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  November 1, 2008** |
|                                                      |       |                                                                                                    |
| **OR**                                                    |
|                                                      |       |                                                                                                    |
| **o**                                                     | ** ** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from            to            **

 

**CommissionFile No. 1-3381**

 

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

(Exact name of registrant as specified inits charter)

 

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

 

**215-430-9000**

(Registrant’s telephone number, includingarea code)

 

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

 

Indicate by checkmark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

 

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

 

Asof November 28, 2008 there were 52,127,463 shares of the registrant’sCommon Stock outstanding.

 

 

 

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Table of Contents

 

Index

 
|                                     | ** ** | **Page**                                                                                                                                                                  |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| PART I - FINANCIAL INFORMATION |       |                                                                                                                                                                      |
|                                |       |                                                                                                                                                                      |   |   |
| Item 1.                             |       | Condensed Consolidated Financial Statements (Unaudited)                                                                                                                   |   |   |
|                                |       |                                                                                                                                                                      |   |   |
|                                |       | Condensed Consolidated Balance Sheets – November 1, 2008 and February 2,  2008                                                                             |   | 2 |
|                                |       |                                                                                                                                                                      |   |   |
|                                |       | Condensed Consolidated Statements of Operations and Changes in  Retained Earnings - Thirteen and Thirty-nine Weeks Ended November 1,  2008 and November 3, 2007 |   | 3 |
|                                |       |                                                                                                                                                                      |   |   |
|                                |       | Condensed Consolidated Statements of Cash Flows – Thirty-nine Weeks  Ended November 1, 2008 and November 3, 2007                                           |   | 4 |
|                                |       |                                                                                                                                                                      |   |   |
|                                |       | Notes to Condensed Consolidated Financial  Statements                                                                                                                     |   | 5-19 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 2.                             |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                               |   | 20-26 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 3.                             |       | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                               |   | 26 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 4.                             |       | Controls and Procedures                                                                                                                                                   |   | 26 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 5.                             |       | Other Information                                                                                                                                                         |   | 26 |
|                                |       |                                                                                                                                                                      |   |   |
| PART II - OTHER INFORMATION    |       |                                                                                                                                                                      |
|                                |       |                                                                                                                                                                      |   |   |
| Item 1.                             |       | Legal Proceedings                                                                                                                                                         |   | 26 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 1A.                            |       | Risk Factors                                                                                                                                                              |   | 27 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 2.                             |       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                              |   | 27 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 3.                             |       | Defaults Upon Senior Securities                                                                                                                                           |   | 27 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 4.                             |       | Submission of Matters to a Vote of Security  Holders                                                                                                                      |   | 27 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 5.                             |       | Other Information                                                                                                                                                         |   | 27 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 6.                             |       | Exhibits                                                                                                                                                                  |   | 28 |
|                                |       |                                                                                                                                                                      |   |   |
| SIGNATURES                          |       | 29                                                                                                                                                                        |
|                                |       |                                                                                                                                                                      |   |   |
| INDEX TO EXHIBITS                   |       | 30                                                                                                                                                                        |
|                                     |            |                                                                                                                                                                           |  |  |  |

 

1

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Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated FinancialStatements (Unaudited)

 

THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(dollar amounts in thousands, exceptshare data)

UNAUDITED

 
| ** **                                                                           | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                           |       |                       |       |                       |       |
| Current Assets:                                                                      |       |                       |       |                       |       |
| Cash and cash equivalents                                                            |       | $                          | 38,371     |                       | $          | 20,926 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $2,109 and $1,937 |       | 25,838                     |       | 29,450                     |       |
| Merchandise inventories                                                              |       | 584,700                    |       | 561,152                    |       |
| Prepaid expenses                                                                     |       | 30,133                     |       | 43,842                     |       |
| Other                                                                                |       | 43,774                     |       | 77,469                     |       |
| Assets held for disposal                                                             |       | 18,222                     |       | 16,918                     |       |
| Total Current Assets                                                                 |       | 741,038                    |       | 749,757                    |       |
|                                                                                 |       |                       |       |                       |       |
| Property and Equipment - net                                                         |       | 747,921                    |       | 780,779                    |       |
| Deferred income taxes                                                                |       | 50,315                     |       | 20,775                     |       |
| Other                                                                                |       | 28,669                     |       | 32,609                     |       |
| Total Assets                                                                         |       | $                          | 1,567,943  |                       | $          | 1,583,920 |   |
|                                                                                 |       |                       |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                        |       |                       |       |                       |       |
| Current Liabilities:                                                                 |       |                       |       |                       |       |
| Accounts payable                                                                     |       | $                          | 221,863    |                       | $          | 245,423 |   |
| Trade payable program liability                                                      |       | 38,316                     |       | 14,254                     |       |
| Accrued expenses                                                                     |       | 256,620                    |       | 292,623                    |       |
| Deferred income taxes                                                                |       | 15,013                     |       | —                     |       |
| Current maturities of long-term debt and  obligations under capital lease            |       | 2,060                      |       | 2,114                      |       |
| Total Current Liabilities                                                            |       | 533,872                    |       | 554,414                    |       |
|                                                                                 |       |                       |       |                       |       |
| Long-term debt and obligations under  capital lease, less current maturities         |       | 330,535                    |       | 400,016                    |       |
| Other long-term liabilities                                                          |       | 64,487                     |       | 72,183                     |       |
| Deferred gain from asset sales                                                       |       | 173,184                    |       | 86,595                     |       |
| Commitments and Contingencies                                                        |       |                       |       |                       |       |
| Stockholders’ Equity:                                                           |       |                       |       |                       |       |
| Common Stock, par value $1 per share:                                                |       |                       |       |                       |       |
| Authorized 500,000,000 shares; Issued  68,557,041 shares                             |       | 68,557                     |       | 68,557                     |       |
| Additional paid-in capital                                                           |       | 292,585                    |       | 296,074                    |       |
| Retained earnings                                                                    |       | 396,697                    |       | 406,819                    |       |
| Accumulated other comprehensive loss                                                 |       | (11,470                    | )          | (14,183                    | )          |
| Less cost of shares in treasury —  14,234,313 shares and 14,609,094 shares      |       | 221,240                    |       | 227,291                    |       |
| Less cost of shares in benefits trust -  2,195,270 shares                            |       | 59,264                     |       | 59,264                     |       |
| Total Stockholders’ Equity                                                      |       | 465,865                    |       | 470,712                    |       |
| Total Liabilities and Stockholders’ Equity                                      |       | $                          | 1,567,943  |                       | $          | 1,583,920 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

AND CHANGES IN RETAINEDEARNINGS

(dollar amounts in thousands, except pershare amounts)

UNAUDITED

 
| ** **                                                           | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                                           | ** ** | **November 1,  2008**         | ** ** | **November 3,  2007**            | ** ** | **November 1,  2008** | ** ** | **November 3,  2007** | ** ** |
| Merchandise Sales                                                    |       | $                                  | 378,461    |                                  | $          | 430,368 |   | $ | 1,189,872 |   | $ | 1,323,161 |   |
| Service Revenue                                                      |       | 85,705                             |       | 98,393                                |       | 272,380 |   | 297,275 |   |
| Total Revenues                                                       |       | 464,166                            |       | 528,761                               |       | 1,462,252 |   | 1,620,436 |   |
| Costs of Merchandise Sales                                           |       | 268,235                            |       | 343,933                               |       | 838,574 |   | 971,358 |   |
| Costs of Service Revenue                                             |       | 81,087                             |       | 86,902                                |       | 250,434 |   | 261,847 |   |
| Total Costs of Revenues                                              |       | 349,322                            |       | 430,835                               |       | 1,089,008 |   | 1,233,205 |   |
| Gross Profit from Merchandise Sales                                  |       | 110,226                            |       | 86,435                                |       | 351,298 |   | 351,803 |   |
| Gross Profit from Service Revenue                                    |       | 4,618                              |       | 11,491                                |       | 21,946 |   | 35,428 |   |
| Total Gross Profit                                                   |       | 114,844                            |       | 97,926                                |       | 373,244 |   | 387,231 |   |
| Selling, General and Administrative  Expenses                        |       | 119,827                            |       | 133,550                               |       | 361,445 |   | 392,501 |   |
| Net (Loss) Gain from Dispositions of Assets                          |       | (53                                | )          | (515                                  | )          | 9,555 |   | 1,829 |   |
| Operating (Loss) Profit                                              |       | (5,036                             | )          | (36,139                               | )          | 21,354 |   | (3,441 | ) |
| Non-operating Income                                                 |       | 305                                |       | 1,032                                 |       | 1,797 |   | 4,703 |   |
| Interest Expense                                                     |       | 7,098                              |       | 11,501                                |       | 18,977 |   | 36,488 |   |
| (Loss) Earnings From Continuing Operations  Before Income Taxes      |       | (11,829                            | )          | (46,608                               | )          | 4,174 |   | (35,226 | ) |
| Income Tax (Benefit) Expense                                         |       | (4,775                             | )          | (20,677                               | )          | 185 |   | (16,293 | ) |
| Net (Loss) Earnings From Continuing  Operations                      |       | (7,054                             | )          | (25,931                               | )          | 3,989 |   | (18,933 | ) |
| Discontinued Operations, Net of Tax                                  |       | (228                               | )          | (2059                                 | )          | (1,151 | ) | (1,703 | ) |
| Net (Loss) Earnings                                                  |       | (7,282                             | )          | (27,990                               | )          | 2,838 |   | (20,636 | ) |
|                                                                 |       |                               |       |                                  |       |   |   |   |   |
| Retained Earnings, beginning of period                               |       | 408,351                            |       | 462,615                               |       | 406,819 |   | 463,797 |   |
| Cumulative effect adjustment for adoption  of EITF 06-10, net of tax |       | —                             |       | —                                |       | (1,165 | ) | — |   |
| Cumulative effect adjustment for adoption  of FIN 48                 |       | —                             |       | —                                |       | — |   | (155 | ) |
| Cash Dividends                                                       |       | (3,523                             | )          | (3,510                                | )          | (10,551 | ) | (10,630 | ) |
| Effect of Stock Options                                              |       | —                             |       | —                                |       | (37 | ) | (1,261 | ) |
| Dividend Reinvestment Plan                                           |       | (849                               | )          | (27                                   | )          | (1,207 | ) | (27 | ) |
| Retained Earnings, end of period                                     |       | $                                  | 396,697    |                                  | $          | 431,088 |   | $ | 396,697 |   | $ | 431,088 |   |
|                                                                 |       |                               |       |                                  |       |   |   |   |   |
| Basic and Diluted (Loss) Earnings Per  Share:                        |       |                               |       |                                  |       |   |   |   |   |
|                                                                 |       |                               |       |                                  |       |   |   |   |   |
| Net (Loss) Earnings from Continuing  Operations                      |       | $                                  | (0.13      | )                                     | $          | (0.49 | ) | $ | 0.08 |   | $ | (0.36 | ) |
| Discontinued Operations, Net of Tax                                  |       | (0.01                              | )          | (0.05                                 | )          | (0.03 | ) | (0.04 | ) |
| (Loss) Earnings Per Share                                            |       | $                                  | (0.14      | )                                     | $          | (0.54 | ) | $ | 0.05 |   | $ | (0.40 | ) |
|                                                                 |       |                               |       |                                  |       |   |   |   |   |
| Cash Dividends Per Share                                             |       | $                                  | 0.0675     |                                  | $          | 0.0675 |   | $ | 0.2025 |   | $ | 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 amounts inthousands)

