** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-Q/A**

** **

**(Amendment No. 1)**

 
| **(Mark One)**                                  |
|-------------------------------------------------|
| ** **                                      | ** ** | ** ** |
| **x**                                           | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
| ** **                                      | ** ** | ** ** |
| **For the  quarterly period ended May 5, 2007** |
| ** **                                      | ** ** | ** ** |
| **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 Pep Boys - Manny,Moe & Jack**

(Exact name ofregistrant as specified in its 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 telephonenumber, including area code)

 

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

 

Indicateby checkmark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 
| Large accelerated  filer  o    Accelerated  filer  x    Non-accelerated  filer  o |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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

 

Asof June 1, 2007 there were 51,404,789 shares of the registrant’s Common Stockoutstanding.

 

 

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**EXPLANATORYNOTE**

 

This amendment to theQuarterly Report on Form 10-Q/A (“Amendment No. 1”) is being filed in order toreflect the restatement of previously issued condensed consolidated financialstatements as of May 5, 2007 and for the thirteen weeks ended May 5, 2007 andApril 29, 2006 included in the original Quarterly Report on Form 10-Q for thequarterly period ended May 5, 2007, previously filed on June 13, 2007 (the“Original Filing”). 

 

Subsequent to theissuance of the Company’s condensed consolidated financial statements includedin Item 1, “Condensed Consolidated Financial Statements (Unaudited),” in theOriginal Filing, the Company determined that certain information in thecondensed consolidating financial statements presented in the supplementalguarantor information note (Note 10) contained errors. The correction of theseerrors has no impact, for any previously reported interim or annual period, onthe Company’s (i) condensed consolidated balance sheets, (ii) condensedconsolidated statements of operations, (iii) condensed consolidated statementsof stockholders’ equity, or (iv) condensed consolidated statements of cashflows. 

 

In addition, the Companycorrected its presentation of borrowings and payments under its line of creditagreement and vendor financing trade payable program to a gross basis versus anet basis in its condensed consolidated statements of cash flows for thethirteen weeks ended May 5, 2007 and April 29, 2006. For further discussionregarding the restatement, see “Note 14 – Restatement of Previously IssuedFinancial Statements” under “Notes to Condensed Consolidated FinancialStatements” included in Item 1. 

 

This Amendment No. 1amends and restates only Items 1 and 4 of Part I of the Original Filing toreflect the restatement of the Company’s condensed consolidated financialstatements and notes thereto for the periods presented. The remaining itemscontained within this Amendment No. 1 consist of all other items originallycontained in the Form 10-Q for the quarterly period ended May 5, 2007. Theseremaining items are not amended hereby, but are included for the convenience ofthe reader. Except for the foregoing amended information, this Amendment No. 1on Form 10-Q/A continues to describe conditions as of the date of the OriginalFiling, and we have not updated the disclosures contained herein to reflectevents that occurred at a later date. We are also updating the Signature Pageand certifications of our Chief Executive and Financial Officers contained inExhibits 31.1, 31.2, 32.1 and 32.2. 

 

2

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| **Index**                           | ** ** | ** **                                                                                  | ** ** | **Page** |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| PART I - FINANCIAL INFORMATION |       |                                                                                        |       |     |
|                                |       |                                                                                        |       |     |   |   |
| Item 1.                             |       | Condensed Consolidated Financial Statements  (Unaudited)                                    |       |     |   |   |
|                                |       |                                                                                        |       |     |   |   |
|                                |       | Condensed Consolidated Balance Sheets -                                                     |       |     |   |   |
|                                |       | May 5, 2007 and February 3, 2007                                                  |       |     | 4 |   |
|                                |       |                                                                                        |       |     |   |   |
|                                |       | Condensed Consolidated Statements of  Operations and Changes in Retained Earnings -         |       |     |   |   |
|                                |       | Thirteen weeks ended May 5, 2007 and  April 29, 2006                              |       |     | 5 |   |
|                                |       |                                                                                        |       |     |   |   |
|                                |       | Condensed Consolidated Statements of Cash  Flows (Restated) -                               |       |     |   |   |
|                                |       | Thirteen weeks ended May 5, 2007 and  April 29, 2006                              |       |     | 6 |   |
|                                |       |                                                                                        |       |     |   |   |
|                                |       | Notes to Condensed Consolidated Financial  Statements                                       |       |     | 7-18 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 2.                             |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       |     | 19-23 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 3.                             |       | Quantitative and Qualitative Disclosures  About Market Risk                                 |       |     | 24 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 4.                             |       | Controls and Procedures                                                                     |       |     | 24 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 5.                             |       | Other Information                                                                           |       |     | 24 |   |
|                                |       |                                                                                        |       |     |   |   |
| PART II - OTHER INFORMATION    |       |                                                                                        |       |     |
|                                |       |                                                                                        |       |     |   |   |
| Item 1.                             |       | Legal Proceedings                                                                           |       |     | 25 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 1A.                            |       | Risk Factors                                                                                |       |     | 25 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 2.                             |       | Unregistered Sales of Equity Securities and  Use of Proceeds                                |       |     | 25 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 3.                             |       | Defaults Upon Senior Securities                                                             |       |     | 25 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 4.                             |       | Submission of Matters to a Vote of Security  Holders                                        |       |     | 25 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 5.                             |       | Other Information                                                                           |       |     | 25 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 6.                             |       | Exhibits                                                                                    |       |     | 26 |   |
|                                |       |                                                                                        |       |     |   |   |
| SIGNATURES                          |       |                                                                                        | 27         |     |
|                                |       |                                                                                        |       |     |   |   |
| INDEX TO EXHIBITS                   |       |                                                                                        | 28         |     |

 

3

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PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated FinancialStatements (Unaudited)

 

THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts inthousands, except share data)

 

