSOLIDATINGSTATEMENTS OF OPERATIONS

(dollars in thousands)

(unaudited)

 
| ** **                                                         | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Thirteen Weeks Ended October 31, 2009** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                               |       |              |       |           |       |                     |       |                     |       |             |       |
| Merchandise Sales                                                  |       | $                 | 127,689    |           | $          | 251,171                  |       | $                        | —     |             | $          | — |   | $ | 378,860 |   |
| Service Revenue                                                    |       | 32,813            |       | 60,970         |       | —                   |       | —                   |       | 93,783           |       |
| Other Revenue                                                      |       | —            |       | —         |       | 5,723                    |       | (5,723                   | )          | —           |       |
| Total Revenues                                                     |       | 160,502           |       | 312,141        |       | 5,723                    |       | (5,723                   | )          | 472,643          |       |
| Costs of Merchandise Sales                                         |       | 91,008            |       | 179,003        |       | —                   |       | (407                     | )          | 269,604          |       |
| Costs of Service Revenue                                           |       | 28,607            |       | 56,201         |       | —                   |       | (38                      | )          | 84,770           |       |
| Costs of Other Revenue                                             |       | —            |       | —         |       | 4,270                    |       | (4,270                   | )          | —           |       |
| Total Costs of Revenues                                            |       | 119,615           |       | 235,204        |       | 4,270                    |       | (4,715                   | )          | 354,374          |       |
| Gross Profit from Merchandise Sales                                |       | 36,681            |       | 72,168         |       | —                   |       | 407                      |       | 109,256          |       |
| Gross Profit from Service Revenue                                  |       | 4,206             |       | 4,769          |       | —                   |       | 38                       |       | 9,013            |       |
| Gross Profit from Other Revenue                                    |       | —            |       | —         |       | 1,453                    |       | (1,453                   | )          | —           |       |
| Total Gross Profit                                                 |       | 40,887            |       | 76,937         |       | 1,453                    |       | (1,008                   | )          | 118,269          |       |
| Selling, General and Administrative Expenses                       |       | 39,249            |       | 71,841         |       | 79                       |       | (1,624                   | )          | 109,545          |       |
| Net Gain from Dispositions of Assets                               |       | 877               |       | 455            |       | —                   |       | —                   |       | 1,332            |       |
| Operating Profit                                                   |       | 2,515             |       | 5,551          |       | 1,374                    |       | 616                      |       | 10,056           |       |
| Non-Operating (Expense) Income                                     |       | (3,650            | )          | 21,650         |       | 616                      |       | (17,892                  | )          | 724              |       |
| Interest Expense (Income)                                          |       | 17,280            |       | 7,440          |       | (522                     | )          | (17,276                  | )          | 6,922            |       |
| (Loss) Earnings from Continuing Operations Before  Income Taxes    |       | (18,415           | )          | 19,761         |       | 2,512                    |       | —                   |       | 3,858            |       |
| Income Tax (Benefit) Expense                                       |       | (6,760            | )          | 7,208          |       | 1,053                    |       | —                   |       | 1,501            |       |
| Equity in Earnings of Subsidiaries                                 |       | 13,791            |       | —         |       | —                   |       | (13,791                  | )          | —           |       |
| Net Earnings from Continuing Operations                            |       | 2,136             |       | 12,553         |       | 1,459                    |       | (13,791                  | )          | 2,357            |       |
| Discontinued Operations, Net of Tax                                |       | (12               | )          | (221           | )          | —                   |       | —                   |       | (233             | )          |
| Net Earnings                                                       |       | $                 | 2,124      |           | $          | 12,332                   |       | $                        | 1,459      |             | $          | (13,791 | ) | $ | 2,124 |   |

 
| **Thirteen Weeks Ended November 1, 2008** | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
|                                                               |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Merchandise Sales                                                  |       | $                 | 126,430    |                       | $          | 252,031                          |       | $                                     | —     |             | $          | — |   | $ | 378,461 |   |
| Service Revenue                                                    |       | 29,283            |       | 56,422                     |       | —                           |       | —                                |       | 85,705           |       |
| Other Revenue                                                      |       | —            |       | —                     |       | 5,797                            |       | (5,797                                | )          | —           |       |
| Total Revenues                                                     |       | 155,713           |       | 308,453                    |       | 5,797                            |       | (5,797                                | )          | 464,166          |       |
| Costs of Merchandise Sales                                         |       | 88,368            |       | 180,273                    |       | —                           |       | (406                                  | )          | 268,235          |       |
| Costs of Service Revenue                                           |       | 25,523            |       | 55,602                     |       | —                           |       | (38                                   | )          | 81,087           |       |
| Costs of Other Revenue                                             |       | —            |       | —                     |       | 2,814                            |       | (2,814                                | )          | —           |       |
| Total Costs of Revenues                                            |       | 113,891           |       | 235,875                    |       | 2,814                            |       | (3,258                                | )          | 349,322          |       |
| Gross Profit from Merchandise Sales                                |       | 38,062            |       | 71,758                     |       | —                           |       | 406                                   |       | 110,226          |       |
| Gross Profit from Service Revenue                                  |       | 3,760             |       | 820                        |       | —                           |       | 38                                    |       | 4,618            |       |
| Gross Profit from Other Revenue                                    |       | —            |       | —                     |       | 2,983                            |       | (2,983                                | )          | —           |       |
| Total Gross Profit                                                 |       | 41,822            |       | 72,578                     |       | 2,983                            |       | (2,539                                | )          | 114,844          |       |
| Selling, General and Administrative Expenses                       |       | 44,688            |       | 78,226                     |       | 67                               |       | (3,154                                | )          | 119,827          |       |
| Net Gain (Loss) from Dispositions of Assets                        |       | 82                |       | (135                       | )          | —                           |       | —                                |       | (53              | )          |
| Operating (Loss) Profit                                            |       | (2,784            | )          | (5,783                     | )          | 2,916                            |       | 615                                   |       | (5,036           | )          |
| Non-Operating (Expense) Income                                     |       | (3,685            | )          | 26,740                     |       | 636                              |       | (23,386                               | )          | 305              |       |
| Interest Expense (Income)                                          |       | 21,976            |       | 8,695                      |       | (802                             | )          | (22,771                               | )          | 7,098            |       |
| (Loss) Earnings from Continuing Operations Before  Income Taxes    |       | (28,445           | )          | 12,262                     |       | 4,354                            |       | —                                |       | (11,829          | )          |
| Income Tax (Benefit) Expense                                       |       | (10,587           | )          | 4,395                      |       | 1,417                            |       | —                                |       | (4,775           | )          |
| Equity in Earnings of Subsidiaries                                 |       | 10,473            |       | —                     |       | —                           |       | (10,473                               | )          | —           |       |
| Net Earnings from Continuing Operations                            |       | (7,385            | )          | 7,867                      |       | 2,937                            |       | (10,473                               | )          | (7,054           | )          |
| Discontinued Operations, Net of Tax                                |       | 103               |       | (331                       | )          | —                           |       | —                                |       | (228             | )          |
| Net (Loss) Earnings                                                |       | $                 | (7,282     | )                          | $          | 7,536                            |       | $                                     | 2,937      |             | $          | (10,473 | ) | $ | (7,282 | ) |