UNAUDITED

 
| **Thirty-nine weeks ended**                                                                  | ** ** | **November 1,  2008** | ** ** | **November 3,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                             | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Cash Flows from Operating Activities:                                                                  |       |                       |       |                       |       |
| Net Earnings (Loss)                                                                                    |       | $                          | 2,838      |                       | $          | (20,636 | ) |
| Adjustments to reconcile net earnings  (loss) to net cash (used in) provided by continuing operations: |       |                       |       |                       |       |
| Discontinued operations                                                                                |       | 1,151                      |       | 1,703                      |       |
| Depreciation and amortization                                                                          |       | 55,109                     |       | 61,724                     |       |
| Inventory impairment                                                                                   |       | —                     |       | 32,803                     |       |
| Amortization of deferred gain from asset  sales                                                        |       | (7,305                     | )          | —                     |       |
| Accretion of asset retirement obligation                                                               |       | 206                        |       | 191                        |       |
| Stock compensation expense                                                                             |       | 2,314                      |       | 8,529                      |       |
| Gain from debt retirement                                                                              |       | (3,460                     | )          | —                     |       |
| Deferred income taxes                                                                                  |       | (3,603                     | )          | (11,812                    | )          |
| Gain from dispositions of assets                                                                       |       | (9,555                     | )          | (1,829                     | )          |
| Change in fair value of derivative                                                                     |       | 140                        |       | 3,665                      |       |
| Loss from asset impairment                                                                             |       | 370                        |       | 7,199                      |       |
| Excess tax benefits from stock based awards                                                            |       | (3                         | )          | (687                       | )          |
| Change in cash surrender value of life  insurance policies                                             |       | 98                         |       | (5,423                     | )          |
| Changes in Operating Assets and  Liabilities:                                                          |       |                       |       |                       |       |
| Decrease in accounts receivable, prepaid  expenses and other                                           |       | 39,759                     |       | 32,004                     |       |
| Increase in merchandise inventories                                                                    |       | (23,548                    | )          | (15,677                    | )          |
| Decrease in accounts payable                                                                           |       | (23,560                    | )          | (38,954                    | )          |
| Decrease in accrued expenses                                                                           |       | (37,077                    | )          | (5,911                     | )          |
| (Decrease) increase in other long-term  liabilities                                                    |       | (3,818                     | )          | 682                        |       |
| Net cash (used in) provided by continuing  operations                                                  |       | (9,944                     | )          | 47,571                     |       |
| Net cash (used in) provided by discontinued  operations                                                |       | (880                       | )          | 2,752                      |       |
| Net Cash (Used in) Provided by Operating  Activities                                                   |       | (10,824                    | )          | 50,323                     |       |
|                                                                                                   |       |                       |       |                       |       |
| Cash Flows from Investing Activities:                                                                  |       |                       |       |                       |       |
| Cash paid for master lease properties                                                                  |       | (117,121                   | )          | —                     |       |
| Cash paid for property and equipment                                                                   |       | (22,653                    | )          | (33,074                    | )          |
| Proceeds from dispositions of assets                                                                   |       | 209,085                    |       | 2,376                      |       |
| Proceeds from surrender of life insurance  policies                                                    |       | —                     |       | 26,714                     |       |
| Net cash provided by (used in) continuing  operations                                                  |       | 69,311                     |       | (3,984                     | )          |
| Net cash provided by (used in) discontinued  operations                                                |       | 2,558                      |       | (432                       | )          |
| Net Cash Provided by (Used in) Investing  Activities                                                   |       | 71,869                     |       | (4,416                     | )          |
|                                                                                                   |       |                       |       |                       |       |
| Cash Flows from Financing Activities:                                                                  |       |                       |       |                       |       |
| Borrowings under line of credit agreements                                                             |       | 99,888                     |       | 436,584                    |       |
| Payments under line of credit agreements                                                               |       | (141,413                   | )          | (419,267                   | )          |
| Excess tax benefits from stock based awards                                                            |       | 3                          |       | 687                        |       |
| Borrowings on trade payable program  liability                                                         |       | 154,886                    |       | 87,578                     |       |
| Payments on trade payable program liability                                                            |       | (130,824                   | )          | (79,972                    | )          |
| Payment for finance issuance cost                                                                      |       | (182                       | )          | —                     |       |
| Proceeds from lease financing                                                                          |       | 8,661                      |       | —                     |       |
| Reduction of long-term debt                                                                            |       | (24,550                    | )          | (2,432                     | )          |
| Payments on capital lease obligations                                                                  |       | (146                       | )          | (210                       | )          |
| Dividends paid                                                                                         |       | (10,551                    | )          | (10,630                    | )          |
| Repurchase of common stock                                                                             |       | —                     |       | (58,152                    | )          |
| Proceeds from exercise of stock options                                                                |       | 23                         |       | 3,632                      |       |
| Proceeds from dividend reinvestment plan                                                               |       | 605                        |       | 591                        |       |
| Net Cash Used in Financing Activities                                                                  |       | (43,600                    | )          | (41,591                    | )          |
| Net Increase in Cash and Cash Equivalents                                                              |       | 17,445                     |       | 4,316                      |       |
| Cash and Cash Equivalents at Beginning of  Period                                                      |       | 20,926                     |       | 21,884                     |       |
| Cash and Cash Equivalents at End of Period                                                             |       | $                          | 38,371     |                       | $          | 26,200 |   |
|                                                                                                   |       |                       |       |                       |       |
| Supplemental Disclosure of Cash Flow  Information:                                                     |       |                       |       |                       |       |
| Cash paid for income taxes                                                                             |       | $                          | 1,070      |                       | $          | 214 |   |
| Cash paid for interest                                                                                 |       | $                          | 17,043     |                       | $          | 30,100 |   |
| Accrued purchases of property and equipment                                                            |       | $                          | 1,435      |                       | $          | 258 |   |

 

See notes to condensed consolidated financialstatements.

 

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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

(DollarAmounts in Thousands)

 

NOTE1. Condensed Consolidated Financial Statements

 

Thecondensed consolidated balance sheet as of November 1, 2008, the condensedconsolidated statements of operations and changes in retained earnings for thethirteen and thirty-nine week periods ended November 1, 2008 and November 3,2007 and the condensed consolidated statements of cash flows for thethirty-nine week periods ended November 1, 2008 and November 3, 2007are unaudited. In the opinion of management, all adjustments necessary topresent fairly the financial position, results of operations and cash flows at November 1,2008 and for all periods presented have been made.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted, as permitted by Rule 10-01of the Securities and Exchange Commission’s Regulation S-X, “Interim FinancialStatements”. It is suggested that these condensed consolidated financialstatements be read in conjunction with the financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended February 2, 2008. The results of operations for thethirteen and thirty-nine week periods ended November 1, 2008 are notnecessarily indicative of the operating results for the full fiscal year.

 

Our fiscal year ends on the Saturday nearest January 31.Accordingly, references to fiscal 2007, fiscal 2008 and fiscal 2009 refer tothe years ended February 2, 2008, January 31, 2009 and January 30,2010.

 

NOTE2. New Accounting Standards

 

Adopted:

 

In September 2006, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157defines the term fair value, establishes a framework for measuring it withingenerally accepted accounting principles and expands disclosures about itsmeasurements. The Company adopted SFAS 157 on February 3, 2008.  This adoption did not have a material effecton the Company’s financial statements. Fair value disclosures are provided in Note 15.

 

InMarch 2007, the Emerging Issues Task Force (EITF) reached a consensus onIssue Number 06-10, “Collateral Assignment Split-Dollar Life Insurance Arrangements”(EITF 06-10). EITF 06-10 provides guidance to help companiesdetermine whether a liability for the postretirement benefit associated with acollateral assignment split-dollar life insurance arrangement should berecorded in accordance with either SFAS No. 106, “Employers’ Accountingfor Postretirement Benefits Other Than Pensions” (if, in substance, apostretirement benefit plan exists), or Accounting Principles Board Opinion No. 12(if the arrangement is, in substance, an individual deferred compensationcontract). EITF 06-10 also provides guidance on how a company shouldrecognize and measure the asset in a collateral assignment split-dollar lifeinsurance contract. EITF 06-10 is effective for fiscal years beginningafter December 15, 2007, although early adoption is permitted. On February 3,2008, the Company adopted EITF 06-10, which resulted in a $1,855 pretaxcharge to retained earnings for its only existing collateral assignmentsplit-dollar life insurance arrangement – an arrangement in place for a formerCEO who retired in fiscal 2003.

 

In June 2007, the FASB ratified EITF Issue Number 06-11, “Accountingfor Income Tax Benefits of Dividends on Share-Based Payment Awards”(EITF 06-11). EITF 06-11 applies to share-based payment arrangements withdividend protection features that entitle employees to receive (a) dividendson equity-classified nonvested shares, (b) dividend equivalents onequity-classified nonvested share units, or (c) payments equal to thedividends paid on the underlying shares while an equity-classified share optionis outstanding, when those dividends or dividend equivalents are charged toretained earnings under SFAS No. 123(R), “Share-Based Payment,” and resultin an income tax deduction for the employer. A consensus was reached that arealized income tax benefit from dividends or dividend equivalents that arecharged to retained earnings and are paid to employees for equity-classifiednon-vested equity shares, non-vested equity share units, and outstanding equityshare options should be recognized as an increase in additional paid-incapital. EITF 06-11 is effective prospectively for the income tax benefitsthat result from dividends on equity-classified employee share-based paymentawards that are declared in fiscal years beginning after December 15,2007, and interim periods within those fiscal years. On February 3, 2008,the Company adopted EITF 06-11, which did not have a material impact on itsconsolidated Financial statements.

 

In October 2008the FASB issued FASB Staff Position FSP FAS 157-3, “Determining the Fair Valueof a Financial Asset When the Market for That Asset Is Not Active.” This FSPclarifies the application of SFAS 157 in a market that is not active. This FSPshall be effective upon issuance, including prior periods for which financialstatements have not been issued. The adoption of this standard did not have amaterial impact on the Company’s financial statements.

 

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Tobe adopted:

 

InDecember 2007, the FASB issued SFAS No. 141R, “Business Combinations,”which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141R,among other things, establishes principles and requirements for how an acquirerentity recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed and any controlling interests in theacquired entity; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. Costs of the acquisition willbe recognized separately from the business combination. SFAS No. 141Rapplies prospectively, except for taxes, to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod on or after December 15, 2008. The Company is currently evaluatingthe impact SFAS No. 141 will have on its consolidated financial statementsbeginning in fiscal 2009.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51.” SFAS No. 160, among other things, provides guidance andestablishes amended accounting and reporting standards for a parent company’snoncontrolling interest in a subsidiary. SFAS No. 160 is effective forfiscal years beginning on or after December 15, 2008. The Company does notexpect the adoption of SFAS No. 160 to have a material impact on itsfinancial condition, results of operations or cash flows.

 

In February 2008, the FASB issued StaffPosition No. FAS 157-2 (FSP No.157-2), “Effective Date of FASBStatement No. 157,” that defers the effective date of SFAS 157 forone year for certain nonfinancial assets and nonfinancial liabilities.  SFAS 157 is effective for certainnonfinancial assets and nonfinancial liabilities for financial statementsissued for fiscal years beginning after November 15, 2008. The Company iscurrently evaluating the impact of SFAS No. 157 on its consolidatedfinancial statements beginning in fiscal 2009.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161expands the disclosure requirements in SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” about an entity’s derivativeinstruments and hedging activities. SFAS No. 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The Company is currently evaluating the impactSFAS No. 161 will have on its consolidated financial statements beginning infiscal 2009.

 

InJune 2008, the FASB, issued Staff Position EITF 03-6-1 (FSP EITF 03-6-1), “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities.” FSP EITF 03-6-1 addresses whether instrumentsgranted in share-based payment transactions are participating securities priorto vesting, and therefore need to be included in the earnings allocation incomputing earnings per share under the two-class method as described in SFAS No. 128,“Earnings per Share.” Under the guidance of FSP EITF 03-6-1, unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andshall be included in the computation of earnings-per-share pursuant to thetwo-class method.  FSP EITF 03-6-1 iseffective for financial statements issued for fiscal years beginning after December 15,2008 and interim periods within these fiscal years. All prior-period earningsper share data presented shall be adjusted retrospectively.  Early application is not permitted. TheCompany is currently evaluating the impact FSP EITF 03-6-1 will have on itsconsolidated financial statements beginning in fiscal 2009.

 

NOTE3. 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 $586,811 and $555,188 as of November 1, 2008 andFebruary 2, 2008, respectively. Inventory levels increased during thecurrent quarter reflecting seasonal product offerings.

 

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

 

TheCompany also provides for potentially excess and obsolete inventories based oncurrent inventory levels, the historical analysis of product sales and currentmarket conditions. The nature of the Company’s inventory is such that the riskof obsolescence is minimal and excess inventory has historically been returnedto the Company’s vendors for credit. The Company records a provision when lessthan full credit is expected from a vendor or when market is lower thanrecorded costs. These provisions are revised, if necessary, on a quarterlybasis for adequacy. The Company’s inventory is recorded net of provisions forthese matters which were $12,679 and $11,167 at November 1, 2008 and February 2,2008, respectively.

 

During the third quarter of fiscal 2007, theCompany recorded a $32,803 inventory write-down for the discontinuance andplanned exit of certain non-core merchandise adopted as one of the initialsteps in the Company’s long-term strategic plan. The write-down 

 

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reduced the carrying value of the discontinuedmerchandise from $74,080 to $41,277. The carrying value of the discontinuedmerchandise is evaluated quarterly as compared to the estimated sell throughthat was utilized in determining the impairment. The inventory impairment wasrecorded in cost of merchandise sales on the consolidated statement ofoperations. The carrying value of the discontinued merchandise was $226 at November 1,2008 and $8,612 at February 2, 2008.

 

NOTE4. Property and Equipment

 

TheCompany’s property and equipment as of November 1, 2008 and February 2,2008 was as follows:

 
| **(dollar amounts in thousands)** | ** ** | **November 1, 2008** | ** ** | **February 2, 2008** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                             |       |                           |       |                           |       |
| Property and  Equipment - at cost:               |       |                           |       |                           |       |
| Land                                             |       | $                              | 207,653    |                           | $          | 213,962 |   |
| Buildings and  improvements                      |       | 831,664                        |       | 858,699                        |       |
| Furniture,  fixtures and equipment               |       | 677,662                        |       | 699,303                        |       |
| Construction in  progress                        |       | 2,327                          |       | 3,992                          |       |
|                                             |       | 1,719,306                      |       | 1,775,956                      |       |
| Less accumulated  depreciation and amortization  |       | 971,385                        |       | 995,177                        |       |
| Total Property  and Equipment - Net              |       | $                              | 747,921    |                           | $          | 780,779 |   |

 

Duringthe second quarter of fiscal 2008, the Company settled an outstandingcontractual obligation to purchase 29 properties that were previously leasedunder a master operating lease for $117,121, including $803 of fees.  The Company allocated the acquisition cost tothese properties based on relative fair values. The acquisition cost was lower than the aggregate fair value for theseproperties.