UNAUDITED

 
| ** **                                                                    | ** ** | **May 5, 2007** | ** ** | **February 3, 2007** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------|------------|--------------------------------|------------|
| **ASSETS**                                                                    |       |                      |       |                           |       |
| Current Assets:                                                               |       |                      |       |                           |       |
| Cash and cash  equivalents                                                    |       | $                         | 30,781     |                           | $          | 21,884 |   |
| Accounts receivable,  net                                                     |       | 31,261                    |       | 29,582                         |       |
| Merchandise inventories                                                       |       | 618,814                   |       | 607,042                        |       |
| Prepaid expenses                                                              |       | 40,145                    |       | 39,264                         |       |
| Other                                                                         |       | 62,142                    |       | 70,368                         |       |
| Total Current Assets                                                          |       | 783,143                   |       | 768,140                        |       |
| Property and Equipment  - at cost:                                            |       |                      |       |                           |       |
| Land                                                                          |       | 251,705                   |       | 251,705                        |       |
| Buildings and  improvements                                                   |       | 931,268                   |       | 929,225                        |       |
| Furniture, fixtures and  equipment                                            |       | 692,391                   |       | 684,042                        |       |
| Construction in  progress                                                     |       | 3,049                     |       | 3,464                          |       |
|                                                                          |       | 1,878,413                 |       | 1,868,436                      |       |
| Less accumulated  depreciation and amortization                               |       | 982,585                   |       | 962,189                        |       |
| Property and Equipment  - net                                                 |       | 895,828                   |       | 906,247                        |       |
| Deferred income taxes                                                         |       | 24,845                    |       | 24,828                         |       |
| Other                                                                         |       | 64,476                    |       | 67,984                         |       |
| Total Assets                                                                  |       | $                         | 1,768,292  |                           | $          | 1,767,199 |   |
|                                                                          |       |                      |       |                           |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                | ** ** | ** **                | ** ** | ** **                     | ** ** |
| Current Liabilities:                                                          |       |                      |       |                           |       |
| Accounts payable                                                              |       | $                         | 232,872    |                           | $          | 265,489 |   |
| Trade payable program  liability                                              |       | 14,046                    |       | 13,990                         |       |
| Accrued expenses                                                              |       | 281,120                   |       | 292,280                        |       |
| Deferred income taxes                                                         |       | 25,215                    |       | 28,931                         |       |
| Current maturities of  long-term debt and obligations under capital leases    |       | 3,474                     |       | 3,490                          |       |
| Total Current  Liabilities                                                    |       | 556,727                   |       | 604,180                        |       |
|                                                                          |       |                      |       |                           |       |
| Long-term debt and  obligations under capital leases, less current maturities |       | 623,761                   |       | 535,031                        |       |
| Other long-term  liabilities                                                  |       | 66,339                    |       | 60,233                         |       |
| 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                                                   |       | 292,837                   |       | 289,384                        |       |
| Retained earnings                                                             |       | 462,757                   |       | 463,797                        |       |
| Accumulated other  comprehensive loss                                         |       | (9,906                    | )          | (9,380                         | )          |
| Less cost of shares in  treasury - 15,000,595 shares and 12,427,687 shares    |       | 233,516                   |       | 185,339                        |       |
| Less cost of shares in  benefits trust - 2,195,270 shares                     |       | 59,264                    |       | 59,264                         |       |
| Total Stockholders’  Equity                                              |       | 521,465                   |       | 567,755                        |       |
| Total Liabilities and  Stockholders’ Equity                              |       | $                         | 1,768,292  |                           | $          | 1,767,199 |   |

 

See notes to condensedconsolidated financial statements.

 

4

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN RETAINEDEARNINGS

(dollar amounts inthousands, except per share amounts)UNAUDITED

 
| **Thirteen weeks ended**                                                                                       | ** ** | **May 5, 2007** | ** ** | **April 29, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| Merchandise Sales                                                                                                        |       | $                         | 445,035    |                         | $          | 457,315 |   |
| Service Revenue                                                                                                          |       | 100,978                   |       | 99,286                       |       |
| Total Revenues                                                                                                           |       | 546,013                   |       | 556,601                      |       |
| Costs of Merchandise  Sales                                                                                              |       | 315,310                   |       | 329,548                      |       |
| Costs of Service  Revenue                                                                                                |       | 88,911                    |       | 88,175                       |       |
| Total Costs of Revenues                                                                                                  |       | 404,221                   |       | 417,723                      |       |
| Gross Profit from  Merchandise Sales                                                                                     |       | 129,725                   |       | 127,767                      |       |
| Gross Profit from  Service Revenue                                                                                       |       | 12,067                    |       | 11,111                       |       |
| Total Gross Profit                                                                                                       |       | 141,792                   |       | 138,878                      |       |
| Selling, General and  Administrative Expenses                                                                            |       | 128,072                   |       | 131,221                      |       |
| Net Gain (Loss) from  Dispositions of Assets                                                                             |       | 2,359                     |       | (415                         | )          |
| **Operating Profit**                                                                                                     | ** ** | **16,079**                | ** ** | **7,242**                    | ** ** |
| Non-operating Income                                                                                                     |       | 1,905                     |       | 2,259                        |       |
| Interest Expense                                                                                                         |       | 12,656                    |       | 10,337                       |       |
| Earnings (Loss) From  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       | 5,328                     |       | (836                         | )          |
| Income Tax Expense                                                                                                       |       | 2,108                     |       | 31                           |       |
| Net Earnings (Loss)  From Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | 3,220                     |       | (867                         | )          |
| Loss From Discontinued  Operations, Net of Tax                                                                           |       | (45                       | )          | (103                         | )          |
| Cumulative Effect of  Change in Accounting Principle, Net of Tax                                                         |       | —                    |       | 267                          |       |
| **Net Earnings (Loss)**                                                                                                  | ** ** | **3,175**                 | ** ** | **(703**                     | **)**      |
|                                                                                                                     |       |                      |       |                         |       |
| Retained Earnings,  beginning of period                                                                                  |       | 463,797                   |       | 481,926                      |       |
| Cumulative effect  adjustment for adoption of FIN 48                                                                     |       | (155                      | )          | —                       |       |
| Cash Dividends                                                                                                           |       | (3,581                    | )          | (3,705                       | )          |
| Effect of Stock Options                                                                                                  |       | (479                      | )          | (66                          | )          |
| Dividend Reinvestment  Plan                                                                                              |       | —                    |       | (14                          | )          |
| Retained Earnings, end  of period                                                                                        |       | $                         | 462,757    |                         | $          | 477,438 |   |
|                                                                                                                     |       |                      |       |                         |       |
| Basic Earnings (Loss)  Per Share:                                                                                        |       |                      |       |                         |       |
| Basic weighted average  shares outstanding                                                                               |       | 53,122                    |       | 54,224                       |       |
|                                                                                                                     |       |                      |       |                         |       |
| Net Earnings (Loss)  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | $                         | 0.06       |                         | $          | (0.02 | ) |
| Discontinued  Operations, Net of Tax                                                                                     |       | —                    |       | —                       |       |
| Cumulative Effect of  Change in Accounting Principle, Net of Tax                                                         |       | —                    |       | 0.01                         |       |
| Basic Earnings (Loss)  Per Share                                                                                         |       | $                         | 0.06       |                         | $          | (0.01 | ) |
|                                                                                                                     |       |                      |       |                         |       |
| Diluted Earnings (Loss)  Per Share:                                                                                      |       |                      |       |                         |       |
| Diluted weighted  average shares outstanding                                                                             |       | 53,634                    |       | 54,224                       |       |
|                                                                                                                     |       |                      |       |                         |       |
| Net Earnings (Loss)  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | $                         | 0.06       |                         | $          | (0.02 | ) |
| Discontinued  Operations, Net of Tax                                                                                     |       | —                    |       | —                       |       |
| Cumulative Effect of  Change in Accounting Principle, Net of Tax                                                         |       | —                    |       | 0.01                         |       |
| Diluted Earnings (Loss)  Per Share                                                                                       |       | $                         | 0.06       |                         | $          | (0.01 | ) |
|                                                                                                                     |       |                      |       |                         |       |
| Cash Dividends Per  Share                                                                                                |       | $                         | 0.0675     |                         | $          | 0.0675 |   |