 

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| ** **                                                            | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary  Non-** | ** ** | **Consolidation  /** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------------|------------|----------------------|------------|------------------|------------|
| **Thirty-Nine Weeks Ended October 31, 2009** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**       | ** ** | **Elimination**      | ** ** | **Consolidated** | ** ** |
| Merchandise Sales                                                     |       | $                 | 397,677    |           | $          | 771,431              |       | $                    | —     |             | $          | — |   | $ | 1,169,108 |   |
| Service Revenue                                                       |       | 101,672           |       | 187,262        |       | —               |       | —               |       | 288,934          |       |
| Other Revenue                                                         |       | —            |       | —         |       | 17,168               |       | (17,168              | )          | —           |       |
| Total Revenues                                                        |       | 499,349           |       | 958,693        |       | 17,168               |       | (17,168              | )          | 1,458,042        |       |
| Costs of Merchandise Sales                                            |       | 282,482           |       | 545,170        |       | —               |       | (1,223               | )          | 826,429          |       |
| Costs of Service Revenue                                              |       | 86,371            |       | 169,296        |       | —               |       | (114                 | )          | 255,553          |       |
| Costs of Other Revenue                                                |       | —            |       | —         |       | 16,412               |       | (16,412              | )          | —           |       |
| Total Costs of Revenues                                               |       | 368,853           |       | 714,466        |       | 16,412               |       | (17,749              | )          | 1,081,982        |       |
| Gross Profit from Merchandise Sales                                   |       | 115,195           |       | 226,261        |       | —               |       | 1,223                |       | 342,679          |       |
| Gross Profit from Service Revenue                                     |       | 15,301            |       | 17,966         |       | —               |       | 114                  |       | 33,381           |       |
| Gross Profit from Other Revenue                                       |       | —            |       | —         |       | 756                  |       | (756                 | )          | —           |       |
| Total Gross Profit                                                    |       | 130,496           |       | 244,227        |       | 756                  |       | 581                  |       | 376,060          |       |
| Selling, General and Administrative Expenses                          |       | 116,471           |       | 211,643        |       | 234                  |       | (1,268               | )          | 327,080          |       |
| Net Gain from Dispositions of Assets                                  |       | 891               |       | 428            |       | —               |       | —               |       | 1,319            |       |
| Operating Profit                                                      |       | 14,916            |       | 33,012         |       | 522                  |       | 1,849                |       | 50,299           |       |
| Non-Operating (Expense) Income                                        |       | (11,700           | )          | 64,429         |       | 1,855                |       | (52,918              | )          | 1,666            |       |
| Interest Expense (Income)                                             |       | 45,680            |       | 22,278         |       | (1,565               | )          | (51,069              | )          | 15,324           |       |
| (Loss) Earnings from Continuing Operations Before  Income Taxes       |       | (42,464           | )          | 75,163         |       | 3,942                |       | —               |       | 36,641           |       |
| Income Tax (Benefit) Expense                                          |       | (17,865           | )          | 31,569         |       | 1,659                |       | —               |       | 15,363           |       |
| Equity in Earnings of Subsidiaries                                    |       | 45,372            |       | —         |       | —               |       | (45,372              | )          | —           |       |
| Net Earnings from Continuing Operations                               |       | 20,773            |       | 43,594         |       | 2,283                |       | (45,372              | )          | 21,278           |       |
| Discontinued Operations, Net of Tax                                   |       | (5                | )          | (505           | )          | —               |       | —               |       | (510             | )          |
| Net Earnings                                                          |       | $                 | 20,768     |           | $          | 43,089               |       | $                    | 2,283      |             | $          | (45,372 | ) | $ | 20,768 |   |

 

 
| **Thirty-Nine Weeks Ended November 1, 2008** | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
|                                                                  |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Merchandise Sales                                                     |       | $                 | 404,555    |                       | $          | 785,317                          |       | $                                     | —     |             | $          | — |   | $ | 1,189,872 |   |
| Service Revenue                                                       |       | 94,526            |       | 177,854                    |       | —                           |       | —                                |       | 272,380          |       |
| Other Revenue                                                         |       | —            |       | —                     |       | 17,167                           |       | (17,167                               | )          | —           |       |
| Total Revenues                                                        |       | 499,081           |       | 963,171                    |       | 17,167                           |       | (17,167                               | )          | 1,462,252        |       |
| Costs of Merchandise Sales                                            |       | 283,416           |       | 556,382                    |       | —                           |       | (1,224                                | )          | 838,574          |       |
| Costs of Service Revenue                                              |       | 82,604            |       | 167,943                    |       | —                           |       | (113                                  | )          | 250,434          |       |
| Costs of Other Revenue                                                |       | —            |       | —                     |       | 12,105                           |       | (12,105                               | )          | —           |       |
| Total Costs of Revenues                                               |       | 366,020           |       | 724,325                    |       | 12,105                           |       | (13,442                               | )          | 1,089,008        |       |
| Gross Profit from Merchandise Sales                                   |       | 121,139           |       | 228,935                    |       | —                           |       | 1,224                                 |       | 351,298          |       |
| Gross Profit from Service Revenue                                     |       | 11,922            |       | 9,911                      |       | —                           |       | 113                                   |       | 21,946           |       |
| Gross Profit from Other Revenue                                       |       | —            |       | —                     |       | 5,062                            |       | (5,062                                | )          | —           |       |
| Total Gross Profit                                                    |       | 133,061           |       | 238,846                    |       | 5,062                            |       | (3,725                                | )          | 373,244          |       |
| Selling, General and Administrative Expenses                          |       | 134,104           |       | 232,688                    |       | 227                              |       | (5,574                                | )          | 361,445          |       |
| Net Gain from Dispositions of Assets                                  |       | 3,385             |       | 6,170                      |       | —                           |       | —                                |       | 9,555            |       |
| Operating Profit                                                      |       | 2,342             |       | 12,328                     |       | 4,835                            |       | 1,849                                 |       | 21,354           |       |
| Non-Operating (Expense) Income                                        |       | (11,640           | )          | 88,230                     |       | 1,920                            |       | (76,713                               | )          | 1,797            |       |
| Interest Expense (Income)                                             |       | 73,089            |       | 23,430                     |       | (2,678                           | )          | (74,864                               | )          | 18,977           |       |
| (Loss) Earnings from Continuing Operations Before  Income Taxes       |       | (82,387           | )          | 77,128                     |       | 9,433                            |       | —                                |       | 4,174            |       |
| Income Tax (Benefit) Expense                                          |       | (27,077           | )          | 24,291                     |       | 2,971                            |       |                                  |       | 185              |       |
| Equity in Earnings of Subsidiaries                                    |       | 58,250            |       | —                     |       | —                           |       | (58,250                               | )          | —           |       |
| Net Earnings from Continuing Operations                               |       | 2,940             |       | 52,837                     |       | 6,462                            |       | (58,250                               | )          | 3,989            |       |
| Discontinued Operations, Net of Tax                                   |       | (102              | )          | (1,049                     | )          | —                           |       | —                                |       | (1,151           | )          |
| Net Earnings                                                          |       | $                 | 2,838      |                       | $          | 51,788                           |       | $                                     | 6,462      |             | $          | (58,250 | ) | $ | 2,838 |   |