 

NOTE5. Income Taxes

 

On February 4, 2007, the Company adopted the provisions ofFIN 48. In connection with the adoption, the Company recorded a netdecrease to retained earning of $155 and reclassified certain previouslyrecognized deferred tax attributes as FIN 48 liabilities.  The amount of unrecognized tax benefits at February 4,2007 was $7,126 including accrued interest of $734.

 

The company recognizes interest and penalties related to uncertain taxpositions in income tax expense.  As of November 1,2008 and February 2, 2008, we had approximately $1,263 and $1,172 of accruedinterest and penalties related to uncertain tax positions, respectively.

 

Includedin the unrecognized tax benefits of $2,741 and $3,847 at November 1, 2008and February 2, 2008 was $1,744 and $2,244 of tax benefits, respectively, thatif recognized, would affect our annual effective tax rate.  We are undergoing examinations of our taxreturns in certain jurisdictions.  Wehave uncertain liabilities of approximately $1,877 for which it is reasonablypossible that the amount will increase or decrease within the next twelvemonths.  However, based on theuncertainties associated with settlements and the status of examination, it isnot possible to estimate the impact of the change.

 

TheCompany and its subsidiaries file U.S., state and Puerto Rico income taxreturns in jurisdictions with varying statutes of limitations.  The 2005 through 2007 tax years generallyremain subject to examination by federal and most state tax authorities.  The Company and its subsidiaries have variousstate income tax returns in the process of examination, appeals and settlement.  In Puerto Rico, the 2004 through 2007 taxyears generally remain subject to examination by their respective taxauthorities.

 

Under FAS 109, the company is required to project the deferred taxeffects of expected year end temporary differences.  Based on the projections, as of January 31,2009 the company will have $29,632 federal net operating losses, $128,455 ofstate losses and $0 of Puerto Rico losses. As of February 2, 2008, the Company had $46,716 of federal losses,$180,411 of state losses and $768 of Puerto Rico losses.  The state losses will expire in various yearsbeginning in 2008.

 

Thetemporary differences between the book and tax treatment of income and expensesresult in deferred tax assets and liabilities, which are included within theconsolidated balance sheets. The Company must assess the likelihood that anyrecorded deferred tax assets will be recovered against future taxable income.To the extent the Company believes that recovery is not more likely than not, avaluation allowance must be established. In this regard when determiningwhether or not a valuation allowance should be established, the Companyconsiders various tax planning strategies, including potential real estatetransactions to generate future taxable income.  The Company had valuationallowances for these matters of $5,649 and $4,077 as of November 1, 2008and February 2, 2008, respectively.

 

NOTE6. Discontinued Operations

 

In the third quarter of fiscal 2007, the Companyadopted its long-term strategic plan. One of the initial steps in this plan wasthe 

 

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identification of 31 low-return stores forclosure. The Company is accounting for these store closures in accordance withthe provisions of SFAS No. 146 “Accounting for Costs Associated with Exitor Disposal Activities” and SFAS No. 144 “Accounting for Impairment orDisposal of Long-Lived Assets” (SFAS 144). In accordance with SFAS No. 144,discontinued operations for all periods presented reflect the operating resultsfor 11 of the 31 closed stores because the Company does not believe that thecustomers of these stores are likely to become customers of other Pep Boysstores due to geographical considerations. The operating results for the other20 closed stores are included in continuing operations because the Companybelieves that the customers of these stores are likely to become customers ofother Pep Boys stores that are in close proximity.  Below is a summary of these discontinuedstores’ operations for the thirteen and thirty-nine weeks ended November 1,2008 and November 3, 2007:

 
| ** **                                              | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)**        | ** ** | **November 1, 2008**     | ** ** | **November 3, 2007**        | ** ** | **November 1, 2008** | ** ** | **November 3, 2007** | ** ** |
|                                                    |       |                               |       |                                  |       |   |   |   |   |
| Revenues in discontinued operations                     |       |                               |       |                                  |       |   |   |   |   |
| Merchandise Sales                                       |       | $                                  | —     |                                  | $          | 5,357 |   | $ | — |   | $ | 16,168 |   |
| Service Revenue                                         |       | —                             |       | 1,258                                 |       | — |   | 3,674 |   |
| Total revenues, discontinued operations                 |       | $                                  | —     |                                  | $          | 6,615 |   | $ | — |   | $ | 19,842 |   |
|                                                    |       |                               |       |                                  |       |   |   |   |   |
| Loss from discontinued operations, before  income taxes |       | $                                  | (351       | )                                     | $          | (3,154 | ) | $ | (1,771 | ) | $ | (2,607 | ) |

 

The loss from discontinued operations during thethirteen and thirty-nine week periods ended November 3, 2007 includes a$3,764 asset impairment charge associated with 11 closed stores classified asdiscontinued operations.

 

Additionally, the Company has classified certainassets as assets held for disposal on its balance sheets.  As of November 1, 2008 and February 2,2008, the net book values of these assets were as follows:

 
| **(dollar amounts in thousands)** | ** ** | **November 1, 2008** | ** ** | **February 2, 2008** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                             |       |                           |       |                           |       |   |   |   |   |
| Land                                             |       |                           |       |                           |       | $ | 9,876 |   | $ | 9,976 |   |
| Buildings and  improvements                      |       |                           |       |                           |       | 15,548 |   | 15,805 |   |
|                                             |       |                           |       |                           |       | 25,424 |   | 25,781 |   |
| Less accumulated  depreciation and amortization  |       |                           |       |                           |       | (7,202 | ) | (8,863 | ) |
| Assets held for  disposal                        |       |                           |       |                           |       | $ | 18,222 |   | $ | 16,918 |   |

 

Three properties purchased on July 30, 2008as part of the settlement of the master operating lease (see footnote 4), havebeen classified as held for sale as of November 1, 2008.

 

During the second quarter offiscal 2008, the Company sold one property that was classified as held for salefor net proceeds of $1,266 and recognized a $254 net gain from disposition ofassets.  During the third quarter offiscal 2008, the Company sold three properties that were classified as held forsale as of February 2, 2008, for net proceeds of $2,944 and recognized a $201gain within discontinued operations and a $36 net loss from disposition ofassets.

 

The following details the fiscal 2008 activityin the reserve for store closings. The remaining reserve includes remainingrent on leases.

 
| **(dollar amount in thousands)** | ** ** | **Severance** | ** ** | **Lease  Expenses** | ** ** | **Other Costs and  Contractual Obligations** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|---------------|------------|---------------------|------------|-------------------------------------------------------------|------------|-----------|------------|
| Balance at  February 2, 2008               | ** ** | **$**         | 58         | ** **          | **$**      | 3,574                                                       | ** ** | **$**     | 109        | ** ** | **$** | 3,741 | ** ** |
| Provision for  present value of liabilities     |       | —        |       | 270                 |       | —                                                      |       | 270       |       |
| Other                                           |       | —        |       | (62                 | )          | —                                                      |       | (62       | )          |
| Cash payments                                   |       | (58           | )          | (1,281              | )          | (109                                                        | )          | (1,448    | )          |
| Balance at  November 1, 2008               | ** ** | **$**         | **—** | ** **          | **$**      | 2,501                                                       | ** ** | **$**     | **—** | ** ** | **$** | 2,501 | ** ** |

 

NOTE7. Pension and Savings Plan

 

Pensionexpense includes the following:

 

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| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **November 1,  2008**         | ** ** | **November 3,  2007**            | ** ** | **November 1,  2008** | ** ** | **November 3,  2007** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Service cost                                     |       | $                                  | 30         |                                  | $          | 22 |   | $ | 90 |   | $ | 124 |   |
| Interest cost                                    |       | 858                                |       | 893                                   |       | 2,602 |   | 2,565 |   |
| Expected return on plan assets                   |       | (612                               | )          | (566                                  | )          | (1,837 | ) | (1,740 | ) |
| Amortization of transition obligation            |       | 40                                 |       | 40                                    |       | 122 |   | 122 |   |
| Amortization of prior service cost               |       | 92                                 |       | 95                                    |       | 277 |   | 277 |   |
| Amortization of net loss                         |       | 255                                |       | 385                                   |       | 763 |   | 1,361 |   |
| Net periodic benefit cost                        |       | $                                  | 663        |                                  | $          | 869 |   | $ | 2,017 |   | $ | 2,709 |   |

 

TheCompany has a qualified defined benefit pension plan with accrued benefitsfrozen at December 31, 1996. The Company makes contributions to this planin accordance with the requirements of ERISA. The Company does not anticipatemaking a contribution to this plan during fiscal 2008.

 

TheCompany has a non-qualified Executive Supplemental Retirement Plan (SERP) thatis an unfunded defined benefit plan. This plan was closed to new participantson January 31, 2004. As of November 1, 2008, the Company contributed$3,967 of an anticipated $5,500 contribution during fiscal 2008 to this plan.

 

The Company has a non-qualified SERP defined contribution plan for keyemployees who were designated by the Board of Directors after January 31,2004. The Company recorded a benefit for the defined contribution portion ofthe plan of approximately $248 and $158 for the thirteen weeks ended November 1,2008, and November 3, 2007, respectively. The Company’s contributionexpense was approximately $59 and $263 for the thirty-nine weeks ended November 1,2008 and November 3, 2007, respectively.

 

TheCompany has two qualified savings plans, which cover all full-timeemployees who are at least 21 years of age with one or more years of service.The Company contributes the lesser of 50% of the first 6% of a participant’scontributions or 3% of the participant’s compensation. The Company’s savingsplans’ contribution expense was approximately $927 and $961 for the thirteenweeks ended November 1, 2008 and November 3, 2007, respectively, andapproximately $2,971 and $2,589 for the thirty-nine weeks ended November 1,2008 and November 3, 2007, respectively.

 

NOTE 8. Sale-Leaseback Transactions

 

On March 25, 2008, the Company sold 18owned properties to an independent third party. Net proceeds from this salewere $62,542. Concurrent with the sale, the Company entered into agreements tolease the properties back from the purchaser over a minimum lease term of15 years. The Company classified these leases as operating leases. The twomaster leases have an initial term of 15 years with four five-year renewaloptions. The leases have yearly incremental rental increases that are 1.5% ofthe prior year’s rentals.  These leasesresult in approximately $82,000 in future minimum rental payments during theinitial non-cancelable lease term. The second through the fourth renewaloptions are at fair market rents. A $9 gain on the sale of these properties wasrecognized immediately upon execution of the sale and a $26,809 gain wasdeferred. The deferred gain is being recognized over 15 years.

 

On April 10, 2008, the Company sold 23owned properties to an independent third party. Net proceeds from this salewere $72,977. Concurrent with the sale, the Company entered into agreements tolease the properties back from the purchaser over a minimum lease term of15 years. The Company classified 22 of these leases as operating leases.The leases have an initial term of 15 years with four five-year renewaloptions. The leases have yearly incremental rental increases that are 1.5% ofthe prior year’s rentals. These leases result in approximately $92,000 infuture minimum rental payments during the initial non-cancelable lease term.The second through the fourth renewal options are at fair market rents. A$5,522 gain on the sale of these properties was recognized immediately uponexecution of the sale and a $34,483 gain was deferred. The deferred gain isbeing recognized over 15 years. The Company initially had continuinginvolvement in one property and, accordingly, recorded $4,583 of thetransaction’s total net proceeds as a borrowing and as a financing activity inthe Statement of Cash Flows. During the second quarter of 2008, the Companydetermined it no longer had continuing involvement with this property andrecorded the sale of this property as a sale-leaseback transaction, removingthe asset and related lease financing and recorded a $1,515 deferred gain.

 

On July 30, 2008, the Company sold 22properties to an independent third party. Net proceeds from this sale were$75,951. Concurrent with the sale, the Company entered into agreements to leasethe properties back from the purchaser over a minimum lease term of15 years. The Company classified 21 of these leases as operating leases.The leases have an initial term of 15 years with four five-year renewaloptions. The leases have yearly incremental rental increases that are 1.5% ofthe prior year’s rentals. These leases result in approximately $97,000 infuture minimum rental payments during the initial non-cancelable lease term.The second through the fourth renewal options are at fair market rents. A$2,124 gain on the sale of these properties was recognized immediately uponexecution of the sale and a $28,638 gain was deferred. The deferred gain isbeing recognized over 15 years. The Company initially had continuinginvolvement in one property and, accordingly, recorded $3,896 of thetransaction’s total net proceeds as a borrowing 

 

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and as a financing activity in the Statement ofCash Flows. During the third quarter of 2008, the Company determined it nolonger had continuing involvement with this property and recorded the sale ofthis property as a sale-leaseback transaction, removing the asset and relatedlease financing and recorded a $2,448 deferred gain.