 

See notes to condensedconsolidated financial statements.

 

5

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(dollar amounts inthousands)UNAUDITED

 
| **Thirteen weeks ended**                                                                      | ** ** | **May 5, 2007  (as restated,  See Note 14)** | ** ** | **April 29, 2006  (as restated,  See Note 14)** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Cash Flows from  Operating Activities:                                                                  |       |                                                   |       |                                                      |       |
| Net Earnings (Loss)                                                                                     |       | $                                                      | 3,175      |                                                      | $          | (703 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash (used in) provided by continuing  operations: |       |                                                   |       |                                                      |       |
| Net loss from  discontinued operations                                                                  |       | 45                                                     |       | 103                                                       |       |
| Depreciation and amortization                                                                           |       | 21,111                                                 |       | 20,723                                                    |       |
| Cumulative effect of  change in accounting principle, net of tax                                        |       | —                                                 |       | (267                                                      | )          |
| Accretion of asset  disposal obligation                                                                 |       | 65                                                     |       | 67                                                        |       |
| Stock compensation  expense                                                                             |       | 4,390                                                  |       | 1,148                                                     |       |
| Deferred income taxes                                                                                   |       | 1,642                                                  |       | (90                                                       | )          |
| (Gain) loss from dispositions  of assets & insurance recoveries                                     |       | (3,719                                                 | )          | 415                                                       |       |
| Change in fair value of  derivatives                                                                    |       | 1,802                                                  |       | —                                                    |       |
| Excess tax benefits  from stock based awards                                                            |       | (301                                                   | )          | (23                                                       | )          |
| Increase in cash  surrender value of life insurance policies                                            |       | (534                                                   | )          | (385                                                      | )          |
| Changes in Operating  Assets and Liabilities:                                                           |       |                                                   |       |                                                      |       |
| Decrease in accounts  receivable, prepaid expenses and other                                            |       | 10,178                                                 |       | 12,901                                                    |       |
| Increase in merchandise  inventories                                                                    |       | (11,772                                                | )          | (2,358                                                    | )          |
| Decrease in accounts  payable                                                                           |       | (32,617                                                | )          | (5,200                                                    | )          |
| Decrease in accrued  expenses                                                                           |       | (2,257                                                 | )          | (10,088                                                   | )          |
| Increase in other  long-term liabilities                                                                |       | 1,075                                                  |       | 696                                                       |       |
| Net cash (used in)  provided by continuing operations                                                   |       | (7,717                                                 | )          | 16,939                                                    |       |
| Net cash used in  discontinued operations                                                               |       | (90                                                    | )          | (165                                                      | )          |
| Net Cash (Used in)  Provided by Operating Activities                                                    |       | (7,807                                                 | )          | 16,774                                                    |       |
|                                                                                                    |       |                                                   |       |                                                      |       |
| Cash Flows from  Investing Activities:                                                                  |       |                                                   |       |                                                      |       |
| Cash paid for property  and equipment                                                                   |       | (11,610                                                | )          | (5,628                                                    | )          |
| Proceeds from  dispositions of assets                                                                   |       | —                                                 |       | 135                                                       |       |
| Net Cash Used in  Investing Activities                                                                  |       | (11,610                                                | )          | (5,493                                                    | )          |
|                                                                                                    |       |                                                   |       |                                                      |       |
| Cash Flows from Financing  Activities:                                                                  |       |                                                   |       |                                                      |       |
| Borrowings under line  of credit agreements                                                             |       | 207,505                                                |       | 151,581                                                   |       |
| Payments under line of  credit agreements                                                               |       | (117,900                                               | )          | (158,031                                                  | )          |
| Excess tax benefits  from stock based awards                                                            |       | 301                                                    |       | 23                                                        |       |
| Borrowings on trade  payable program liability                                                          |       | 17,461                                                 |       | 17,365                                                    |       |
| Payments on trade  payable program liability                                                            |       | (17,405                                                | )          | (15,278                                                   | )          |
| Reduction of long-term  debt                                                                            |       | (808                                                   | )          | (5                                                        | )          |
| Payments on capital  lease obligations                                                                  |       | (83                                                    | )          | (81                                                       | )          |
| Dividends paid                                                                                          |       | (3,581                                                 | )          | (3,705                                                    | )          |
| Repurchase of common  stock                                                                             |       | (58,152                                                | )          | —                                                    |       |
| Proceeds from exercise  of stock options                                                                |       | 773                                                    |       | 48                                                        |       |
| Proceeds from dividend  reinvestment plan                                                               |       | 203                                                    |       | 219                                                       |       |
| Net Cash Provided by  (Used in) Financing Activities                                                    |       | 28,314                                                 |       | (7,864                                                    | )          |
| Net Increase in Cash  and Cash Equivalents                                                              |       | 8,897                                                  |       | 3,417                                                     |       |
| Cash and Cash  Equivalents at Beginning of Period                                                       |       | 21,884                                                 |       | 48,281                                                    |       |
| Cash and Cash  Equivalents at End of Period                                                             |       | $                                                      | 30,781     |                                                      | $          | 51,698 |   |
|                                                                                                    |       |                                                   |       |                                                      |       |
| Supplemental Disclosure  of Cash Flow Information:                                                      |       |                                                   |       |                                                      |       |
| Non-cash investing  activities:                                                                         |       |                                                   |       |                                                      |       |
| Accrued purchases of  property and equipment                                                            |       | $                                                      | 2,804      |                                                      | $          | 672 |   |

 

Seenotes to condensed consolidated financial statements.