 

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CONDENSEDCONSOLIDATING STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 
| **Thirty-Nine Weeks Ended October 31, 2009**                           | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash Flows from Operating Activities:**                                                       |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net  Earnings                                                                                   |       | $                 | 20,768     |                       | $          | 43,089                          |       | $                                     | 2,283      |             | $          | (45,372 | ) | $ | 20,768 |   |
| Adjustments  to Reconcile Net Earnings to Net Cash Provided by (Used in) Continuing  Operations |       | (30,554           | )          | 35,260                     |       | 1,360                           |       | 43,523                                |       | 49,589           |       |
| Changes  in operating assets and liabilities                                                    |       | 29,151            |       | (1,436                     | )          | (15,517                         | )          | —                                |       | 12,198           |       |
| Net  cash provided by (used in) continuing operations                                           |       | 19,365            |       | 76,913                     |       | (11,874                         | )          | (1,849                                | )          | 82,555           |       |
| Net  cash used in discontinued operations                                                       |       | (5                | )          | (589                       | )          | —                          |       | —                                |       | (594             | )          |
| Net  Cash Provided by (Used in) Operating Activities                                            |       | 19,360            |       | 76,324                     |       | (11,874                         | )          | (1,849                                | )          | 81,961           |       |
|                                                                                            |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net  cash used in continuing operations                                                         |       | (11,144           | )          | (7,648                     | )          | —                          |       | —                                |       | (18,792          | )          |
| Net  cash provided by discontinued operations                                                   |       | —            |       | 1,762                      |       | —                          |       | —                                |       | 1,762            |       |
| Net  Cash Used in Investing Activities                                                          |       | (11,144           | )          | (5,886                     | )          | —                          |       | —                                |       | (17,030          | )          |
|                                                                                            |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net  Cash Provided by (Used In) Financing Activities                                            |       | 5,066             |       | (68,097                    | )          | 15,762                          |       | 1,849                                 |       | (45,420          | )          |
|                                                                                            |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net  Increase in Cash and Cash Equivalents                                                      |       | 13,282            |       | 2,341                      |       | 3,888                           |       | —                                |       | 19,511           |       |
| Cash  and Cash Equivalents at Beginning of Period                                               |       | 12,753            |       | 6,393                      |       | 2,186                           |       | —                                |       | 21,332           |       |
| Cash  and Cash Equivalents at End of Period                                                     |       | $                 | 26,035     |                       | $          | 8,734                           |       | $                                     | 6,074      |             | $          | — |   | $ | 40,843 |   |

 

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| **Thirty-Nine Weeks Ended November 1, 2008**                           | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation  / Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash Flows from Operating Activities:**                                                       |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net  Earnings                                                                                   |       | $                 | 2,838      |                       | $          | 51,788                           |       | $                                     | 6,462      |             | $          | (58,250 | ) | $ | 2,838 |   |
| Adjustments  to Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing  Operations |       | (46,872           | )          | 24,653                     |       | 1,278                            |       | 56,403                                |       | 35,462           |       |
| Changes  in operating assets and liabilities                                                    |       | (29,894           | )          | (6,979                     | )          | (11,371                          | )          | —                                |       | (48,244          | )          |
| Net  cash (used in) provided by continuing operations                                           |       | (73,928           | )          | 69,462                     |       | (3,631                           | )          | (1,847                                | )          | (9,944           | )          |
| Net  cash used in discontinued operations                                                       |       | (221              | )          | (659                       | )          | —                           |       | —                                |       | (880             | )          |
| Net  Cash (Used in) Provided by Operating Activities                                            |       | (74,149           | )          | 68,803                     |       | (3,631                           | )          | (1,847                                | )          | (10,824          | )          |
|                                                                                            |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net  Cash Provided by Investing Activities                                                      |       | 25,877            |       | 45,992                     |       | —                           |       | —                                |       | 71,869           |       |
|                                                                                            |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net  Cash Provided by (Used in) Financing Activities                                            |       | 63,590            |       | (113,894                   | )          | 4,857                            |       | 1,847                                 |       | (43,600          | )          |
|                                                                                            |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net  Increase in Cash and Cash Equivalents                                                      |       | 15,318            |       | 901                        |       | 1,226                            |       | —                                |       | 17,445           |       |
| Cash  and Cash Equivalents at Beginning of Period                                               |       | 12,208            |       | 6,655                      |       | 2,063                            |       | —                                |       | 20,926           |       |
| Cash  and Cash Equivalents at End of Period                                                     |       | $                 | 27,526     |                       | $          | 7,556                            |       | $                                     | 3,289      |             | $          | — |   | $ | 38,371 |   |

 

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NOTE 13. Commitments andContingencies

 

In September 2006,the United States Environmental Protection Agency (“EPA”) requested certaininformation from the Company as part of an investigation to determine whetherthe Company had violated, and is in violation of, the Clean Air Act and itsnon-road engine regulations. The information requested concerned certaingenerator and personal transportation merchandise offered for sale by theCompany. In the fourth quarter of fiscal year 2008, the EPA informed theCompany that it believed that the Company had violated the Clean Air Act byvirtue of the fact that certain of this merchandise did not conform to theircorresponding EPA Certificates of Conformity. During the third quarter offiscal 2009, the Company and the EPA reached a settlement in principle of thismatter requiring that the Company (i) pay a monetary penalty of $5million, (ii) take certain corrective action with respect to certaininventory that had been restricted from sale during the course of theinvestigation, (iii) implement a formal compliance program and (iv) participatein certain non-monetary emission offset activities. The Company had previouslyaccrued an amount equal to the agreed upon civil penalty and a $3 millioncontingency accrual with respect to the restricted inventory. During the thirdquarter of fiscal 2009, the Company reversed $1 million of the inventoryaccrual as a portion of the subject inventory was released for sale. When theCompany successfully completes the required corrective action with respect tothe remaining restricted inventory, it may reverse all or a portion of theremaining $2 million accrual in future periods.