 

The Company recognized $2,260 and $5,511 in Costof Merchandise Sales, and $736 and $1,794 in Costs of Service Revenue of thedeferred gain generated from the sale-leaseback transactions for the thirteenweeks and thirty-nine weeks ended November 1, 2008, respectively.

 

Of the 562 store locations operated by theCompany at November 1, 2008, 235 are owned and 327 are leased.

 

NOTE9. Debt and Financing Arrangements

 
| **(dollar amounts in thousands)**                              | ** ** | **November 1, 2008** | ** ** | **February 2, 2008** |   |
|-------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|--------|
| 7.50% Senior Subordinated Notes, due  December 2014                      |       | $                              | 174,535    |                           | $      | 200,000 |   |
| Senior Secured Term Loan, due  October 2013                              |       | 152,712                        |       | 154,652                        |   |
| Other notes payable, 8.0%                                                     |       | —                         |       | 248                            |   |
| Lease financing obligations, payable  through October 2022               |       | 4,575                          |       | 4,786                          |   |
| Capital lease obligations payable through  October 2009                  |       | 253                            |       | 399                            |   |
| Line of credit agreement, through  December 2009                         |       | 520                            |       | 42,045                         |   |
|                                                                          |       | 332,595                        |       | 402,130                        |   |
| Less current maturities                                                       |       | 2,060                          |       | 2,114                          |   |
| Long-term debt and obligations under  capital leases, less current maturities |       | $                              | 330,535    |                           | $      | 400,016 |   |

 

OnFebruary 15, 2007, the Company amended its Senior Secured Term Loan toreduce the interest rate from London Interbank Offered Rate (LIBOR) plus 2.75%to LIBOR plus 2.00%.

 

The Company used the proceeds from its March 25,2008 sale-leaseback transaction and available cash to repay the $49,915 thendrawn on its line of credit agreement and to repurchase $20,965 principalamount of its 7.50% Senior Subordinated Notes for $18,082.  The gain on the retirement of debt isincluded in interest expense.

 

As part of the April 10, 2008sale-leaseback transaction, the Company determined that it has continuinginvolvement in one property and recorded the $4,583 proceeds, net of executioncosts, as a borrowing in accordance with Statement of Financial AccountingStandards No. 13, “Accounting for Leases.” During the second quarter of2008, the Company determined it no longer had continuing involvement with thisproperty. Accordingly, the Company recorded this property as a sale-leaseback,retired the asset and related lease financing and recorded a $1,515 deferredgain.

 

As part of the July 30, 2008 sale-leasebacktransaction, the Company determined that it has continuing involvement in oneproperty and has recorded the $3,896 proceeds, net of execution costs, as aborrowing in accordance with Statement of Financial Accounting Standards No. 13,“Accounting for Leases.” During the third quarter of 2008, the Companydetermined it no longer had continuing involvement with this property.Accordingly, the Company recorded this property as a sale-leaseback, retiredthe asset and related lease financing and recorded a $2,448 deferred gain.

 

The Company had $231,223 of availability underits line of credit agreement on November 1, 2008.

 

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NOTE10. Warranty Reserve

 

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

 

Thereserve for warranty costs activity for the thirty-nine week periods ended November 1,2008 and November 3, 2007, respectively, is as follows:

 
| **(dollar amounts in thousands)** | ** ** | **Thirty-nine  Weeks Ended  November 1, 2008** | ** ** | **Thirty-nine  Weeks Ended  November 3, 2007** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                                    | ** ** | ** **                                                    | ** ** |
| Beginning balance                                |       | $                                                             | 247        |                                                          | $          | 645 |   |
|                                             |       |                                                          |       |                                                          |       |
| Additions related to current period sales        |       | 9,188                                                         |       | 7,774                                                         |       |
|                                             |       |                                                          |       |                                                          |       |
| Warranty costs incurred in current period        |       | (8,790                                                        | )          | (7,993                                                        | )          |
|                                             |       |                                                          |       |                                                          |       |
| Ending balance                                   |       | $                                                             | 645        |                                                          | $          | 426 |   |

 

NOTE11. (Loss) Earnings Per Share

 

(in thousands, except per share amounts)

 
| ** **   | ** **   | ** **                                                                                                                     | ** **   | **Thirteen Weeks Ended** | ** **   | **Thirty-nine Weeks Ended** | ** **   |
|--------------|--------------|--------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------------|--------------|---------------------------------------|--------------|
| ** **   | ** **   | ** **                                                                                                                     | ** **   | **November 1,   2008**   | ** **   | **November 3,  2007**            | ** **   | **November 1,   2008** | ** ** | **November 3,   2007** | ** ** |
| *** *** | *** *** | *** ***                                                                                                                   | *** *** | *** ***                       | *** *** | *** ***                          | *** *** | *** *** | *** *** | *** *** | *** *** |
| (a)          |         | Net (Loss) Earnings From Continuing  Operations                                                                                |         | $                                  | (7,054       | )                                     | $            | (25,931 | ) | $ | 3,989 |   | $ | (18,933 | ) |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         |         | Discontinued Operations, Net of Tax                                                                                            |         | (228                               | )            | (2,059                                | )            | (1,151 | ) | (1,703 | ) |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         |         | Net (Loss) Earnings                                                                                                            |         | $                                  | (7,282       | )                                     | $            | (27,990 | ) | $ | 2,838 |   | $ | (20,636 | ) |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
| (b)          |         | Basic average number of common shares  outstanding during period                                                               |         | 52,099                             |         | 51,844                                |         | 52,106 |   | 52,206 |   |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         |         | Common shares assumed issued upon exercise  of dilutive stock options, net of assumed repurchase, at the average market  price |         | —                             |         | —                                |         | 83 |   | — |   |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
| (c)          |         | Diluted average number of common shares  assumed outstanding during period                                                     |         | 52,099                             |         | 51,844                                |         | 52,189 |   | 52,206 |   |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         | ** **   | **Basic Loss Earnings per Share:**                                                                                             | ** **   | ** **                         | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
|         |         | Net (Loss) Earnings From Continuing  Operations (a/b)                                                                          |         | $                                  | (0.13        | )                                     | $            | (0.49 | ) | $ | 0.08 |   | $ | (0.36 | ) |
|         |         | Discontinued Operations, Net of Tax                                                                                            |         | (0.01                              | )            | (0.05                                 | )            | (0.03 | ) | (0.04 | ) |
|         |         | Basic (Loss) Earnings per Share                                                                                                |         | $                                  | (0.14        | )                                     | $            | (0.54 | ) | $ | 0.05 |   | $ | (0.40 | ) |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         | ** **   | **Diluted (Loss) Earnings per Share:**                                                                                         | ** **   | ** **                         | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
|         |         | Net (Loss) Earnings From Continuing  Operations (a/c)                                                                          |         | $                                  | (0.13        | )                                     | $            | (0.49 | ) | $ | 0.08 |   | $ | (0.36 | ) |
|         |         | Discontinued Operations, Net of Tax                                                                                            |         | (0.01                              | )            | (0.05                                 | )            | (0.03 | ) | (0.04 | ) |
|         |         | Diluted (Loss) Earnings per Share                                                                                              |         | $                                  | (0.14        | )                                     | $            | (0.54 | ) | $ | 0.05 |   | $ | (0.40 | ) |

 

As of November 1, 2008 and November 3, 2007, respectively,there were 1,339,000 and 3,397,000 outstanding options and restricted stockunits. Certain stock options were excluded from the calculation of dilutedearnings per share because their exercise prices were 

 

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greater than the average market price of the common shares for theperiods then ended and therefore would be anti-dilutive. All such shares areexcluded from the diluted earnings per share calculation for the thirteen weeksended November 1, 2008 and November 3, 2007, respectively, and forthe thirty-nine weeks ended November 3, 2007. The total numbers of suchshares excluded from the diluted earnings per share calculation are 1,540,000for the thirty-nine weeks ended November 1, 2008.

 

NOTE12. Supplemental Guarantor Information

 

TheCompany’s 7.50% Senior Subordinated Notes (the “Notes”) are fully andunconditionally and joint and severally guaranteed by certain of the Company’sdirect and indirectly wholly-owned subsidiaries - namely, The Pep Boys MannyMoe & Jack of California, Pep Boys - Manny Moe & Jack ofDelaware, Inc., Pep Boys — Manny Moe & Jack of Puerto Rico, Inc.and PBY Corporation, (collectively, the “Subsidiary Guarantors”). The Notes arenot guaranteed by the Company’s wholly owned subsidiary, Colchester InsuranceCompany.

 

Thefollowing condensed consolidating information presents, in separate columns,the condensed consolidating balance sheets as of November 1, 2008 and February 2,2008 and the related condensed consolidating statements of operations for thethirteen and thirty-nine weeks ended November 1, 2008 and November 3,2007 and condensed consolidating statements of cash flows for the thirty-nineweeks ended November 1, 2008 and November 3, 2007 for (i) theCompany (“Pep Boys”) on a parent only basis, with its investment insubsidiaries recorded under the equity method, (ii) the SubsidiaryGuarantors on a combined basis including the consolidation by PBY Corporationof its wholly owned subsidiary, Pep Boys Manny Moe & Jack of California,(iii) the subsidiary of the Company that does not guarantee the Notes, and(iv) the Company on a consolidated basis.

 

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CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

 
| **As of November 1, 2008**                                | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation  / Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Current Assets:                                                               |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Cash and cash equivalents                                                     |       | $                 | 27,526     |                       | $          | 7,556                            |       | $                                     | 3,289      |             | $          | — |   | $ | 38,371 |   |
| Accounts receivable, net                                                      |       | 12,481            |       | 13,357                     |       | —                           |       | —                                |       | 25,838           |       |
| Merchandise inventories                                                       |       | 199,381           |       | 385,319                    |       | —                           |       | —                                |       | 584,700          |       |
| Prepaid expenses                                                              |       | 23,041            |       | 12,670                     |       | 2,352                            |       | (7,930                                | )          | 30,133           |       |
| Other                                                                         |       | 7,490             |       | 6                          |       | 47,772                           |       | (11,494                               | )          | 43,774           |       |
| Assets held for sale                                                          |       | 2,517             |       | 15,705                     |       | —                           |       | —                                |       | 18,222           |       |
| Total Current Assets                                                          |       | 272,436           |       | 434,613                    |       | 53,413                           |       | (19,424                               | )          | 741,038          |       |
|                                                                          |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Property and Equipment—Net of accumulated  depreciation and amortization |       | 240,225           |       | 495,076                    |       | 32,396                           |       | (19,776                               | )          | 747,921          |       |
| Investment in subsidiaries                                                    |       | 1,702,752         |       | —                     |       | —                           |       | (1,702,752                            | )          | —           |       |
| Intercompany receivable                                                       |       | —            |       | 977,169                    |       | 75,129                           |       | (1,052,298                            | )          | —           |       |
| Deferred income taxes                                                         |       | 11,433            |       | 38,882                     |       | —                           |       | —                                |       | 50,315           |       |
| Other                                                                         |       | 28,003            |       | 666                        |       | —                           |       | —                                |       | 28,669           |       |
| Total Assets                                                                  |       | $                 | 2,254,849  |                       | $          | 1,946,406                        |       | $                                     | 160,938    |             | $          | (2,794,250 | ) | $ | 1,567,943 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                 | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **                            | ** ** | ** **       | ** ** |
| Current Liabilities:                                                          |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Accounts payable                                                              |       | $                 | 221,854    |                       | $          | 9                                |       | $                                     | —     |             | $          | — |   | $ | 221,863 |   |
| Trade payable program liability                                               |       | 38,316            |       | —                     |       | —                           |       | —                                |       | 38,316           |       |
| Accrued expenses                                                              |       | 45,003            |       | 84,112                     |       | 135,435                          |       | (7,930                                | )          | 256,620          |       |
| Deferred income taxes                                                         |       | —            |       | 26,507                     |       | —                           |       | (11,494                               | )          | 15,013           |       |
| Current maturities of long-term debt and  obligations under capital leases    |       | 1,815             |       | 245                        |       | —                           |       | —                                |       | 2,060            |       |
| Total Current Liabilities                                                     |       | 306,988           |       | 110,873                    |       | 135,435                          |       | (19,424                               | )          | 533,872          |       |
| Long-term debt and obligations under  capital leases, less current maturities |       | 325,862           |       | 4,673                      |       | —                           |       | —                                |       | 330,535          |       |
| Other long-term liabilities                                                   |       | 32,053            |       | 32,434                     |       | —                           |       | —                                |       | 64,487           |       |
| Deferred gain from asset sales                                                |       | 71,783            |       | 121,177                    |       | —                           |       | (19,776                               | )          | 173,184          |       |
| Intercompany liabilities                                                      |       | 1,052,298         |       | —                     |       | —                           |       | (1,052,298                            | )          | —           |       |
| Stockholders’ Equity                                                     |       | 465,865           |       | 1,677,249                  |       | 25,503                           |       | (1,702,752                            | )          | 465,865          |       |
| Total Liabilities and Stockholders’ Equity                               |       | $                 | 2,254,849  |                       | $          | 1,946,406                        |       | $                                     | 160,938    |             | $          | (2,794,250 | ) | $ | 1,567,943 |   |