 

6

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THE PEP BOYS - MANNY, MOE & JACK ANDSUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE1. Condensed Consolidated Financial Statements

 

Thecondensed consolidated balance sheet as of May 5, 2007, the condensedconsolidated statements of operations and changes in retained earnings for thethirteen week periods ended May 5, 2007 and April 29, 2006 and the condensedconsolidated statements of cash flows for the thirteen week periods ended May5, 2007 and April 29, 2006 are unaudited. In the opinion of management,all adjustments necessary to present fairly the financial position, results ofoperations and cash flows at May 5, 2007 and for all periods presented havebeen 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 byRule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “InterimFinancial Statements”. It is suggested that these condensed consolidatedfinancial statements be read in conjunction with the financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K/A,Amendment No. 1 for the fiscal year ended February 3, 2007. The results ofoperations for the thirteen weeks ended May 5, 2007 are not necessarilyindicative of the operating results for the full year. 

 

NOTE2. New Accounting Standards

 

Adopted:

 

InJune 2006, the FASB issued Financial Interpretation No 48, “Accounting forUncertainty in Income Taxes” (FIN 48), which clarifies the accounting foruncertainty in income taxes recognized in a company’s financial statements inaccordance with the Financial Accounting Standards Board (FASB) Statement ofFinancial Accounting Standards No 109, “Accounting for Income Taxes”. Theinterpretation prescribes a recognition threshold and measurement attributecriteria for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. The interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.

 

TheCompany and its subsidiaries file income tax returns in the U.S federal,various states and Puerto Rico jurisdictions. The Company is no longer subjectto federal income tax examination by tax authorities for years before fiscal2001. The federal audit of tax fiscal years 2001, 2002 and 2003 has beencompleted, but is still pending review by the Joint Committee on Taxation. Theimpact of any changes made as a result of a federal audit remains subject toexamination by various states for a period of up to one year after notificationof such changes to the respective states. State and local income tax returnsare generally subject to examination for a period of three to five years afterfiling of the respective return. The Company and its subsidiaries have variousstate income tax returns in the process of examination, appeals and litigation.

 

TheCompany adopted the provisions of FIN 48 on February 4, 2007. In connectionwith the adoption, the Company recorded a net decrease to retained earnings of$155,000 and reclassified certain previously recognized deferred tax attributesas FIN 48 liabilities. The amount of unrecognized tax benefits at February 4,2007 was $7,126,000 of which $2,216,000 would impact the Company’s tax rate, ifrecognized. The amount of unrecognized tax benefits did not materially changeas of May 5, 2007.

 

The Company recognizespotential interest and penalties for unrecognized tax benefits in income taxexpense and, accordingly, during the thirteen weeks ended May 5, 2007, theCompany recognized approximately $25,282 in potential interest and penaltiesassociated with uncertain tax positions. At February 5, 2007, the Company hasrecorded approximately $734,000 for the payment of interest and penalties,which is included in the $7,126,000 unrecognized tax benefit noted above.

 

TheCompany’s tax returns are under various audits, including a review by the JointCommittee of Taxation, certain of which are scheduled to be finalized with thenext twelve months. It is reasonably possible that the uncertain tax positionsrelative to the years under audit could be resolved in Company’s favorresulting in the recognition of up to $4,227,000 of additional income taxbenefit.

 

In February 2006, the FASB issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB Statements No.133 and 140.” This statement simplifies accounting for certain hybridinstruments currently governed by SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” or SFAS No. 133, by allowing fair valueremeasurement of hybrid instruments that contain an embedded derivative thatotherwise would require bifurcation. The Company adopted this standard onFebruary 4, 2007, which did not affect our financial statements.

 

In March 2006, theFASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—anamendment of FASB Statement No. 140.” SFAS No. 156 amends SFASNo. 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,” with respect to the accounting for separatelyrecognized servicing assets and servicing liabilities. SFAS No. 156 iseffective for fiscal years beginning after September 15, 2006. The Company adopted thisstandard on February 4, 2007, which did not affect our financial statements.

 

In June of 2006, theFASB ratified the consensus reached by the Emerging Issues Task Force (EITF) onIssue 06-3, How Taxes Collected from Customers and Remitted toGovernmental Authorities Should be Presented in the Income Statement (That Is,Gross versus Net Presentation). The Company presents sales net of salestaxes in its condensed consolidated statement of operations and the adoption ofthis EITF did not affect our financial statements. 

 

Tobe adopted:

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157).SFAS 157 defines the term fair value, establishes a framework for measuring itwithin generally accepted accounting principles and expands disclosures aboutits measurements. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007. The Company iscurrently evaluating the impact of SFAS No. 157 on its consolidatedfinancial statements. 

 

7

----

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities.” SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. SFAS No. 159 is effective for fiscal years beginningafter November 15, 2007. The Company is currently evaluating the impact ofSFAS No. 159 on its consolidated financial statements. 

 

InMarch 2007, the Emerging Issues Task Force (“EITF”) reached a consensus onissue number 06-10, “Accounting for Deferred Compensation and PostretirementBenefit Aspects of Collateral Assignment Split-Dollar Life InsuranceArrangements”, (“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 should recognizeand measure the asset in a collateral assignment split-dollar life insurancecontract. EITF 06-10 is effective for fiscal years beginning afterDecember 15, 2007, although early adoption is permitted. The Company iscurrently evaluating the impact of EITF 06-10 on its consolidated financialstatements. 

 

NOTE3. Accounting for Stock-Based Compensation

 

TheCompany has stock-based compensation plans, under which it grants stock optionsand restricted stock units to key employees and members of its Board ofDirectors. Generally, new stock option grants vest over a four-year period,with one-fifth vesting on each of the grant date and the next fouranniversaries thereof and have an expiration date of seven years. Generally,new restricted stock unit grants vest over a four-year period, with one-fourthvesting on each of the first four anniversaries of the grant date. During thefirst quarter ended May 5, 2007, we granted 1,052,367 stock options with aweighted average fair value of $5.09 per option and 630,300 restricted stockunits with a weighted average fair value of $15.26 per unit. Such grantsincluded an inducement grant of 1,000,000 stock options and 500,000 restrictedstock units to our newly-hired President & Chief Executive Officer on March13, 2007. One-fourth of such awards vest on each of the first threeanniversaries of the date of grant.