 

The Companyis also party to various other actions and claims arising in the normal courseof business.

 

The Company believes that amounts accrued forawards or assessments in connection with all such matters are adequate and thatthe ultimate resolution of these matters will not have a material adverseeffect on the Company’s financial position. However, there exists a reasonablepossibility of loss in excess of the amounts accrued, the amount of whichcannot currently be estimated. While the Company does not believe that theamount of such excess loss could be material to the Company’s financialposition, any such loss could have a material adverse effect on the Company’sresults of operations in the period(s) during which the underlying mattersare resolved.

 

NOTE 14. Comprehensive Income (Loss)

 

The following are the components of othercomprehensive income (loss):

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **October 31,  2009**         | ** ** | **November 1,  2008**            | ** ** | **October 31,  2009** | ** ** | **November 1,  2008** | ** ** |
| Net earnings (loss)                              |       | $                                  | 2,124      |                                  | $          | (7,282 | ) | $ | 20,768 |   | $ | 2,838 |   |
| Other comprehensive income (loss), net of tax:   |       |                               |       |                                  |       |   |   |   |   |
| Defined benefit plan adjustment                  |       | 280                                |       | 246                                   |       | 840 |   | 733 |   |
| Derivative financial instrument adjustment       |       | (542                               | )          | (1,080                                | )          | 496 |   | 1,980 |   |
| Comprehensive Income (Loss)                      |       | $                                  | 1,862      |                                  | $          | (8,116 | ) | $ | 22,104 |   | $ | 5,551 |   |

 

The components of accumulated othercomprehensive loss are:

 
| **(dollar amounts in thousands)**        | ** ** | **October 31, 2009** | ** ** | **January 31, 2009** | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Defined benefit plan adjustment, net of tax             |       | $                         | (6,913     | )                         | $          | (7,753 | ) |
| Derivative financial instrument adjustment, net of  tax |       | (9,826                    | )          | (10,322                   | )          |
| Accumulated other comprehensive loss                    |       | $                         | (16,739    | )                         | $          | (18,075 | ) |

 

NOTE 15. Fair Value Measurements

 

Fair value is the price received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. The Company uses a framework formeasuring fair value based on a hierarchy of valuation inputs used to measurefair value.

 

The hierarchy prioritizes the inputs into threebroad levels:

 

Level 1 inputs—unadjusted quoted prices inactive markets for identical assets or liabilities that the Company has theability to access. An active market for the asset or liability is one in whichtransactions for the asset or liability occur with sufficient frequency andvolume to provide ongoing pricing information.

 

Level 2 inputs—inputs other than quoted marketprices included in Level 1 that are observable, either directly or indirectly,for the asset or liability. Level 2 inputs include, but are not limited to,quoted prices for similar assets or liabilities in an active market, quotedprices for identical or similar assets or liabilities in markets that are notactive and inputs other than quoted market prices that are 

 

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observable for the asset or liability, such asinterest rate curves and yield curves observable at commonly quoted intervals,volatilities, credit risk and default rates.

 

Level 3 inputs—unobservable inputs for the assetor liability.

 

The following table provides the fair valuemeasurement amounts for assets and liabilities recorded on the Company’sCondensed Consolidated Balance Sheet at fair value as of October 31, 2009:

 
| **(dollar amounts in thousands)** | ** ** | **Fair Value  at  October** | ** ** | **Fair Value Measurements  Using Inputs Considered as** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Description**                                  | ** ** | **31, 2009**                | ** ** | **Level 1**                                                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets:**                                      |       |                             |       |                                                                             |       |   |   |   |   |
| Cash  and Cash Equivalents                       |       | $                                | 40,843     |                                                                             | $          | 40,843 |   |   |   |   |   |
| Assets  held for disposal                        |       | 6,616                            |       |                                                                             |       | $ | 6,616 |   |   |   |
| Investments  (a)                                 |       | 500                              |       | 500                                                                              |       |   |   |   |   |
|                                             |       |                             |       |                                                                             |       |   |   |   |   |
| **Liabilities:**                                 |       |                             |       |                                                                             |       |   |   |   |   |
| Derivative  liability (b)                        |       | 15,246                           |       |                                                                             |       | 15,246 |   |   |   |
| Contingent  Consideration (c)                    |       | 1,660                            |       |                                                                             |       |   |   | 1,660 |   |
|                                                  |            |                                  |            |                                                                                  |            |  |  |  |  |  |  |  |

 

----

(a)          included in other long-term assets

(b)         included in other long-term liabilities

(c)          based on weighted average probability scenariosincluding management’s assumptions on expected future cash flow

 

The Company has one interest rate swapdesignated as a cash flow hedge on $145,000 of the Company’s $149,985 SeniorSecured Term Loan facility that expires in October 2013. The swap is usedto minimize interest rate exposure and overall interest costs by converting thevariable interest rate to a fixed rate of 5.036%. Since February 1, 2008,this swap was deemed to be fully effective and all adjustments in the interestrate swap’s fair value have been recorded to Accumulated Other ComprehensiveLoss.

 

The table below shows the effect of the Company’sinterest rate swap on the Condensed Consolidated Statement of Operations forthe periods indicated:

 
| **(dollar amounts in thousands)** | ** ** | **Amount of Gain in********Other  Comprehensive Income********(Effective Portion)** | ** ** | **Earnings Statement Classification** | ** **       | **Amount of Loss  Recognized in  Earnings (Effective  Portion) (a)** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------|------------------|----------------------------------------------------------------------|------------|
| Thirteen  weeks ended October 31, 2009      |       | $                                                                                   | 571        |                                  | Interest expense |                                                                 | $          | (1,599 | ) |
| Thirty-nine  weeks ended October 31, 2009   |       | $                                                                                   | 354        |                                  | Interest expense |                                                                 | $          | (4,030 | ) |

 

----

(a) representsthe effective portion of the loss reclassified from accumulated othercomprehensive loss

 

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

 

The discussion and analysis below should be readin conjunction with (i) the condensed consolidated interim financialstatements and the notes to such financial statements included elsewhere inthis Quarterly Report on Form 10-Q and (ii) the consolidatedfinancial statements and the notes to such financial statements included inItem 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-Kfor the fiscal year ended January 31, 2009.