 

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| **As of February 2, 2008**                                | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **                            | ** ** | ** **       | ** ** |
| Current Assets:                                                               |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Cash and cash equivalents                                                     |       | $                 | 12,208     |                       | $          | 6,655                            |       | $                                     | 2,063      |             | $          | — |   | $ | 20,926 |   |
| Accounts receivable, net                                                      |       | 15,580            |       | 13,854                     |       | 16                               |       | —                                |       | 29,450           |       |
| Merchandise inventories                                                       |       | 198,975           |       | 362,177                    |       | —                           |       | —                                |       | 561,152          |       |
| Prepaid expenses                                                              |       | 21,368            |       | 17,938                     |       | 18,655                           |       | (14,119                               | )          | 43,842           |       |
| Other                                                                         |       | 21,272            |       | 15                         |       | 69,323                           |       | (13,141                               | )          | 77,469           |       |
| Assets held for disposal                                                      |       | 4,991             |       | 11,927                     |       | —                           |       | —                                |       | 16,918           |       |
| Total Current Assets                                                          |       | 274,394           |       | 412,566                    |       | 90,057                           |       | (27,260                               | )          | 749,757          |       |
|                                                                          |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Property and Equipment—Net                                               |       | 258,527           |       | 509,398                    |       | 32,908                           |       | (20,054                               | )          | 780,779          |       |
| Investment in subsidiaries                                                    |       | 1,646,349         |       | —                     |       | —                           |       | (1,646,349                            | )          | —           |       |
| Intercompany receivable                                                       |       | —            |       | 888,352                    |       | 81,833                           |       | (970,185                              | )          | —           |       |
| Deferred income taxes                                                         |       | 1,403             |       | 19,372                     |       | —                           |       | —                                |       | 20,775           |       |
| Other                                                                         |       | 31,638            |       | 971                        |       | —                           |       | —                                |       | 32,609           |       |
| Total Assets                                                                  |       | $                 | 2,212,311  |                       | $          | 1,830,659                        |       | $                                     | 204,798    |             | $          | (2,663,848 | ) | $ | 1,583,920 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                 | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **                            | ** ** | ** **       | ** ** |
| Current Liabilities:                                                          |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Accounts payable                                                              |       | $                 | 245,414    |                       | $          | 9                                |       | $                                     | —     |             | $          | — |   | $ | 245,423 |   |
| Trade payable program liability                                               |       | 14,254            |       | —                     |       | —                           |       | —                                |       | 14,254           |       |
| Accrued expenses                                                              |       | 57,320            |       | 70,486                     |       | 183,910                          |       | (19,093                               | )          | 292,623          |       |
| Deferred income taxes                                                         |       | —            |       | 8,167                      |       | —                           |       | (8,167                                | )          | —           |       |
| Current maturities of long-term debt and  obligations under capital leases    |       | 1,843             |       | 271                        |       | —                           |       | —                                |       | 2,114            |       |
| Total Current Liabilities                                                     |       | 318,831           |       | 78,933                     |       | 183,910                          |       | (27,260                               | )          | 554,414          |       |
| Long-term debt and obligations under  capital leases, less current maturities |       | 369,657           |       | 30,359                     |       | —                           |       | —                                |       | 400,016          |       |
| Other long-term liabilities                                                   |       | 38,109            |       | 34,074                     |       | —                           |       | —                                |       | 72,183           |       |
| Deferred gain from sale of assets                                             |       | 44,817            |       | 61,832                     |       | —                           |       | (20,054                               | )          | 86,595           |       |
| Intercompany liabilities                                                      |       | 970,185           |       | —                     |       | —                           |       | (970,185                              | )          | —           |       |
| Stockholders’ Equity                                                     |       | 470,712           |       | 1,625,461                  |       | 20,888                           |       | (1,646,349                            | )          | 470,712          |       |
| Total Liabilities and Stockholders’ Equity                               |       | $                 | 2,212,311  |                       | $          | 1,830,659                        |       | $                                     | 204,798    |             | $          | (2,663,848 | ) | $ | 1,583,920 |   |

 

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CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS

(dollarsin thousands)

 
| **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 Gain 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 | ) |

 
| ** **                                                         | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary**     | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------|------------|--------------------------|------------|------------------|------------|
| **Thirteen Weeks Ended November 3, 2007** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                               |       |              |       |           |       |               |       |                     |       |             |       |
| Merchandise Sales                                                  |       | $                 | 146,777    |           | $          | 283,591            |       | $                        |       | $                |       | $ | 430,368 |   |
| Service Revenue                                                    |       | 33,964            |       | 64,429         |       |               |       |                     |       | 98,393           |       |
| Other Revenue                                                      |       |              |       |           |       | 6,135              |       | (6,135                   | )          |             |       |
| Total Revenues                                                     |       | 180,741           |       | 348,020        |       | 6,135              |       | (6,135                   | )          | 528,761          |       |
| Costs of Merchandise Sales                                         |       | 117,570           |       | 227,341        |       |               |       | (978                     | )          | 343,933          |       |
| Costs of Service Revenue                                           |       | 29,040            |       | 58,232         |       |               |       | (370                     | )          | 86,902           |       |
| Costs of Other Revenue                                             |       |              |       |           |       | 4,933              |       | (4,933                   | )          |             |       |
| Total Costs of Revenues                                            |       | 146,610           |       | 285,573        |       | 4,933              |       | (6,281                   | )          | 430,835          |       |
| Gross Profit from Merchandise Sales                                |       | 29,207            |       | 56,250         |       |               |       | 978                      |       | 86,435           |       |
| Gross Profit from Service Revenue                                  |       | 4,924             |       | 6,197          |       |               |       | 370                      |       | 11,491           |       |
| Gross Profit from Other Revenue                                    |       |              |       |           |       | 1,202              |       | (1,202                   | )          |             |       |
| Total Gross Profit                                                 |       | 34,131            |       | 62,447         |       | 1,202              |       | 146                      |       | 97,926           |       |
| Selling, General and Administrative  Expenses                      |       | 41,095            |       | 93,824         |       | 84                 |       | (1,453                   | )          | 133,550          |       |
| Net Loss from Dispositions of Assets                               |       | (91               | )          | (424           | )          |               |       |                     |       | (515             | )          |
| Operating Profit                                                   |       | (7,055            | )          | (31,801        | )          | 1,118              |       | 1,599                    |       | (36,139          | )          |
| Non-Operating (Expense) Income                                     |       | (2,521            | )          | 32,846         |       | (1,979             | )          | (27,314                  | )          | (1,032           | )          |
| Interest Expense                                                   |       | 29,871            |       | 11,288         |       | (3,943             | )          | (25,715                  | )          | 11,501           |       |
| (Loss) Earnings from Continuing Operations  Before Income Taxes    |       | (39,447           | )          | (10,243        | )          | 3,082              |       |                     |       | (46,608          | )          |
| Income Tax (Benefit) Expense                                       |       | (22,188           | )          | (508           | )          | 2,019              |       |                     |       | (20,677          | )          |
| Equity in Earnings of Subsidiaries                                 |       | (10,571           | )          |           |       |               |       | 10,571                   |       |             |       |
| Net (Loss) Earnings from Continuing  Operations                    |       | (27,830           | )          | (9,735         | )          | 1,063              |       | 10,571                   |       | (25,931          | )          |
| Discontinued Operations, Net of Tax                                |       | (160              | )          | (1,899         | )          |               |       |                     |       | (2,059           | )          |
| Net (Loss) Earnings                                                |       | $                 | (27,990    | )              | $          | (11,634            | )          | $                        | 1,063      |             | $          | 10,571 |   | $ | (27,990 | ) |
|                                                                    |            |                   |            |                |            |                    |            |                          |            |                  |            |  |  |  |  |  |

 

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| **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 Gain 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 (Loss)                                               |       | 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 |   |

 
| ** **                                                            | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary**     | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------|------------|--------------------------|------------|------------------|------------|
| **Thirty-nine Weeks Ended November 3, 2007** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                                  |       |              |       |           |       |               |       |                     |       |             |       |
| Merchandise Sales                                                     |       | $                 | 455,716    |           | $          | 867,445            |       | $                        |       | $                |       | $ | 1,323,161 |   |
| Service Revenue                                                       |       | 103,388           |       | 193,887        |       |               |       |                     |       | 297,275          |       |
| Other Revenue                                                         |       |              |       |           |       | 18,607             |       | (18,607                  | )          |             |       |
| Total Revenues                                                        |       | 559,104           |       | 1,061,332      |       | 18,607             |       | (18,607                  | )          | 1,620,436        |       |
| Costs of Merchandise Sales                                            |       | 335,183           |       | 637,153        |       |               |       | (978                     | )          | 971,358          |       |
| Costs of Service Revenue                                              |       | 88,125            |       | 174,092        |       |               |       | (370                     | )          | 261,847          |       |
| Costs of Other Revenue                                                |       |              |       |           |       | 14,771             |       | (14,771                  | )          |             |       |
| Total Costs of Revenues                                               |       | 423,308           |       | 811,245        |       | 14,771             |       | (16,119                  | )          | 1,233,205        |       |
| Gross Profit from Merchandise Sales                                   |       | 120,533           |       | 230,292        |       |               |       | 978                      |       | 351,803          |       |
| Gross Profit from Service Revenue                                     |       | 15,263            |       | 19,795         |       |               |       | 370                      |       | 35,428           |       |
| Gross Profit from Other Revenue                                       |       |              |       |           |       | 3,836              |       | (3,836                   | )          |             |       |
| Total Gross Profit                                                    |       | 135,796           |       | 250,087        |       | 3,836              |       | (2,488                   | )          | 387,231          |       |
| Selling, General and Administrative  Expenses                         |       | 125,960           |       | 270,637        |       | 242                |       | (4,338                   | )          | 392,501          |       |
| Net Gain (Loss) from Dispositions of Assets                           |       | 2,263             |       | (434           | )          |               |       |                     |       | 1,829            |       |
| Operating Profit                                                      |       | 12,099            |       | (20,984        | )          | 3,594              |       | 1,850                    |       | (3,441           | )          |
| Non-Operating (Expense) Income                                        |       | (10,458           | )          | 98,428         |       | 1,986              |       | (85,253                  | )          | 4,703            |       |
| Interest Expense                                                      |       | 91,393            |       | 32,441         |       | (3,943             | )          | (83,403                  | )          | 36,488           |       |
| (Loss) Earnings from Continuing Operations  Before Income Taxes       |       | (89,752           | )          | 45,003         |       | 9,523              |       |                     |       | (35,226          | )          |
| Income Tax (Benefit) Expense                                          |       | (41,570           | )          | 20,788         |       | 4,489              |       |                     |       | (16,293          | )          |
| Equity in Earnings of Subsidiaries                                    |       | 27,572            |       |           |       |               |       | (27,572                  | )          |             |       |
| Net Earnings from Continuing Operations                               |       | (20,610           | )          | 24,215         |       | 5,034              |       | (27,572                  | )          | (18,933          | )          |
| Discontinued Operations, Net of Tax                                   |       | (26               | )          | (1,677         | )          |               |       |                     |       | (1,703           | )          |
| Net (Loss) Earnings                                                   |       | $                 | (20,636    | )              | $          | 22,538             |       | $                        | 5,034      |             | $          | (27,572 | ) | $ | (20,636 | ) |
|                                                                       |            |                   |            |                |            |                    |            |                          |            |                  |            |  |  |  |  |  |

 

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CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS

(dollarsin thousands)

 
| **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 |   |

 
| **Thirty-nine Weeks Ended November 3, 2007**                          | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash Flows from Operating Activities:**                                                      |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net (Loss) Earnings                                                                            |       | $                 | (20,636    | )                          | $          | 22,538                           |       | $                                     | 5,034      |             | $          | (27,572 | ) | $ | (20,636 | ) |
| Adjustments to Reconcile Net Earnings to  Net Cash (Used in) Provided By Continuing Operations |       | 12,581            |       | 56,894                     |       | 1,162                            |       | 25,426                                |       | 96,063           |       |
| Changes in operating assets and liabilities                                                    |       | (53,244           | )          | 31,793                     |       | (6,701                           | )          | 296                                   |       | (27,856          | )          |
| Net cash (used in) provided by continuing  operations                                          |       | (61,299           | )          | 111,225                    |       | (505                             | )          | (1,850                                | )          | 47,571           |       |
| Net cash provided  by discontinued operations                                                  |       | 1,694             |       | 1,058                      |       | —                           |       | —                                |       | 2,752            |       |
| Net Cash (Used  in) Provided by Operating Activities                                           |       | (59,605           | )          | 112,283                    |       | (505                             | )          | (1,850                                | )          | 50,323           |       |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net cash provided  by (used in) investing activities                                           |       | 18,200            |       | (22,184                    | )          | —                           |       | —                                |       | (3,984           | )          |
| Net cash used in  discontinued operations                                                      |       | (193              | )          | (239                       | )          |                             |       |                                  |       | (432             | )          |
| Net Cash Provided  by (Used in) Investing Activities                                           |       | 18,007            |       | (22,423                    | )          | —                           |       | —                                |       | (4,416           | )          |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Cash Provided  by (Used in) Financing Activities                                           |       | 41,880            |       | (86,994                    | )          | 1,673                            |       | 1,850                                 |       | (41,591          | )          |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Increase in  Cash and Cash Equivalents                                                     |       | 282               |       | 2,866                      |       | 1,168                            |       | —                                |       | 4,316            |       |
| Cash and Cash  Equivalents at Beginning of Period                                              |       | 13,581            |       | 7,946                      |       | 357                              |       | —                                |       | 21,884           |       |
| Cash and Cash Equivalents  at End of Period                                                    |       | $                 | 13,863     |                       | $          | 10,812                           |       | $                                     | 1,525      |             | $          | — |   | $ | 26,200 |   |