 

Inaccordance with SFAS No. 123(R), we recognize compensation expense on astraight-line basis over the vesting period. We recognized $4,390,000 and$1,148,000 of stock-based compensation expense during the thirteen weeks endedMay 5, 2007 and April 29, 2006, respectively. 

 

NOTE4. Merchandise Inventories

 

Merchandiseinventories are valued at the lower of cost or market. Cost is determined byusing the last-in, first-out (LIFO) method. An actual valuation of inventoryunder the LIFO method can be made only at the end of each fiscal year based oninventory and costs at that time. Accordingly, interim LIFO calculations mustbe based on management’s estimates of expected fiscal year-end inventory levelsand costs. If the first-in, first-out (FIFO) method of costing inventory hadbeen used by the Company, inventory would have been  $605,139,000 and $593,265,000 as of May 5,2007 and February 3, 2007, respectively.

 

TheCompany also records valuation adjustments (reserves) for potentially excessand obsolete inventories based on current inventory levels, the historicalanalysis of product sales and current market conditions. The nature of theCompany’s inventory is such that the risk of obsolescence is minimal and excessinventory has historically been returned to the Company’s vendors for credit.The Company provides reserves when less than full credit is expected from avendor or when market is lower than recorded costs. The reserves are revised,if necessary, on a quarterly basis for adequacy. The Company’s reserves againstinventory for these matters were $ 14,178,000 at May 5, 2007 and $ 13,462,000 atFebruary 3, 2007.

 

8

----

 

NOTE5. Other Current Assets

 

TheCompany’s other current assets for the periods ended May 5, 2007 and February3, 2007 were as follows:

 
| ** **                                       | ** ** | **May 5,** | ** **   | **February 3,** | ** ** |
|--------------------------------------------------|------------|-----------------|--------------|----------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **2007**        | ** **   | **2007**             | ** ** |
|                                             |       |            |         |                 |       |
| Reinsurance premiums  and receivable             |       | $               |  62,038 |                 | $          |  69,239 |   |
| Other                                            |       | 104             |         | 1,129                |       |
| Total                                            |       | $               |  62,142 |                 | $          |  70,368 |   |

 

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

 

NOTE6. Discontinued Operations

 

Inaccordance with SFAS No. 144, our discontinued operations continues toreflect the costs associated with the stores remaining from the 33 storesclosed on July 31, 2003 as part of our corporate restructuring. Theremaining reserve balance is not material.

 

Duringthe second quarter of fiscal 2006, we sold a store that we have leased back andwill continue to operate. Due to our significant continuing involvement withthis store following the sale, we reclassified back into continuing operations,for all periods presented, this store’s revenues and costs that had beenpreviously classified into discontinued operations during the third quarter offiscal 2005, in accordance with SFAS No. 144 and EITF No. 03-13.

 

NOTE7. Pension and Savings Plan

 

Pensionexpense includes the following:

 
| ** **                                       | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **May 5, 2007**          | ** ** | **April 29, 2006** | ** ** |
|                                             |       |                               |       |   |   |
| Service cost                                     |       | $                                  | 51         |   | $ | 73 |   |
| Interest Cost                                    |       | 836                                |       | 756 |   |
| Expected return on plan  assets                  |       | (587                               | )          | (581 | ) |
| Amortization of  transition obligation           |       | 41                                 |       | 41 |   |
| Amortization of prior  service cost              |       | 91                                 |       | 87 |   |
| Amortization of net  loss                        |       | 488                                |       | 528 |   |
| Net periodic benefit  cost                       |       | $                                  | 920        |   | $ | 904 |   |

 

 

TheCompany has a qualified defined benefit pension plan with accrued benefitsfrozen at December 31, 1996. The Company makes contributions to this plan inaccordance with the requirements of ERISA. The Company does not anticipatemaking a contribution to this plan during fiscal 2007.

 

TheCompany has an unfunded, non-qualified Executive Supplemental Retirement Plan(SERP) defined benefit plan that was closed to new participants on January 31,2004. As of May 5, 2007, the Company contributed $200,000 of an anticipated $1,000,000contribution during fiscal 2007 to this plan. 

 

TheCompany has a non-qualified SERP defined contribution plan for key employeeswho were designated by the Board of Directors after January 31, 2004. TheCompany’s contribution expense for the defined contribution portion of the planwas approximately $212,000 and $244,000 for the thirteen weeks ended May 5,2007, and April 29, 2006, respectively.

 

TheCompany has two 401(k) savings plans, which cover all full-time employeeswho are at least 21 years of age with one or more years of service. The Companycontributes the lesser of 50% of the first 6% of a participant’s contributionsor 3% of the participant’s compensation. The Company’s savings plans’contribution expense was approximately $976,000 and $829,000 for the thirteen weeksended May 5, 2007 and April 29, 2006, respectively.

 

9

----

 

NOTE8. Debt and Financing Arrangements

 

OnFebruary 15, 2007, the Company amended its $320,000,000 Senior SecuredTerm Loan, due in 2013, to reduce the interest rate from London InterbankOffered Rate (LIBOR) plus 2.75% to LIBOR plus 2.00%.

 

NOTE9. 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.

 

Componentsof the reserve for warranty costs for the thirteen-week period ended May 5,2007 were as follows:

 
| **(dollar amounts in thousands)** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|
| Beginning balance at  February 3, 2007           |       | $          | 645        |   |
|                                             |       |       |       |
| Additions related to  current period sales       |       | 2,576      |       |
|                                             |       |       |       |
| Warranty costs incurred  in current period       |       | (2,750     | )          |
|                                             |       |       |       |
| Ending Balance at May  5, 2007                   |       | $          |  471  |   |

 

NOTE 10. Supplemental Guarantor Information 

The Company’s $200,000,000 aggregate principal amount of 7.50% SeniorSubordinated Notes (the “Notes”) are fully and unconditionally and joint andseverally guaranteed by certain of the Company’s direct and indirectlywholly-owned subsidiaries - namely, The Pep Boys Manny Moe & Jack ofCalifornia, Pep Boys - Manny, Moe & Jack of Delaware, Inc., Pep Boys —Manny, Moe & Jack of Puerto Rico, Inc. and PBY Corporation, (collectively,the “Subsidiary Guarantors”). The Notes are not guaranteed by the Company’swholly owned subsidiary, Colchester Insurance Company. 