 

OVERVIEW

 

The Pep Boys-Manny, Moe & Jack is theonly national chain offering automotive service, tires, parts and accessories,positioning us to achieve our vision of becoming the automotive solutionsprovider of choice for the value-oriented customer. Our primary operating unitis our Supercenter format, which serves both “do-it-for-me” DIFM (servicelabor, installed merchandise and tires) and “do-it-yourself” DIY (retail)customers with the highest quality service offerings and merchandise. In mostof our Supercenters, we also have a commercial sales program that providescommercial credit and prompt delivery of tires, parts and other products tolocal, regional and national repair shops and dealers. As part of our long-termstrategy to lead with automotive service, in 2009 we began complementing ourexisting Supercenter store base with Service & Tire Centers. These Service &Tire Centers are designed to capture market share and leverage our existingSupercenters and support infrastructure. In the third quarter of 2009, weopened five new Service & Tire Centers and acquired ten additionallocations through our purchase of Florida Tire, Inc. (see note 3). As of October 31,2009, we operated 552 Supercenters and 20 Service & Tire Centers, as wellas nine legacy Pep Boys Express (retail only) stores throughout 35 states andPuerto Rico.

 

The prototypical Service & Tire Center isexpected to have between four and eight service bays, preferably six. Thecapital investment for a prototype, including inventory net of payables, isprojected to be approximately $450,000 to $550,000 and a prototype is expectedto 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 Service & TireCenter locations, as we believe that there are sufficient existing availablelocations with attractive lease terms to enable our expansion. We are targetinga total of 25 new Service & Tire Centers in fiscal year 2009, 40 in fiscal2010 and 80 in fiscal 2011.

 

For the thirteen weeks ended October 31,2009, our comparable sales (sales generated by locations in operation duringthe same period) increased by 1.6% compared to a decrease of 10.4% for thethirteen weeks ended November 1, 2008. This increase in comparable saleswas comprised of an 8.9% increase in comparable service revenue and a 0.1%decrease in comparable merchandise sales. The difficult macro environment,including higher unemployment and the credit crisis, continues to negativelyimpact sales in our discretionary product categories like accessories andcomplementary merchandise. Sales of non-discretionary product categories likeservice and hard parts have benefited somewhat from these trends, as customershave focused on maintaining their existing vehicles rather than purchasing newvehicles. Our non-discretionary product categories are primarily impacted bymiles driven, which has stabilized since the second quarter of 2009, afterhaving declined for the previous year. 

 

We continue to focus on refining and expandingour parts assortment to improve our in stock position, improving execution andthe customer experience and utilizing television and radio advertising tocommunicate our value offerings. In the thirteen and thirty-nine weeks ended October 31,2009, we were able to successfully increase customer traffic and sales in ourservice and commercial businesses. In addition, for the thirteen week periodended October 31, 2009, total customer traffic and total revenue increasedfor the first time in twenty-one quarters and 10 quarters, respectively.

 

Our net earnings for the thirteen weeks ended October 31,2009 were $2,124,000, a $9,406,000 improvement over the net loss of $7,282,000reported for the thirteen weeks ended November 1, 2008. This increase inprofitability resulted primarily from increased sales and gross profit marginsin our service business and lower selling, general and administrative expensesdue to continued disciplined spending control.

 

Our diluted earnings per share for the thirteenand thirty-nine weeks ended October 31, 2009 were $0.04 and $0.40 pershare, respectively, as compared to ($0.14) and $0.05 per share for thecorresponding periods ended November 1, 2008, respectively. (See Resultsof Operations).

 

The following discussion explains thesignificant developments affecting our financial condition and material changesin our results of operations for the thirteen weeks and thirty-nine weeks endedOctober 31, 2009. We recommend that you also read the audited consolidatedfinancial statements, footnotes and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in our Annual Report on Form 10-Kfor the fiscal year ended January 31, 2009.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Our cash requirements arise principally from thepurchase of inventory and capital expenditures related to existing and newstores, offices and distribution centers, debt service and contractualobligations. Cash flows realized through the sales of automotive services,tires, parts and accessories are our primary source of liquidity. Net cash providedby continuing operations was $82,555,000 in the thirty-nine weeks ended October 31,2009 compared to a use of cash of $9,944,000 in the thirty-nine weeks ended November 1,2008. The $92,499,000 improvement from the prior year was due to a $32,057,000increase in our net earnings (net of non-cash adjustments) and a $60,442,000favorable change in operating assets and liabilities. The change in operatingassets and liabilities was primarily due to favorable changes in inventory of$17,742,000, accounts payable of $30,015,000 and in all other assets andliabilities of $12,685,000. The improved cash flows from inventory resultedfrom more disciplined inventory management, including reduced seasonalinventory purchases, inventory lead times and safety stocks. The improvement inaccounts payable was attributable to the timing of our accounts payable cycle.The favorable change in all other assets and liabilities was due to reducedaccounts receivable as a result of improved collection of vendor allowances andtrade receivables and as a result of lower declines in accrued expenses due inpart to a payment in the prior year first quarter of $4,539,000 in connectionwith reducing the notional value on an interest rate swap by $55,000,000.

 

Cash used in investing activities by continuingoperations was $18,792,000 for the thirty-nine week period ended October 31,2009 as compared to cash provided of $69,311,000 in the thirty-nine weeks endedNovember 1, 2008. During the thirty-nine week period ended October 31,2009, we sold three properties that were classified as held for sale for netproceeds of $2,783,000, of which $1,758,000 is included in discontinuedoperations, and completed sale leaseback transactions on three stores for netproceeds of $10,986,000. In the thirteen weeks ended October 31, 2009 weacquired substantially all of the assets (other than real property) of FloridaTire, Inc.  which included a cashpayment of $2,610,000 and the recording of a $1,660,000 contingent liabilitywhich could result in future payments through November 2013. During fiscalyear 2008, we generated $209,085,000 from the disposition of assets primarilydue to sale-leaseback transactions, the proceeds of which were used torepurchase 29 properties for $117,121,000 that were previously leased under amaster operating lease. Capital expenditures in the first thirty-nine weeks of2009 and 2008 were $27,775,000 and $22,653,000, respectively. Capitalexpenditures for the current year were for maintenance of our existing storesand distribution centers, and for the opening of the new Service & Tire Centers.

 

Our fiscal year 2009 capital expenditures areexpected to be approximately $45,000,000 which includes the addition ofapproximately 25 Service & Tire Centers and required expenditures for ourexisting stores, offices and distribution centers. These expenditures areexpected to be funded by net cash generated from operating activities,opportunistic single store sale leaseback transactions and our existing line ofcredit.

 

In the thirty-nine weeks ended October 31,2009 and November 1, 2008, we used cash in financing activities of$45,420,000 and $43,600,000, respectively. In the current year, we repurchased$16,970,000 of our outstanding 7.5% Senior Subordinated Notes for $10,722,000, repaid$23,862,000 of borrowings under our credit facility and repaid $5,471,000 onborrowings under our trade payable financing program discussed below. In theprior year, we used the proceeds from the sale-leaseback transactions discussedabove to reduce debt obligations under our then existing credit facility, andto repurchase $25,465,000 principal amount of our 7.5% Senior Secured Notes for$22,005,000.