 

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NOTE13. Commitments and Contingencies

 

During the fourth quarter of2006 and the first quarter of 2007, the Company was served with four separatelawsuits brought by former associates employed in California, each of whichlawsuits purports to be a class action on behalf of all current and formerCalifornia store associates. One or more of the lawsuits claim that theplaintiff was not paid for (i) overtime, (ii) accrued vacation time, (iii) alltime worked (i.e. “off the clock” work) and/or (iv) late or missed mealperiods or rest breaks. The plaintiffs also allege that the Company violatedcertain record keeping requirements arising out of the foregoing alleged violations.The lawsuits (i) claim these alleged practices are unfair businesspractices, (ii) request back pay, restitution, penalties, interest andattorney fees and (iii) request that the Company be enjoined fromcommitting further unfair business practices.  The Company has reached asettlement in principle regarding the accrued vacation time claims, which waspreliminarily approved by the court on December 1, 2008.  The remaining purported class action claimshave been settled and have received final court approval and are expected to bepaid out in the fourth quarter of 2008.

 

The Company is also party tovarious other actions and claims arising in the normal course of business.

 

The Company believes thatamounts accrued for awards or assessments in connection with all such matters,which amounts were increased by $625 and $3,725 in the thirteen weeks andthirty-nine weeks ended November 1, 2008, respectively, are adequate.However, there exists a reasonable possibility of loss in excess of the amountsaccrued, the amount of which cannot currently be estimated.  While theCompany does not believe that the amount of such excess loss could be materialto the Company’s financial position, any such loss could have a materialadverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

NOTE14. Other Comprehensive (Loss) Income

 

Thefollowing are the components of comprehensive (loss) income:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **November 1,  2008**         | ** ** | **November 3,  2007**            | ** ** | **November 1,  2008** | ** ** | **November 3,  2007** | ** ** |
| Net (loss) earnings                              |       | $                                  | (7,282     | )                                     | $          | (27,990 | ) | $ | 2,838 |   | $ | (20,636 | ) |
| Other comprehensive income (loss), net of  tax:  |       |                               |       |                                  |       |   |   |   |   |
| Defined benefit plan adjustment                  |       | 246                                |       | 318                                   |       | 733 |   | 1,097 |   |
| Derivative financial instrument adjustments  (1) |       | (1,080                             | )          | (3,733                                | )          | 1,980 |   | (3,016 | ) |
| Comprehensive (loss)                             |       | $                                  | (8,116     | )                                     | $          | (31,405 | ) | $ | (5,551 | ) | $ | (22,555 | ) |

 

Thecomponents of accumulated other comprehensive loss are:

 
| **(dollar amounts in thousands)**        | ** ** | **November 1,  2008** | ** ** | **February 2,  2008** | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Derivative financial instrument adjustment,  net of tax |       | $                          | 4,442      |                       | $          | 2,462 |   |
| Defined benefit plan adjustment, net of tax             |       | (15,912                    | )          | (16,645                    | )          |
| Accumulated other comprehensive loss                    |       | $                          | (11,470    | )                          | $          | (14,183 | ) |

 

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| (1) |   | Of the net $3,010 increase in fair value  during the thirty-nine weeks ended November 1, 2008, $3,150 ($1,980 net  of tax) is included in Accumulated Other Comprehensive Loss on the condensed  consolidated balance sheet and a $140 expense was recorded through the  condensed consolidated statement of operations. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

NOTE15. Fair Value Measurements

 

The Company adopted SFAS No. 157,(as impacted by FSP Nos. 157-1, 157-2, and 157-3) effective February 3,2008, with respect to fair value measurements of (a) nonfinancial assetsand liabilities that are recognized or disclosed at fair value in the Company’sfinancial statements on a recurring basis (at least annually) and (b) allfinancial assets and liabilities.

 

Under SFAS No. 157,fair value is defined as the exit price, or the amount that would be receivedto sell an asset or paid to transfer a liability in an orderly transactionbetween market participants as of the measurement date. SFAS No. 157 alsoestablishes a hierarchy for inputs used in measuring fair value that maximizesthe use of observable inputs and minimizes the use of unobservable inputs by

 

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requiring that the mostobservable inputs be used when available. Observable inputs are inputs marketparticipants would use in valuing the asset or liability developed based onmarket data obtained from sources independent of the Company. Unobservable inputsare inputs that reflect the Company’s assumptions about the factors marketparticipants would use in valuing the asset or liability developed based uponthe best information available in the circumstances. The hierarchy is brokendown into three levels. Level 1 inputs are quoted prices (unadjusted) in activemarkets for identical assets or liabilities. Level 2 inputs include quotedprices for similar assets or liabilities in active markets. Level 3 inputs areunobservable inputs for the asset or liability.

 

Categorization within thevaluation hierarchy is based upon the lowest level of input that is significantto the fair value measurement.

 

*Assets andLiabilities that are Measured at Fair Value on a Recurring Basis:*

 

Effective February 3,2008, the application of fair value under SFAS No. 157 (as amended by FSPNos. 157-1,157-2, and 157-3) related to the Company’s long-term investments andinterest rate swap agreements. These items were previously, and will continueto be, recorded at fair value at each balance sheet date. The information inthe following paragraphs and tables primarily addresses matters relative tothese financial assets and liabilities.

 

Long-term investments:

 

Long-term investmentsconsist principally of U.S. Treasury securities which are valued at quotedmarket prices. The Company considers its long-term investments to be valuedusing Level 1 measurements.

 

Derivative liability:

 

The Company has an interestrate swap which is within the scope of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.” The Company values this swapusing observable market data to discount projected cash flows and for creditrisk adjustments. The Company considers these to be Level 2 measurements.

 

The following table providesinformation by level for assets and liabilities that are measured at fairvalue, as defined by SFAS No. 157, on a recurring basis.

 
| **(dollar amounts in thousands)** | ** ** | **Fair Value  at**        | ** ** | **Fair Value Measurements  Using Inputs Considered as** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Description**                                  | ** ** | **November 1, 2008** | ** ** | **Level 1**                                                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:                                          |       |                           |       |                                                                             |       |   |   |   |   |
| Other long-term assets                           |       |                           |       |                                                                             |       |   |   |   |   |
| Long-term investments                            |       | $                              | 8,303      |                                                                             | $          | 8,303 |   |   |   |   |   |
|                                             |       |                           |       |                                                                             |       |   |   |   |   |
| Liabilities:                                     |       |                           |       |                                                                             |       |   |   |   |   |
| Other long-term liabilities                      |       |                           |       |                                                                             |       |   |   |   |   |
| Derivative liability                             |       | $                              | 7,953      |                                                                             |       |   | $ | 7,953 |   |   |   |
|                                                  |            |                                |            |                                                                                  |            |  |  |  |  |  |  |  |

 

*Assets andLiabilities that are Measured at Fair Value on a Nonrecurring Basis:*

 

Duringthe fiscal quarter ended November 1, 2008, the Company had no significantmeasurements of assets or liabilities at fair value (as defined in SFAS No. 157)on a nonrecurring basis subsequent to their initial recognition. As indicatedin Note 1, the aspects of SFAS No. 157 for which the effective date forthe Company was deferred under FSP No. 157-2 until February 1, 2009relate to nonfinancial assets and liabilities that are measured at fair value,but are recognized or disclosed at fair value on a nonrecurring basis. Thisdeferral applies to such items as nonfinancial assets and liabilities initiallymeasured at fair value in a business combination (but not measured at fairvalue in subsequent periods) or nonfinancial long-lived asset groups measuredat fair value for an impairment assessment.

 

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

 

Thediscussion and analysis below should be read in conjunction with (i) thecondensed consolidated interim financial statements and the notes to suchfinancial statements included elsewhere in this Form 10-Q and (ii) theconsolidated financial statements and the notes to such financial statementsincluded in Item 8, “Financial Statements and Supplementary Data” of our AnnualReport on Form 10-K for the fiscal year ended February 2, 2008.

 

OVERVIEW

 

ThePep Boys-Manny, Moe & Jack is a leader in the automotive aftermarketwith 562 stores located throughout 35 states and Puerto Rico.  All of our stores feature thenationally-recognized Pep Boys brand name, established through more than 80years of providing high-quality automotive merchandise and services, and arecompany-owned, ensuring chain-wide consistency for our customers.  We are the only national chain offeringautomotive service, accessories, tires and parts under one roof, positioning usto achieve our goal of becoming the automotive solutions provider of choice forthe value-oriented customer.

 

Forthe thirteen weeks ended November 1, 2008, our comparable sales (salesgenerated by locations in operation during the same period) decreased by10.4%.  This decrease in comparable saleswas comprised of a 10.3% decrease in comparable merchandise sales and 11.0%decrease in comparable service revenue. Sales were adversely impacted by a challenging economic environment anddecreasing customer count. In addition, merchandise sales were negativelyaffected by the discontinuance and planned exit of certain non-coremerchandise.

 

Ournet loss for the thirteen weeks ended November 1, 2008 was $7,282,000 or a$20,707,000 improvement over the net loss of $27,990,000 reported in thethirteen weeks ended November 3, 2007. The prior year quarter included, on a pre-tax basis,  a $32,803,000 inventory impairment charge, a$10,963,000 asset impairment charge, $3,100,000 in executive severance costsand $6,250,000 in legal settlements and reserves, offset by a $3,900,000benefit on a company-owned life insurance policy. Excluding these items,profitability declined primarily due to lower gross profit dollars as a resultof lower sales partially offset by lower selling, general and administrativeand interest expenses.

 

Forthe thirty-nine weeks ended November 1, 2008, our comparable net salesdecreased 7.8% with comparable merchandise sales decreasing 8.1% and servicerevenue decreasing 6.3%.  Net earningsfor these thirty-nine weeks were $2,838,000 versus a net loss of $20,636,000 inthe same period of fiscal 2007. The improvement in profitability was driven bythe same factors as discussed above.

 

Thefollowing discussion explains the significant developments affecting ourfinancial condition and material changes in our results of operations for thethirteen weeks and thirty-nine weeks ended November 1, 2008.  We recommend that you read the auditedconsolidated financial statements, footnotes and Management’s Discussion andAnalysis of Financial Condition and Results of Operations included in ourAnnual Report on Form 10-K for the fiscal year ended February 2,2008.

 

LIQUIDITYAND CAPITAL RESOURCES

 

Ourcash requirements arise principally from the purchase of inventory and capitalexpenditures related to existing stores, offices, warehouses and informationsystems. The capital expenditures for the thirty-nine weeks ended November 1,2008 were used primarily to purchase 29 properties for $117,121,000 that werepreviously leased under a master operating lease and for store capitalmaintenance and improvements. During the thirty-nine weeks ended November 1,2008, we invested approximately $22,653,000 in store capital maintenance andimprovements versus the $33,074,000 invested during the same period for fiscal2007. We estimate that capital expenditures related to existing stores,warehouses and offices and information systems for the remaining three monthsof fiscal 2008 will be approximately $10,000,000.

 

Duringthe first quarter of fiscal 2008, the Company completed two separatesale-leaseback transactions.  The proceeds from these transactions wereused to repay $49,915,000 then drawn under our revolving line of creditagreement, to repurchase $20,965,000 principal amount of our 7.50% SeniorSubordinated Notes for $18,082,000 and to pay $783,000 in transactioncosts.  The remaining $66,739,000 was invested in cash and cashequivalents.

 

Duringthe second quarter of fiscal 2008, the Company completed a sale-leasebacktransaction for 22 stores. The $75,951,000 net proceeds were used to finance,together with $41,170,000 of cash on hand, the purchase of the 29 propertiesfor $117,121,000 that were previously leased under a master operating lease.

 

Weanticipate that our net cash provided by operating activities and fundsavailable under our existing revolving credit facility will exceed ourprincipal cash requirements for capital expenditures and inventory purchasesfor the next 12 months.

 

WorkingCapital increased from $195,343,000 at February 2, 2008 to $207,166,000 atNovember 1, 2008. At November 1, 2008, we had stockholders’ equity of$465,865,000 and long-term debt, net of current maturities, of $330,535,000. Ourlong-term debt was approximately 42% of our total capitalization at November 1,2008 and 46% at February 2, 2008.