 

 The followingcondensed consolidating information presents, in separate columns, thecondensed consolidating balance sheets as of May 5, 2007 and February 3, 2007and the related condensed consolidating statements of operations and condensedconsolidating statements of cash flows for the thirteen weeks ended May 5, 2007and April 29, 2006 for (i) the Company (“Pep Boys”) on a parent only basis,with its investment in subsidiaries recorded under the equity method, (ii) theSubsidiary Guarantors on a combined basis including the consolidation by PBYCorporation of its wholly owned subsidiary, The Pep Boys Manny Moe & Jackof California, (iii) the subsidiary of the Company that does not guarantee theNotes, and (iv) the Company on a consolidated basis. 

 

10

----

 

CONDENSED CONSOLIDATINGBALANCE SHEET 

(dollars in thousands) 

 
| **As of May 5, 2007**                                                         | ** ** | **Pep Boys (1)** | ** ** | **Subsidiary  Guarantors (1)** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination (1)** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|--------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    | ** ** | ** **       | ** ** | ** **                     | ** ** | ** **                       | ** ** | ** **                           | ** ** | ** **       | ** ** |
| Current Assets:                                                               |       |             |       |                           |       |                             |       |                                 |       |             |       |
| Cash and cash  equivalents                                                    |       | $                | 13,986     |                           | $          | 12,972                           |       | $                                    | 3,823      |             | $          | — |   | $ | 30,781 |   |
| Accounts  receivable, net                                                     |       | 33,806           |       | —                         |       | —                           |       | (2,545                               | )          | 31,261           |       |
| Merchandise  inventories                                                      |       | 232,890          |       | 385,924                        |       | —                           |       | —                               |       | 618,814          |       |
| Prepaid expenses                                                              |       | 35,211           |       | 11,038                         |       | 18,212                           |       | (24,316                              | )          | 40,145           |       |
| Other                                                                         |       | 458              |       | 12                             |       | 61,672                           |       | —                               |       | 62,142           |       |
| Total Current  Assets                                                         |       | 316,351          |       | 409,946                        |       | 83,707                           |       | (26,861                              | )          | 783,143          |       |
| Property and  Equipment—at cost:                                         |       |             |       |                           |       |                             |       |                                 |       |             |       |
| Land                                                                          |       | 78,508           |       | 166,766                        |       | 12,893                           |       | (6,462                               | )          | 251,705          |       |
| Buildings and  improvements                                                   |       | 310,459          |       | 610,484                        |       | 20,937                           |       | (10,612                              | )          | 931,268          |       |
| Furniture,  fixtures and equipment                                            |       | 289,628          |       | 402,763                        |       | —                           |       | —                               |       | 692,391          |       |
| Construction in  progress                                                     |       | 2,674            |       | 375                            |       | —                           |       | —                               |       | 3,049            |       |
|                                                                          |       | 681,269          |       | 1,180,388                      |       | 33,830                           |       | (17,074                              | )          | 1,878,413        |       |
| Less accumulated  depreciation and amortization                               |       | 389,517          |       | 589,307                        |       | 411                              |       | 3,350                                |       | 982,585          |       |
| Total Property  and Equipment—Net                                        |       | 291,752          |       | 591,081                        |       | 33,419                           |       | (20,424                              | )          | 895,828          |       |
| Investment in  subsidiaries (1)                                               |       | 1,598,807        |       | —                         |       | —                           |       | (1,598,807                           | )          | —           |       |
| Intercompany  receivable (1)                                                  |       | —           |       | 769,697                        |       | 78,091                           |       | (847,788                             | )          | —           |       |
| Deferred income  taxes                                                        |       | 23,163           |       | 1,682                          |       | —                           |       | —                               |       | 24,845           |       |
| Other                                                                         |       | 60,567           |       | 3,909                          |       | —                           |       | —                               |       | 64,476           |       |
| Total Assets (1)                                                              |       | $                | 2,290,640  |                           | $          | 1,776,315                        |       | $                                    | 195,217    |             | $          | (2,493,880 | ) | $ | 1,768,292 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                | ** ** | ** **       | ** ** | ** **                     | ** ** | ** **                       | ** ** | ** **                           | ** ** | ** **       | ** ** |
| Current  Liabilities:                                                         |       |             |       |                           |       |                             |       |                                 |       |             |       |
| Accounts payable                                                              |       | $                | 232,863    |                           | $          | 9                                |       | $                                    | —     |             | $          | — |   | $ | 232,872 |   |
| Trade payable  program liability                                              |       | 14,046           |       | —                         |       | —                           |       | —                               |       | 14,046           |       |
| Accrued expenses  (1)                                                         |       | 53,794           |       | 69,006                         |       | 179,413                          |       | (21,093                              | )          | 281,120          |       |
| Deferred income  taxes                                                        |       | 3,371            |       | 27,612                         |       | —                           |       | (5,768                               | )          | 25,215           |       |
| Current  maturities of long-term debt and obligations under capital leases    |       | 3,474            |       | —                         |       | —                           |       | —                               |       | 3,474            |       |
| Total Current  Liabilities (1)                                                |       | 307,548          |       | 96,627                         |       | 179,413                          |       | (26,861                              | )          | 556,727          |       |
| Long-term debt  and obligations under capital leases, less current maturities |       | 556,910          |       | 66,851                         |       | —                           |       | —                               |       | 623,761          |       |
| Other long-term  liabilities                                                  |       | 56,929           |       | 29,834                         |       | —                           |       | (20,424                              | )          | 66,339           |       |
| Intercompany  liabilities (1)                                                 |       | 847,788          |       | —                         |       | —                           |       | (847,788                             | )          | —           |       |
| Stockholders’  Equity:                                                   |       |             |       |                           |       |                             |       |                                 |       |             |       |
| Common stock (1)                                                              |       | 68,557           |       | 2                              |       | 100                              |       | (102                                 | )          | 68,557           |       |
| Additional  paid-in capital (1)                                               |       | 292,837          |       | 386,857                        |       | 3,900                            |       | (390,757                             | )          | 292,837          |       |
| Retained  earnings (1)                                                        |       | 462,757          |       | 1,196,144                      |       | 11,804                           |       | (1,207,948                           | )          | 462,757          |       |
| Accumulated  other comprehensive loss                                         |       | (9,906           | )          | —                         |       | —                           |       | —                               |       | (9,906           | )          |
| Less:                                                                         |       | —           |       |                           |       |                             |       |                                 |       |             |       |
| Cost of shares  in treasury                                                   |       | 233,516          |       | —                         |       | —                           |       | —                               |       | 233,516          |       |
| Cost of shares  in benefits trust                                             |       | 59,264           |       | —                         |       | —                           |       | —                               |       | 59,264           |       |
| Total  Stockholders’ Equity (1)                                          |       | 521,465          |       | 1,583,003                      |       | 15,804                           |       | (1,598,807                           | )          | 521,465          |       |
| Total  Liabilities and Stockholders’ Equity (1)                          |       | $                | 2,290,640  |                           | $          | 1,776,315                        |       | $                                    | 195,217    |             | $          | (2,493,880 | ) | $ | 1,768,292 |   |