 

We anticipate that cash provided by operatingactivities, opportunistic single store sale leaseback transactions and ourexisting line of credit and cash on hand will exceed our expected cashrequirements in fiscal year 2009. We expect to have excess availability underour existing line of credit during the entirety of fiscal year 2009. As of October 31,2009, we had undrawn availability under our revolving credit facility of$133,693,000. We also have substantial owned real estate which we believe wecan monetize, if necessary, through additional sale leaseback or otherfinancing transactions

 

Our working capital was $187,479,000 and$179,233,000 at October 31, 2009 and January 31, 2009, respectively.Our long-term debt, as a percentage of our total capitalization, was 41% and45% at October 31, 2009 and January 31, 2009, respectively.

 

As of October 31, 2009, we had anoutstanding balance of $26,459,000 (classified as trade payable programliability on the condensed consolidated balance sheet) under our vendorfinancing program. On April 6, 2009, a previously existing program wasreplaced by this new program which is funded by various bank participants whohave the ability, but not the obligation, to purchase directly  from our vendors their account receivablesowed by us.

 

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RESULTSOF OPERATIONS

 

ThirteenWeeks Ended October 31, 2009 vs. Thirteen Weeks Ended November 1,2008

 

Thefollowing table presents for the periods indicated certain items in thecondensed consolidated statements of operations as a percentage of totalrevenues (except as otherwise provided) and the percentage change in dollaramounts of such items compared to the indicated prior period.

 
| ** **                                                      | ** ** | **Percentage of Total Revenues**    | ** ** | **Percentage Change**                         | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirteen Weeks Ended**                              | ** ** | **October 31, 2009  (Fiscal 2009)** | ** ** | **November 1, 2008  (Fiscal 2008)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                            |       |                                               |       |                                               |       |   |   |
| Merchandise  Sales                                              |       | 80.2                                               | %          | 81.5                                               | %          | 0.1 | % |
| Service Revenue  (1)                                            |       | 19.8                                               |       | 18.5                                               |       | 9.4 |   |
| Total Revenues                                                  |       | 100.0                                              |       | 100.0                                              |       | 1.8 |   |
| Costs of  Merchandise Sales (2)                                 |       | 71.2                                               | (3)        | 70.9                                               | (3)        | (0.5 | ) |
| Costs of Service  Revenue (2)                                   |       | 90.4                                               | (3)        | 94.6                                               | (3)        | (4.5 | ) |
| Total Costs of  Revenues                                        |       | 75.0                                               |       | 75.3                                               |       | (1.4 | ) |
| Gross Profit  from Merchandise Sales                            |       | 28.8                                               | (3)        | 29.1                                               | (3)        | (0.9 | ) |
| Gross Profit  from Service Revenue                              |       | 9.6                                                | (3)        | 5.4                                                | (3)        | 95.1 |   |
| Total Gross  Profit                                             |       | 25.0                                               |       | 24.7                                               |       | 3.0 |   |
| Selling, General  and Administrative Expenses                   |       | 23.2                                               |       | 25.8                                               |       | 8.6 |   |
| Net Gain (Loss)  from Dispositions of Assets                    |       | 0.3                                                |       | —                                             |       | NM |   |
| Operating Profit  (Loss)                                        |       | 2.1                                                |       | (1.1                                               | )          | 299.7 |   |
| Non-operating  Income                                           |       | 0.2                                                |       | 0.1                                                |       | 137.4 |   |
| Interest Expense                                                |       | 1.5                                                |       | 1.5                                                |       | 2.5 |   |
| Earnings (Loss)  from Continuing Operations Before Income Taxes |       | 0.8                                                |       | (2.5                                               | )          | 132.6 |   |
| Income Tax  Expense                                             |       | 38.9                                               | (4)        | 40.4                                               | (4)        | (131.4 | ) |
| Net Earnings  (Loss) from Continuing Operations                 |       | 0.5                                                |       | (1.5                                               | )          | 133.4 |   |
| Discontinued  Operations, Net of Tax                            |       | —                                             |       | —                                             |       | (2.2 | ) |
| Net Earnings  (Loss)                                            |       | 0.4                                                |       | (1.6                                               | )          | 129.2 |   |

 

----

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

NM  Percentage not meaningful

 

Totalrevenue and comparable sales for the thirteen weeks ended October 31, 2009increased 1.8% and 1.6% respectively, as compared to the thirteen weeks ended November 1,2008. The 1.6% increase in comparable store revenues consisted of a 0.1%decrease in comparable merchandise sales that was offset by an increase of 8.9%in comparable service revenue. The slight decrease in merchandise sales wasprimarily due to weaker sales in our retail business stemming from lessdiscretionary spending by our customers.

 

Inthe third quarter of fiscal year 2009, customer traffic generated by improvedstore execution, promotional events and improved stock position resulted in anincrease in service and commercial customer count. While offset in part by adecrease in DIY customer count, total customer count increased in the thirdquarter of fiscal year 2009. We believe the decrease in retail customer countis a result of the long-term industry decline in the DIY business, overallreduced spending due to the current economic environment and our competitorscontinuing to open new stores. In addition, we carry a large assortment of morediscretionary retail product that is more susceptible to consumer spendingdeferrals. We continue to believe, and our third quarter performance hasvalidated, that providing a differentiated merchandise assortment, bettercustomer experience, value proposition and innovative marketing will stem theoverall decline in customer counts and sales over the long term.

 

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Grossprofit as a percentage of merchandise sales decreased from 29.1% for the thirdquarter of fiscal year 2008 to 28.8% for the third quarter of fiscal year 2009.Gross profit decreased by $970,000 primarily due to a $2,417,000 assetimpairment charge, partially offset by a reduction in inventory relatedaccruals of $1,000,000 and a gain from an insurance settlement of $562,000.

 

Grossprofit from service revenue increased as a percentage of service revenue to 9.6% for the third quarter of fiscal year 2009 from 5.4% for the third quarter of2008. Gross profit from service revenue grew by $4,395,000 or 95.1%. Thecurrent year third quarter gross profit included a $653,000 asset impairmentcharge. The increase in gross profit was primarily due to the increase inservice revenue which resulted in higher absorption of fixed expenses such asoccupancy costs and to a certain extent, labor costs.