 

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Asof November 1, 2008, we had undrawn availability under our revolvingcredit facility of $231,223,000. The Company’s current credit facility expireson December 9, 2009. As of December 8, 2008, we have secured commitmentsfrom a syndicate led by Bank of America for a $300,000,000 replacementfacility.  This facility is expected toclose, subject to the satisfaction of customary closing conditions, before ourfiscal year ends on January 31, 2009.

 

Exceptas noted above, we have no material debt maturities due within the next twelvemonths.

 

Duringthe third quarter of 2008, we amended our vendor financing program to increasethe availability to $40,000,000 reflecting current usage. Under this program,the Company’s factor makes accelerated and discounted payments to our vendorsand the Company, in turn, makes its regularly scheduled full vendor payments tothe factor. As of November 1, 2008, the Company had an outstanding balanceof $38,316,000 under these programs, classified as trade payable programliability in the consolidated balance sheet.

 

DISCONTINUEDOPERATIONS

 

Inthe third quarter of fiscal 2007, we adopted our long-term strategic plan. Oneof the initial steps in this plan was the identification of 31 low-returnstores for closure. We are accounting for these store closures in accordancewith the provisions of SFAS No. 146 “Accounting for Costs Associated withExit or Disposal Activities” and SFAS No. 144, “Accounting for Impairmentor Disposal of Long-Lived Assets” (SFAS No. 144).  In accordance withSFAS No. 144, our discontinued operations for all periods presentedreflect the operating results for 11 of the 31 closed stores because we do notbelieve that the customers of these stores are likely to become customers ofother Pep Boys stores due to geographical considerations. The operating resultsfor the other 20 closed stores are included in continuing operations because webelieve that the customers of these stores are likely to become customers ofother Pep Boys stores that are in close proximity.

 

RESULTSOF OPERATIONS

 

ThirteenWeeks Ended November 1, 2008 vs. Thirteen Weeks Ended November 3,2007

 

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

 
| ** **                                           | ** ** | **Percentage of Total Revenues**    | ** ** | **Percentage Change**                         | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirteen weeks ended**                   | ** ** | **November 1, 2008  (Fiscal 2008)** | ** ** | **November 3, 2007  (Fiscal 2007)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                 |       |                                               |       |                                               |       |   |   |
| Merchandise Sales                                    |       | 81.5                                               | %          | 81.4                                               | %          | (12.1 | )% |
| Service Revenue (1)                                  |       | 18.5                                               |       | 18.6                                               |       | (12.9 | ) |
| Total Revenue                                        |       | 100.0                                              |       | 100.0                                              |       | (12.2 | ) |
| Costs of Merchandise Sales (2)                       |       | 70.9                                               | (3)        | 79.9                                               | (3)        | 22.0 |   |
| Costs of Service Revenue (2)                         |       | 94.6                                               | (3)        | 88.3                                               | (3)        | 6.7 |   |
| Total Costs of Revenue                               |       | 75.3                                               |       | 81.5                                               |       | 18.9 |   |
| Gross Profit from Merchandise Sales                  |       | 29.1                                               | (3)        | 20.1                                               | (3)        | 27.5 |   |
| Gross Profit from Service Revenue                    |       | 5.4                                                | (3)        | 11.7                                               | (3)        | (59.8 | ) |
| Total Gross Profit                                   |       | 24.7                                               |       | 18.5                                               |       | 17.3 |   |
| Selling, General and Administrative  Expenses        |       | 25.8                                               |       | 25.3                                               |       | 10.3 |   |
| Net Loss from Dispositions of Assets                 |       | —                                             |       | (0.1                                               | )          | 89.7 |   |
| Operating Loss                                       |       | (1.1                                               | )          | (6.8                                               | )          | 86.1 |   |
| Non-operating Income                                 |       | 0.1                                                |       | 0.2                                                |       | (70.4 | ) |
| Interest Expense                                     |       | 1.5                                                |       | 2.2                                                |       | 38.3 |   |
| Loss from Continuing Operations Before  Income Taxes |       | (2.5                                               | )          | (8.8                                               | )          | 74.6 |   |
| Income Tax Benefit                                   |       | (40.4                                              | )(4)       | (44.4                                              | )(4)       | (76.9 | ) |
| Net Loss from Continuing Operations                  |       | (1.5                                               | )          | (4.9                                               | )          | 72.8 |   |
| Discontinued Operations, Net of Tax                  |       | —                                             |       | (0.4                                               | )          | 88.9 |   |
| Net Loss                                             |       | (1.6                                               | )          | (5.3                                               | )          | 74.0 |   |

 

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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.                                                                                                                                                                                                                                                                                                                              |

 

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| (4) |   | As  a percentage of Loss from Continuing Operations Before Income Taxes. |
|-----|--------|--------------------------------------------------------------------------|

 

Totalrevenue for the thirteen weeks ended November 1, 2008 decreased 12.2%,with a 10.4% comparable revenue decrease resulting in part from the exiting ofcertain non-core merchandise categories and a reduction in customer trafficversus the same period last year. The reduction in revenues and customer countwas also adversely affected by the challenging economic environment, includinga decline in miles driven in the current year as compared to the prior year.Comparable merchandise sales decreased 10.3% and comparable service revenuesdecreased 11.0%.

 

Grossprofit as a percentage of merchandise sales increased from 20.1% in fiscal 2007to 29.1% or $23,791,000 in fiscal 2008. The prior year third quarter includedan inventory impairment charge of $32,803,000 and a $5,350,000 asset impairmentcharge resulting from the closure of 20 closed stores. Excluding theseadjustments, gross profit as a percent of merchandise sales increased from28.9% in fiscal 2007 to 29.1% in the current year. Our product gross marginsimproved by 160 basis points to 45.3% which were mostly offset by increasedoccupancy costs of 130 basis points as a result of increased rental obligationsstemming from the sale-leaseback transactions. In dollars, merchandise grossprofit decreased $14,362,000 or 11.5% primarily due to reduced merchandisesales

 

Grossprofit from service revenue declined as a percentage of service revenue to 5.4% from 11.7% in fiscal 2007. Gross profit from service revenue declined by59.8% or $6,873,000 from fiscal 2007. The prior year included a $1,849,000asset impairment charge related to the closure of 20 closed stores. Excludingthis adjustment, gross profit from service revenue declined by $8,722,000. As apercentage of service revenues, gross margin declined from 13.6% in the prioryear to 5.4% in fiscal year 2008 primarily due to a $12,688,000 decline inservice revenue as discussed above, partly offset by lower service payroll andrelated expenses. The decline in sales volume resulted in reduced leverage offixed expenses such as occupancy costs resulting in the margin rate declining to 5.4% in the current year thirdquarter.

 

Selling,general and administrative expenses, as a percentage of total revenuesincreased to 25.8% from 25.3% in the third quarter of fiscal 2007.  In dollars, selling, general andadministrative expenses decreased $13,723,000 or 10.3%.  This decrease in dollars was the result ofexpense control initiatives, with major reductions in compensation andcompensation related benefits of $8,048,000 and lower legal costs of $6,539,000partially offset by increased gross media expense of $1,305,000 and informationsystem costs of $1,442,000 as compared to the same period in the prior year.

 

Interestexpense decreased $4,403,000 to $7,098,000 in the thirteen weeks ended November 1,2008 from the $11,501,000 recorded in the thirteen weeks ended November 3,2007 due to reduced debt levels.

 

Ourincome tax benefit for third quarter of fiscal 2008 was $4,775,000 or aneffective rate of 40.4%.  This comparesto an income tax benefit in third quarter of fiscal 2007 of $20,677,000 or aneffective rate of 44.4%.

 

Thethird quarter 2008 net loss from discontinued operations was $228,000 comparedto a net loss of $2,059,000 for fiscal 2007. Fiscal 2007’s loss resultedprimarily from the $3,764,000 asset impairment charge associated with the 11stores closed in the fourth quarter.

 

Netloss of  $7,282,000 for the third quarterof fiscal 2008 improved $20,708,000 from the third quarter of fiscal 2007primarily as a result of the absence of inventory and asset impairment charges in the fiscal 2008, reducedselling, general and administrative expenses, and  lower interest expense, which offset lowergross margins due to decreased revenues.

 

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Thirty-nineWeeks Ended November 1, 2008 vs. Thirty-nine Weeks Ended November 3,2007

 

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

 
| ** **                                                      | ** ** | **Percentage of Total Revenues**    | ** ** | **Percentage Change**                         | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirty-nine weeks ended**                           | ** ** | **November 1, 2008  (Fiscal 2008)** | ** ** | **November 3, 2007  (Fiscal 2007)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| Merchandise Sales                                               |       | 81.4                                               | %          | 81.7                                               | %          | (10.1 | )% |
| Service Revenue (1)                                             |       | 18.6                                               |       | 18.3                                               |       | (8.4 | ) |
| Total Revenue                                                   |       | 100.0                                              |       | 100.0                                              |       | (9.8 | ) |
| Costs of Merchandise Sales (2)                                  |       | 70.5                                               | (3)        | 73.4                                               | (3)        | 13.7 |   |
| Costs of Service Revenue (2)                                    |       | 91.9                                               | (3)        | 88.1                                               | (3)        | 4.4 |   |
| Total Costs of Revenue                                          |       | 74.5                                               |       | 76.1                                               |       | 11.7 |   |
| Gross Profit from Merchandise Sales                             |       | 29.5                                               | (3)        | 26.6(3                                             | )          | (0.1 | ) |
| Gross Profit from Service Revenue                               |       | 8.1                                                | (3)        | 11.9(3                                             | )          | (38.1 | ) |
| Total Gross Profit                                              |       | 25.5                                               |       | 23.9                                               |       | (3.6 | ) |
| Selling, General and Administrative  Expenses                   |       | 24.7                                               |       | 24.2                                               |       | 7.9 |   |
| Net Gain from Dispositions of Assets                            |       | 0.7                                                |       | 0.1                                                |       | 422.4 |   |
| Operating Profit                                                |       | 1.5                                                |       | (0.2                                               | )          | 720.6 |   |
| Non-operating Income                                            |       | 0.1                                                |       | 0.3                                                |       | (61.8 | ) |
| Interest Expense                                                |       | 1.3                                                |       | 2.3                                                |       | 48.0 |   |
| Earnings (Loss) from Continuing Operations  Before Income Taxes |       | 0.3                                                |       | (2.2                                               | )          | 111.8 |   |
| Income Tax Expense (Benefit)                                    |       | 4.4                                                | (4)        | 46.3                                               | (4)        | (101.1 | ) |
| Net Earnings (Loss) from Continuing  Operations                 |       | 0.3                                                |       | (1.2                                               | )          | 121.1 |   |
| Discontinued Operations, Net of Tax                             |       | (0.1                                               | )          | (0.1                                               | )          | 32.4 |   |
| Net Earnings (Loss)                                             |       | 0.2                                                |       | (1.3                                               | )          | 113.8 |   |

 

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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.                                                                                                                                                                                                                                                                                                              |

 

Totalrevenues for the first thirty-nine weeks of fiscal 2008 decreased 9.8% with a7.8% comparable revenue decrease, resulting primarily from a decline in retailand commercial merchandise sales compared to the first thirty-nine weeks of fiscal2007. Comparable merchandise sales decreased 8.1% and comparable servicerevenue decreased 6.3%.  The decline inmerchandise sales resulted primarily from the exiting of certain non-coremerchandise categories and a reduction in customer traffic. The reduction inrevenues and customer count was also adversely affected by the challengingeconomic environment, including a decline in miles driven in the current yearas compared to the prior year.

 

Grossprofit from merchandise as a percentage of merchandise sales was 29.5% for the firstthirty-nine weeks of fiscal 2008 and 26.6% for fiscal 2007.  In dollars, gross profit from merchandisesales decreased $505,000 or 0.1%. The increase, as a percent of merchandisesales, resulted primarily from the absence in the current year of inventory andasset impairment charges of $32,803,000 and $5,350,000, respectively. Excludingthese charges in the prior year, gross profit as a percent of merchandise salesremained flat at 29.5% year over year.

 

Ourgross profit from service revenue as a percentage of service revenues decreasedto 8.1% from 11.9% in the first thirty-nine weeks of fiscal 2007.  In dollars, for the thirty-nine weeks ended November 1,2008, gross profit from service revenue was $21,946,000 or $13,482,000 lessthan the $35,428,000 recorded in the thirty-nine weeks ended November 3,2007. This 38.1% decrease resulted primarily from the following: a decliningrevenue base, a semi-fixed payroll and benefits cost, and a fixed occupancycost.

 

Selling,general and administrative expenses as a percentage of total revenues increasedfrom 24.2% in the first thirty-nine weeks of fiscal 2007 to 24.7% in the sameperiod of fiscal 2008.  In dollars, thisexpense decreased $31,056,000 or 7.9%. This decrease resulted from a $19,161,000 or 20.0% reduction in generaland administrative expenses due to decreased payroll and lower legal settlementexpenses partially offset by increased information systems costs related tooutsourcing our IT center.  In addition, theCompany reduced employee benefits costs, incurred lower media expense andreduced store selling expenses.