 

----

(1) As restated, see Note14 

 

11

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CONDENSED CONSOLIDATINGBALANCE SHEET 

(dollars in thousands) 

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

 

12

----

 

CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS 

(dollars in thousands) 

 
| **Thirteen weeks ended May 5, 2007**                                                                                     | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors (1)** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination (1)** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|------------------|------------|
|                                                                                                                     |       |         |       |                           |       |                             |       |                                 |       |             |       |
| Merchandise  Sales                                                                                                       |       | $            | 154,284    |                           | $          | 290,751                          |       | $                                    | —     |             | $          | — |   | $ | 445,035 |   |
| Service Revenue                                                                                                          |       | 35,612       |       | 65,366                         |       | —                           |       | —                               |       | 100,978          |       |
| Other Revenue                                                                                                            |       | —       |       | —                         |       | 6,260                            |       | (6,260                               | )          | —           |       |
| Total Revenues                                                                                                           |       | 189,896      |       | 356,117                        |       | 6,260                            |       | (6,260                               | )          | 546,013          |       |
| Costs of  Merchandise Sales                                                                                              |       | 109,481      |       | 205,829                        |       | —                           |       | —                               |       | 315,310          |       |
| Costs of Service  Revenue                                                                                                |       | 30,215       |       | 58,696                         |       | —                           |       | —                               |       | 88,911           |       |
| Costs of Other  Revenue                                                                                                  |       | —       |       | —                         |       | 5,566                            |       | (5,566                               | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 139,696      |       | 264,525                        |       | 5,566                            |       | (5,566                               | )          | 404,221          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 44,803       |       | 84,922                         |       | —                           |       | —                               |       | 129,725          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 5,397        |       | 6,670                          |       | —                           |       | —                               |       | 12,067           |       |
| Gross Profit  from Other Revenue                                                                                         |       | —       |       | —                         |       | 694                              |       | (694                                 | )          | —           |       |
| Total Gross  Profit                                                                                                      |       | 50,200       |       | 91,592                         |       | 694                              |       | (694                                 | )          | 141,792          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 42,297       |       | 86,621                         |       | 86                               |       | (932                                 | )          | 128,072          |       |
| Net Gain (Loss)  from Sale of Assets                                                                                     |       | 2,367        |       | (8                             | )          | —                           |       | —                               |       | 2,359            |       |
| Operating Profit                                                                                                         |       | 10,270       |       | 4,963                          |       | 608                              |       | 238                                  |       | 16,079           |       |
| Non-Operating  (Expense) Income                                                                                          |       | (3,901       | )          | 33,719                         |       | 640                              |       | (28,553                              | )          | 1,905            |       |
| Interest Expense  (Income)                                                                                               |       | 31,913       |       | 10,383                         |       | (1,325                           | )          | (28,315                              | )          | 12,656           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (25,544      | )          | 28,299                         |       | 2,573                            |       | —                               |       | 5,328            |       |
| Income Tax  (Benefit) Expense                                                                                            |       | (18,619      | )          | 19,706                         |       | 1,021                            |       |                                 |       | 2,108            |       |
| Equity in  Earnings of Subsidiaries (1)                                                                                  |       | 10,145       |       | —                         |       | —                           |       | (10,145                              | )          | —           |       |
| Net Earnings  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle (1)                 |       | 3,220        |       | 8,593                          |       | 1,552                            |       | (10,145                              | )          | 3,220            |       |
| Loss From  Discontinued Operations, Net of Tax                                                                           |       | (45          | )          | —                         |       | —                           |       | —                               |       | (45              | )          |
| Net Earnings (1)                                                                                                         |       | $            | 3,175      |                           | $          | 8,593                            |       | $                                    | 1,552      |             | $          | (10,145 | ) | $ | 3,175 |   |

 

----

(1) As restated, see Note14 

 

13

----

 
| **Thirteen weeks ended April 29, 2006**                                                                                  | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors (1)** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination (1)** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|------------------|------------|
|                                                                                                                     |       |         |       |                           |       |                             |       |                                 |       |             |       |
| Merchandise  Sales                                                                                                       |       | $            | 159,704    |                           | $          | 297,611                          |       | $                                    | —     |             | $          | — |   | $ | 457,315 |   |
| Service Revenue                                                                                                          |       | 34,867       |       | 64,419                         |       | —                           |       | —                               |       | 99,286           |       |
| Other Revenue                                                                                                            |       | —       |       | —                         |       | 7,137                            |       | (7,137                               | )          | —           |       |
| Total Revenues                                                                                                           |       | 194,571      |       | 362,030                        |       | 7,137                            |       | (7,137                               | )          | 556,601          |       |
| Costs of  Merchandise Sales                                                                                              |       | 114,460      |       | 215,088                        |       | —                           |       | —                               |       | 329,548          |       |
| Costs of Service  Revenue                                                                                                |       | 30,568       |       | 57,607                         |       | —                           |       | —                               |       | 88,175           |       |
| Costs of Other  Revenue                                                                                                  |       | —       |       | —                         |       | 8,608                            |       | (8,608                               | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 145,028      |       | 272,695                        |       | 8,608                            |       | (8,608                               | )          | 417,723          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 45,244       |       | 82,523                         |       | —                           |       | —                               |       | 127,767          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 4,299        |       | 6,812                          |       | —                           |       | —                               |       | 11,111           |       |
| Gross Loss from  Other Revenue                                                                                           |       | —       |       | —                         |       | (1,471                           | )          | 1,471                                |       | —           |       |
| Total Gross  Profit (Loss)                                                                                               |       | 49,543       |       | 89,335                         |       | (1,471                           | )          | 1,471                                |       | 138,878          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 43,016       |       | 86,653                         |       | 81                               |       | 1,471                                |       | 131,221          |       |
| Net Loss from  Sale of Assets                                                                                            |       | —       |       | (415                           | )          | —                           |       | —                               |       | (415             | )          |
| Operating Profit  (Loss)                                                                                                 |       | 6,527        |       | 2,267                          |       | (1,552                           | )          | —                               |       | 7,242            |       |
| Non-Operating  (Expense) Income                                                                                          |       | (4,675       | )          | 27,916                         |       | 298                              |       | (21,280                              | )          | 2,259            |       |
| Interest Expense  (Income)                                                                                               |       | 24,961       |       | 7,844                          |       | (1,188                           | )          | (21,280                              | )          | 10,337           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (23,109      | )          | 22,339                         |       | (66                              | )          | —                               |       | (836             | )          |
| Income Tax  (Benefit) Expense                                                                                            |       | (120         | )          | 151                            |       | —                           |       |                                 |       | 31               |       |
| Equity in  Earnings of Subsidiaries (1)                                                                                  |       | 22,024       |       | —                         |       | —                           |       | (22,024                              | )          | —           |       |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle (1)          |       | (965         | )          | 22,188                         |       | (66                              | )          | (22,024                              | )          | (867             | )          |
| Loss From  Discontinued Operations, Net of Tax                                                                           |       | (5           | )          | (98                            | )          | —                           |       | —                               |       | (103             | )          |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | 267          |       | —                         |       | —                           |       | —                               |       | 267              |       |
| Net (Loss)  Earnings (1)                                                                                                 |       | $            | (703       | )                              | $          | 22,090                           |       | $                                    | (66        | )                | $          | (22,024 | ) | $ | (703 | ) |