 

Selling, General andAdministrative expenses, as a percentage of total revenues decreased from 25.8%for the third quarter of fiscal year 2008 to 23.2% for the third quarter offiscal year 2009. Selling, General and Administrative expenses decreased$10,282,000 or 8.6%. The decrease was primarily due to reduced payroll andrelated expenses of $1,632,000, less media expense of $3,958,000, lower legalexpenses and professional services fees of $2,242,000, improved store sellingexpenses of $1,208,000 and lower travel expenses of $740,000.

 

Netgains from the disposition of assets for the thirteen weeks ended October 1,2009, reflects $1,332,000 in gains from the sale and leaseback of three stores.

 

Interestexpense declined by $176,000 to $6,922,000 in the third quarter of fiscal 2009compared to $7,098,000 for the third quarter of fiscal 2008 primarily due toreduced debt levels.

 

Ourincome tax expense for the third quarter of fiscal year 2009 was $1,501,000 oran effective rate of 38.9% as compared to a tax benefit of $4,775,000 or aneffective rate of 40.4% for the third quarter of fiscal year 2008. The currentyear third quarter included an $80,000 tax benefit resulting primarily from thesettlement of certain state tax liabilities. Excluding this adjustment theeffective tax rate would have been 41.0 %.

 

Thirty-NineWeeks Ended October 31, 2009 vs. Thirty-Nine Weeks Ended November 1,2008

 

Thefollowing table presents for the periods indicated certain items in thecondensed consolidated statements of operations as a percentage of totalrevenues (except as otherwise provided) and the percentage change in dollaramounts of such items compared to the indicated prior period.

 
| ** **                                               | ** ** | **Percentage of Total Revenues**    | ** ** | **Percentage Change**                         | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirty-Nine Weeks Ended**                    | ** ** | **October 31, 2009  (Fiscal 2009)** | ** ** | **November 1, 2008  (Fiscal 2008)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                     |       |                                               |       |                                               |       |   |   |
| Merchandise  Sales                                       |       | 80.2                                               | %          | 81.4                                               | %          | (1.7 | )% |
| Service Revenue  (1)                                     |       | 19.8                                               |       | 18.6                                               |       | 6.1 |   |
| Total Revenues                                           |       | 100.0                                              |       | 100.0                                              |       | (0.3 | ) |
| Costs of  Merchandise Sales (2)                          |       | 70.7                                               | (3)        | 70.5                                               | (3)        | 1.4 |   |
| Costs of Service  Revenue (2)                            |       | 88.4                                               | (3)        | 91.9                                               | (3)        | (2.0 | ) |
| Total Costs of  Revenues                                 |       | 74.2                                               |       | 74.5                                               |       | 0.6 |   |
| Gross Profit  from Merchandise Sales                     |       | 29.3                                               | (3)        | 29.5                                               | (3)        | (2.5 | ) |
| Gross Profit  from Service Revenue                       |       | 11.6                                               | (3)        | 8.1                                                | (3)        | 52.1 |   |
| Total Gross  Profit                                      |       | 25.8                                               |       | 25.5                                               |       | 0.8 |   |
| Selling, General  and Administrative Expenses            |       | 22.4                                               |       | 24.7                                               |       | 9.5 |   |
| Net Gain from  Dispositions of Assets                    |       | 0.1                                                |       | 0.7                                                |       | (86.2 | ) |
| Operating Profit                                         |       | 3.4                                                |       | 1.5                                                |       | 135.5 |   |
| Non-operating  Income                                    |       | 0.1                                                |       | 0.1                                                |       | (7.3 | ) |
| Interest Expense                                         |       | 1.1                                                |       | 1.3                                                |       | 19.2 |   |
| Earnings from  Continuing Operations Before Income Taxes |       | 2.5                                                |       | 0.3                                                |       | 777.8 |   |
| Income Tax  Expense Benefit                              |       | 41.9                                               | (4)        | 4.4                                                | (4)        | NM |   |
| Net Earnings  from Continuing Operations                 |       | 1.5                                                |       | 0.3                                                |       | 433.4 |   |
| Discontinued  Operations, Net of Tax                     |       | —                                             |       | (0.1                                               | )          | 55.7 |   |
| Net Earnings                                             |       | 1.4                                                |       | 0.2                                                |       | 631.8 |   |

 

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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  Earnings from Continuing Operations Before Income Taxes.                                                                                                                                                                                                                                                                                                              |

NM  Percentage not meaningful

 

Totalrevenue and comparable sales for the thirty-nine weeks ended October 31,2009 decreased by approximately 0.3% and 0.4% as compared to the thirty-nineweeks ended November 1, 2008. Comparable merchandise sales decreased 1.8%and was mostly offset by an increase in comparable service revenue of 5.9%. Thedecrease in merchandise sales was due to weaker sales in our retail businessstemming from lower customer counts and less discretionary spending by ourcustomers.

 

Grossprofit as a percent of merchandise sales decreased to 29.3% for the thirty-nineweeks ended October 31, 2009 from 29.5% for the thirty-nine weeks ended November 1,2008. Gross profit from merchandise sales decreased $8,619,000 or 2.5%primarily due to the reduced merchandise sales discussed above. Merchandisesales gross profit margins declined by 70 basis points as result of increasedproduct promotions and an overall change in product mix, offset by loweroccupancy and warehousing costs, which improved by 40 basis points.

 

Grossprofit from service revenue increased as a percentage of service revenues to11.6% for the thirty-nine weeks ended October 31, 2009 from 8.1% for thethirty-nine weeks ended November 1, 2008. Gross profit from service revenueincreased by 52.1% or $11,435,000. This increase in gross profit was primarilydue to the increase in service revenue which 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 24.7% for the thirty-nine weeks ended November 1, 2008 to22.4% for the thirty-nine weeks ended October 31, 2009. Selling, Generaland Administrative expenses decreased $34,365,000 or 9.5%. The decrease wasprimarily due to reduced payroll and related expenses of $7,042,000, less mediaexpense of $15,008,000, lower legal expenses and professional services fees of$7,604,000 and lower travel expenses of $2,384,000.

 

Netgain from the disposition of assets for the thirty-nine weeks ended October 31,2009 and November 1, 2008 reflects gains of $1,319,000 and $ 9,555,000, respectively,primarily as a result of the sale and lease back transactions.

 

Interestexpense declined by $3,653,000 to $15,324,000 for the thirty-nine weeks ended October 31,2009 from $18,977,000 for the thirty-nine weeks ended November 1, 2008.Both periods included gains from the retirement of debt of $6,248,000 and$3,460,000, respectively. Excluding these gains, interest expense declined by$865,000 from 2008 to 2009 primarily due to reduced debt levels.

 

Incometax expense was $15,363,000 or an effective rate of 41.9% for the thirty-nineweeks ended October 31, 2009 as compared to $185,000 or an effective rateof 4.4% for the thirty-nine weeks ended November 1, 2008. The increase intax expense was primarily due to improved earnings. The prior year included aone-time tax benefit of $2,200,000 resulting from the recording of a deferredtax asset due to a state tax law change.