 

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Netgains from disposition of assets increased $7,726,000 to $9,555,000 in thethirty-nine weeks ended November 1, 2008 from $1,829,000 in fiscal year2007.  The increase resulted principallyfrom three sale-leaseback transactions completed during fiscal 2008.

 

Interestexpense of $18,977,000 for the first thirty-nine weeks of fiscal 2008 was$17,511,000 less than the $36,488,000 recorded in the first thirty-nine weeksof fiscal 2007 due to a reduced debt level and gains resulting from debtrepurchases.

 

Incometax expense was $185,000 or an effective rate of 4.4% in the thirty-nine weeksended November 1, 2008 as compared to an income tax benefit of $16,293,000in the thirty-nine weeks ended November 3, 2007.  The second quarter of fiscal 2008 included aone-time benefit of recording a $2,400,000 deferred tax asset as a result of a June 2007state tax law change.

 

Netearnings improved to $2,838,000 in the current thirty-nine weeks as compared toa net loss of $20,636,000 in the prior year. This $23,474,000 improvement resulted primarily from the absence of aninventory and asset impairment charge in fiscal 2008, reduced selling, generaland administrative expenses, real estate gains generated from sale-leasebacktransactions, lower interest expense, and a one-time out of period income taxbenefit, which offset lower gross margins due to decreased revenues.

 

INDUSTRYCOMPARISON

 

Weoperate in the U.S. automotive aftermarket, which has two general competitivearenas: Do-It-For-Me (“DIFM”) (service labor, installed merchandise and tires)market and the Do-It-Yourself (“DIY”) (retail merchandise) market. Generally,the specialized automotive retailers focus on either the “DIY” or “DIFM” areasof the business. We believe that our operation in both the “DIY” and “DIFM”areas of the business positively differentiates us from most of ourcompetitors. Although we manage our store performance at a store level inaggregation, we believe that the following presentation shows a representativecomparison against competitors within the two sales arenas. We compete in the “DIY”area of the business through our retail sales floor and commercial salesbusiness (Retail Sales). Our Service Center Business (labor and installedmerchandise and tires) competes in the “DIFM” area of the industry.

 

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

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **November 1,**               | ** ** | **November 3,**                  | ** ** | **November 1,** | ** ** | **November 3,** | ** ** |
| **(Dollar amounts in thousands)** | ** ** | **2008**                           | ** ** | **2007**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Retail Sales (1)                                 |       | $                                  | 253,492    |                                  | $          | 294,232 |   | $ | 802,707 |   | $ | 924,043 |   |
| Service Center Revenue (2)                       |       | 210,674                            |       | 234,529                               |       | 659,545 |   | 696,393 |   |
| Total Revenues                                   |       | $                                  | 464,166    |                                  | $          | 528,761 |   | $ | 1,462,252 |   | $ | 1,620,436 |   |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Gross Profit from Retail Sales (3)               |       | $                                  | 68,360     |                                  | $          | 43,867 |   | $ | 220,139 |   | $ | 224,396 |   |
| Gross Profit from Service Center Revenue  (3)    |       | 46,484                             |       | 54,059                                |       | 153,105 |   | 162,835 |   |
| Total Gross Profit                               |       | $                                  | 114,844    |                                  | $          | 97,926 |   | $ | 373,244 |   | $ | 387,231 |   |

 

----

| (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 TO BE ADOPTED

 

In December 2007, the Financial Accounting Standards Board (FASB)issued SFAS No. 141R, “Business Combinations,” which replaces SFAS No. 141,“Business Combinations.” SFAS No. 141R, among other things, establishesprinciples and requirements for how an acquirer entity recognizes and measuresin its financial statements the identifiable assets acquired, the liabilitiesassumed and any controlling interests in the acquired entity; recognizes andmeasures the goodwill acquired in the business combination or a gain from abargain purchase; and determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination. Costs of the acquisition will be recognized separatelyfrom the business combination. SFAS No. 141R applies prospectively, exceptfor taxes, to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period on or after December 15,2008. The Company is currently evaluating the impact SFAS No. 141will have on its consolidated financial statements beginning in fiscal 2009.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51.”SFAS No. 160, among other things, provides guidance and establishesamended accounting and reporting standards for a parent company’snoncontrolling interest in a subsidiary. SFAS No. 160 is effective forfiscal years beginning on or after 

December 15,2008. The Company does not expect the adoption of SFAS No. 160 to have amaterial impact on its financial condition, results of operations or cashflows.

 

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InFebruary 2008, the FASB issued Staff Position No. FAS 157-2 (FSPNo.157-2), “Effective Date of FASB Statement No. 157,” that defers theeffective date of SFAS 157 for one year for certain nonfinancial assetsand nonfinancial liabilities.  SFAS 157 is effective for certainnonfinancial assets and nonfinancial liabilities for financial statementsissued for fiscal years beginning after November 15, 2008. The Company iscurrently evaluating the impact SFAS No. 157 will have on its consolidatedfinancial statements beginning in fiscal 2009.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities.” SFAS No. 161 expands thedisclosure requirements in SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” about an entity’s derivative instrumentsand hedging activities. SFAS No. 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008. The Company is currently evaluating the impact SFAS No. 161 willhave on its consolidated financial statements beginning in fiscal 2009.

 

InJune 2008, the FASB, issued Staff Position EITF 03-6-1 (FSP EITF 03-6-1), “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities.” FSP EITF 03-6-1 addresses whether instrumentsgranted in share-based payment transactions are participating securities priorto vesting, and therefore need to be included in the earnings allocation incomputing earnings per share under the two-class method as described in SFAS No. 128,“Earnings per Share.” Under the guidance of FSP EITF 03-6-1, unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andshall be included in the computation of earnings-per-share pursuant to thetwo-class method.  FSP EITF 03-6-1 iseffective for financial statements issued for fiscal years beginning after December 15,2008 and interim periods within these fiscal years. All prior-period earningsper share data presented shall be adjusted retrospectively.  Early application is not permitted. TheCompany is currently evaluating the impact FSP EITF 03-6-1 will have on itsconsolidated financial statements beginning in fiscal 2009.

 

In October 2008the FASB issued FASB Staff Position FSP FAS 157-3, “Determining the Fair Valueof a Financial Asset When the Market for That Asset Is Not Active.” This FSPclarifies the application SFAS 157 in a market that is not active. This FSPshall be effective upon issuance, including prior periods for which financialstatements have not been issued. The adoption of this standard did not have amaterial impact on the Company’s financial statement.

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

 

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

 

Onan on-going basis, we evaluate our estimates and judgments, including thoserelated to customer incentives, product returns and warranty obligations, baddebts, inventories, income taxes, financing operations, restructuring costs,retirement benefits, risk participation agreements and contingencies andlitigation. We base our estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. For a detailed discussion of significantaccounting policies that may involve a higher degree of judgment or complexity,refer to “Critical Accounting Policies and Estimates” as reported in our Form10-K for the fiscal year ended February 2, 2008, which disclosures arehereby incorporated by reference.

 

FORWARD-LOOKINGSTATEMENTS

 

Certainstatements contained herein constitute “forward-looking statements” within themeaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,”“expect,” “anticipate,” “estimates,” “forecasts” and similar expressions areintended to identify such forward-looking statements. Forward-lookingstatements include management’s expectations regarding implementation of itslong-term strategic plan, future financial performance, automotive aftermarkettrends, levels of competition, business development activities, future capitalexpenditures, financing sources and availability and the effects of regulationand litigation. Although we believe that the expectations reflected in suchforward-looking statements are based on reasonable assumptions, we can give noassurance that our expectations will be achieved. Our actual results may differmaterially from the results discussed in the forward-looking statements due 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

 

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costsand the additional factors described in our filings with the Securities andExchange Commission (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

 

TheCompany’s primary market risk exposure with regard to financial instruments isto changes in interest rates. Pursuant to the terms of its revolving creditagreement, changes in LIBOR could affect the rates at which the Company couldborrow funds thereunder. At November 1, 2008, the Company had borrowingsof $520,000 under this facility. Additionally, the Company has a $152,712,000Senior Secured Term Loan facility that bears interest at LIBOR plus 2.0%.

 

The Company has an interest rate swap for anotional amount of $145,000,000, which is designated as a cash flow hedge onits $152,712,000 Senior Secured Term Loan. The Company documented that thisswap met the requirements of SFAS No. 133 for hedge accounting on April 9,2007, and has since recorded the effective portion of the change in fair valuethrough Accumulated Other Comprehensive Loss.

 

The fair value of the interest rate swap was$7,953,000 and $10,985,000 payable at November 1, 2008 and February 2,2008 respectively. Of the net $3,032,000 increase in fair value during thethirty-nine weeks ended November 1, 2008, $3,032,000 ($1,906,000 net oftax) was included in Accumulated Other Comprehensive Loss on the condensedconsolidated balance sheet.

 

Item 4. Controls and 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 Company’s management,with the participation of the Company’s chief executive officer and chieffinancial officer, evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report.Based on that evaluation, the chief executive officer and chief financialofficer concluded that our disclosure controls and procedures as of the end ofthe period covered by this report were not functioning effectively to providereasonable assurance that the information required to be disclosed by theCompany in reports filed under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms due to the fact that there was a material weakness in ourinternal control over financial reporting (which is a subset of disclosurecontrols and procedures) as described below.

 

CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Duringthe third quarter of fiscal 2007, the Company determined it had a materialweakness in its internal control over financial reporting related to itsfinancial close and reporting process. Since that time, the Company hascontinued to implement changes designed to enhance the effectiveness of itsfinancial close and reporting process including (i) hiring staff andproviding additional accounting research resources, (ii) improving processdocumentation and (iii) improving the review process by more senioraccounting personnel. However, as of November 1, 2008, the Companybelieves that its ongoing efforts to hire and train additional staff are notyet complete. Accordingly, the Company cannot provide its constituents withreasonable assurance that the material weakness in the financial close andreporting process has been remediated. The Company has retained experiencedaccounting consultants, other than the Company’s independent registered publicaccounting firm, with relevant accounting experience, skills and knowledge, toprovide advice to the Company’s management in connection with the fiscal 2008financial reporting process.

 

Other than described above, no change in theCompany’s internal control over financial reporting occurred during the fiscalquarter covered by this report that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

Item 5.  Other Information

 

None.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

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During the fourth quarter of2006 and the first quarter of 2007, the Company was served with four separatelawsuits brought by former associates employed in California, each of whichlawsuits purports to be a class action on behalf of all current and formerCalifornia store associates. One or more of the lawsuits claim that theplaintiff was not paid for (i) overtime, (ii) accrued vacation time, (iii) alltime worked (i.e. “off the clock” work) and/or (iv) late or missed mealperiods or rest breaks. The plaintiffs also allege that the Company violatedcertain record keeping requirements arising out of the foregoing allegedviolations. The lawsuits (i) claim these alleged practices are unfairbusiness practices, (ii) request back pay, restitution, penalties,interest and attorney fees and (iii) request that the Company be enjoinedfrom committing further unfair business practices.  The Company hasreached a settlement in principle regarding the accrued vacation time claims,which was preliminarily approved by the court on December 1, 2008.  The remaining purported class action claimshave been settled and have received final court approval and are expected to bepaid out in the fourth quarter of 2008.

 

The Company is also party tovarious other actions and claims arising in the normal course of business.

 

The Company believes thatamounts accrued for awards or assessments in connection with all such matters,which amounts were increased by $625,000 and $3,725,000 in the thirteen weeksand thirty-nine weeks ended November 1, 2008, respectively, are adequate.However, there exists a reasonable possibility of loss in excess of the amountsaccrued, the amount of which cannot currently be estimated.  While theCompany does not believe that the amount of such excess loss could be materialto the Company’s financial position, any such loss could have a materialadverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

Item 1A.  Risk Factors

 

Therehave been no changes to the risks described in the Company’s previously filedAnnual Report on Form 10-K for the fiscal year ended February 2,2008.

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

 

 

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Item 6.  Exhibits

 
| (31.1) |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |
| (31.2) |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                   |
|   |   |                                                                                                                                                       |
| (32.1) |   | Chief Executive Officer Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                       |
| (32.2) |   | Chief Financial Officer Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|        |                    |   | THE PEP BOYS - MANNY, MOE & JACK             |
|--------|-------------------------|--------|-------------------------------------------------------|
|   |                    |   | (Registrant)                                          |
|   |                    |   |                                                  |
| Date:  | December 10,  2008 |   | by:                                                   | /s/ Raymond L. Arthur |
|   |                    |   |                                                  |
|   |                    |   | Raymond L. Arthur                                     |
|   |                    |   | Executive Vice President and  Chief Financial Officer |

 

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INDEX TO EXHIBITS

 
| (31.1) |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |
| (31.2) |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                   |
|   |   |                                                                                                                                                       |
| (32.1) |   | Chief Executive Officer Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                       |
| (32.2) |   | Chief Financial Officer Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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