 

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) and the Retail Business defined asDo-It-Yourself (retail merchandise) and commercial. Generally, specializedautomotive retailers focus on either the Retail or Service area of thebusiness. We believe that operation in both the Retail and Service areas of thebusiness positively differentiates us from most of our competitors. Although wemanage our store performance at a store level in aggregation, we believe thatthe following presentation, which includes the reclassification of revenue frominstalled products from retail sales to service center revenue, shows anaccurate comparison against competitors within the two sales arenas. We competein the Retail area of the business through our retail sales floor andcommercial sales business. Our Service Center business competes in the Servicearea of the industry.

 

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Thefollowing table presents the revenues and gross profit for each area of thebusiness:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **October 31,**               | ** ** | **November 1,**                  | ** ** | **October 31,** | ** ** | **November 1,** | ** ** |
| **(Dollar amounts in thousands)** | ** ** | **2009**                           | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Retail Sales (1)                                 |       | $                                  | 246,275    |                                  | $          | 253,492 |   | $ | 770,121 |   | $ | 802,707 |   |
| Service Center  Revenue (2)                      |       | 226,368                            |       | 210,674                               |       | 687,921 |   | 659,545 |   |
| Total Revenues                                   |       | $                                  | 472,643    |                                  | $          | 464,166 |   | $ | 1,458,042 |   | $ | 1,462,252 |   |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Gross Profit  from Retail Sales (3)              |       | $                                  | 65,846     |                                  | $          | 68,360 |   | $ | 210,147 |   | $ | 220,139 |   |
| Gross Profit  from Service Center Revenue (3)    |       | 52,423                             |       | 46,484                                |       | 165,913 |   | 153,105 |   |
| Total Gross  Profit                              |       | $                                  | 118,269    |                                  | $          | 114,844 |   | $ | 376,060 |   | $ | 373,244 |   |

 

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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. 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

 

OnDecember 30, 2008 the Financial Accounting Standards Board (FASB) issuedFASB Staff Position No. 132(R)-1, “Employers’ Disclosures aboutPostretirement Benefit Plan Assets” (FSP FAS 132(R)-1). This pronouncementprovides additional guidance on an employer’s disclosures about plan assets ofa defined benefit pension or other postretirement plan and is effective forfiscal years ending after December 15, 2009.  The Company does not expect the adoption ofFSP FAS 132(R)-1 to have a material impact on its consolidated financial statements.

 

InOctober 2009, the FASB issued Accounting Standards Update 2009-13 “RevenueRecognition (Topic 605) — Multiple-Deliverable Revenue Arrangements a consensusof the FASB Emerging Issues Task Force,” (ASU 2009-13). This update eliminatesthe residual method of allocation and requires that consideration be allocatedto all deliverables using the relative selling price method. ASU 2009-13 iseffective for material revenue arrangements entered into or materially modifiedin fiscal years beginning on or after June 15, 2010. The Company iscurrently evaluating the impact ASU 2009-13 will have on its consolidatedfinancial 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 and thereported amounts of revenues and expenses during the reporting period.Additionally, we estimate our interim product gross margins in accordance withthe FASB’s ASC on Interim Reporting.

 

Onan on-going basis, we evaluate our estimates and judgments, including thoserelated to customer incentives, product returns and warranty obligations, baddebts, merchandise inventories, income taxes, financing operations,restructuring costs, retirement benefits, risk participation agreements andcontingencies and litigation. We base our estimates and judgments on historicalexperience and on various other factors that we believe to be reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions. For a detailed discussion ofsignificant accounting policies that may involve a higher degree of judgment orcomplexity, refer to “Critical Accounting Policies and Estimates” as reportedin our Annual Report on Form 10-K for the fiscal year ended January 31,2009, which disclosures are hereby incorporated by reference.

 

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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 regulation andlitigation. 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 tofactors beyond 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 DisclosuresAbout Market 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 October 31, 2009 we had no borrowings underthis facility. Additionally, we have a $149,985,000 Senior Secured Term Loanfacility 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 record theeffective portion of the change in fair value through Accumulated OtherComprehensive Loss.

 

Thefair value of the interest rate swap was $15,246,000 and $15,808,000 payable atOctober 31, 2009 and January 31, 2009, respectively. Of the net$562,000 decrease in fair value during the thirty-nine weeks ended October 31,2009, $496,000, net of tax, was recorded to accumulated other comprehensiveloss on the condensed consolidated balance sheet.

 

Item 4.  Controlsand Procedures.

 

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 SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by anissuer in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the issuer’s management, including itsprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding required disclosure.The Company’s management, with the participation of the Company’s chiefexecutive officer and chief financial officer, evaluated the effectiveness ofthe Company’s disclosure controls and procedures as of the end of the periodcovered by this report. Based on that evaluation, the chief executive officerand chief financial officer concluded that our disclosure controls andprocedures as of the end of the period covered by this report were functioningeffectively and provide reasonable assurance that the information required tobe disclosed by the Company in reports filed under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

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. Other Information

 

None.

 

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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. During the third quarterof fiscal 2009, the Company and the EPA reached a settlement in principle of thismatter requiring that the Company (i) pay a monetary penalty of $5million, (ii) take certain corrective action with respect to certaininventory that had been restricted from sale during the course of theinvestigation, (iii) implement a formal compliance program and (iv) participatein certain non-monetary emission offset activities. The Company had previouslyaccrued an amount equal to the agreed upon civil penalty and a $3 millioncontingency accrual with respect to the restricted inventory. During the thirdquarter of fiscal 2009, the Company reversed $1 million of the inventoryaccrual as a portion of the subject inventory was released for sale. When theCompany successfully completes the required corrective action with respect tothe remaining restricted inventory, it may reverse all or a portion of the remaining$2 million accrual in future periods.

 

TheCompany is also party to various other actions and claims arising in the normalcourse 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.

 

Item1A.  Risk Factors

 

There have been nochanges to the risks described in the Company’s previously filed Annual Reporton Form 10-K for the fiscal year ended January 31, 2009.

 

Item2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item3.  Defaults Upon Senior Securities

 

None.

 

Item4.  Submission of Matters to a Vote of Security Holders

 

None.

 

Item5.  Other Information

 

None.

 

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Item6.  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

 

Pursuant to therequirements of Section 13 or 15(d) the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|   |                    |   | THE PEP BOYS - MANNY, MOE & JACK                                                                            |
|--------|-------------------------|--------|----------------------------------------------------------------------------------------------------------------------|
|   |                    |   | (Registrant)                                                                                                         |
|   |                    |   |                                                                                                                 |   |
| Date:  | December  09, 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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INDEXTO 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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