 

----

(1) As restated, see Note14 

 

14

----

 

CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS 

(dollars in thousands) 

 
| **Thirteen weeks ended May 5, 2007**                                                                | ** ** | **Pep Boys (1)** | ** ** | **Subsidiary  Guarantors (1)** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation  Elimination (1)** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------------------------|------------|------------------|------------|
|  Cash Flows from Operating  Activities:                                                        |       |             |       |                           |       |                            |       |                               |       |             |       |
| Net Earnings (1)                                                                                    |       | $                | 3,175      |                           | $          | 8,593                           |       | $                                  | 1,552      |             | $          | (10,145 | ) | $ | 3,175 |   |
| Adjustments to  Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing  Operations (1) |       | 3,760            |       | 10,725                         |       | 539                             |       | 9,477                              |       | 24,501           |       |
| Changes in  operating assets and liabilities (1)                                                    |       | (59,878          | )          | 25,513                         |       | (1,079                          | )          | 51                                 |       | (35,393          | )          |
| Net cash (used  in) provided by continuing operations (1)                                           |       | (52,943          | )          | 44,831                         |       | 1,012                           |       | (617                               | )          | (7,717           | )          |
| Net cash used in  discontinued operations                                                           |       | (90              | )          | —                         |       | —                          |       | —                             |       | (90              | )          |
| Net Cash (Used  in) Provided by Operating Activities (1)                                            |       | (53,033          | )          | 44,831                         |       | 1,012                           |       | (617                               | )          | (7,807           | )          |
|                                                                                                |       |             |       |                           |       |                            |       |                               |       |             |       |
| Net Cash (Used  in) Investing Activities                                                            |       | (1,758           | )          | (9,852                         | )          | —                          |       | —                             |       | (11,610          | )          |
|                                                                                                |       |             |       |                           |       |                            |       |                               |       |             |       |
| Net Cash  Provided by (Used in) Financing Activities (1)                                            |       | 55,196           |       | (29,953                        | )          | 2,454                           |       | 617                                |       | 28,314           |       |
|                                                                                                |       |             |       |                           |       |                            |       |                               |       |             |       |
| Net Increase in  Cash and Cash Equivalents                                                          |       | 405              |       | 5,026                          |       | 3,466                           |       | —                             |       | 8,897            |       |
| Cash and Cash  Equivalents at Beginning of Year                                                     |       | 13,581           |       | 7,946                          |       | 357                             |       | —                             |       | 21,884           |       |
| Cash and Cash  Equivalents at End of Year                                                           |       | $                | 13,986     |                           | $          | 12,972                          |       | $                                  | 3,823      |             | $          | — |   | $ | 30,781 |   |

 

----

(1) As restated, see Note14 

 
| **Thirteen weeks ended April 29, 2006**                                                                    | ** ** | **Pep Boys  (1)** | ** ** | **Subsidiary  Guarantors (1)** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation  Elimination (1)** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------------------|------------|---------------------------------|------------|------------------------------------|------------|------------------|------------|
|  Cash Flows from Operating  Activities:                                                               |       |              |       |                           |       |                            |       |                               |       |             |       |
| Net (Loss)  Earnings (1)                                                                                   |       | $                 | (703       | )                              | $          | 22,090                          |       | $                                  | (66        | )                | $          | (22,024 | ) | $ | (703 | ) |
| Adjustments to  Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing  Operations (1) |       | (14,425           | )          | 14,030                         |       | 62                              |       | 22,024                             |       | 21,691           |       |
| Changes in  operating assets and liabilities                                                               |       | 1,301             |       | (477                           | )          | (4,873                          | )          | —                             |       | (4,049           | )          |
| Net cash (used  in) provided by continuing operations (1)                                                  |       | (13,827           | )          | 35,643                         |       | (4,877                          | )          | —                             |       | 16,939           |       |
| Net cash used in  discontinued operations                                                                  |       | (46               | )          | (119                           | )          | —                          |       | —                             |       | (165             | )          |
| Net Cash (Used  in) Provided by Operating Activities (1)                                                   |       | (13,873           | )          | 35,524                         |       | (4,877                          | )          | —                             |       | 16,774           |       |
|                                                                                                       |       |              |       |                           |       |                            |       |                               |       |             |       |
| Net Cash Used in  Investing Activities                                                                     |       | (373              | )          | (5,120                         | )          | —                          |       | —                             |       | (5,493           | )          |
|                                                                                                       |       |              |       |                           |       |                            |       |                               |       |             |       |
| Net Cash  Provided by (Used in) Financing Activities (1)                                                   |       | 15,237            |       | (29,875                        | )          | 6,774                           |       | —                             |       | (7,864           | )          |
|                                                                                                       |       |              |       |                           |       |                            |       |                               |       |             |       |
| Net Increase in  Cash and Cash Equivalents                                                                 |       | 991               |       | 529                            |       | 1,897                           |       | —                             |       | 3,417            |       |
| Cash and Cash  Equivalents at Beginning of Year                                                            |       | 12,019            |       | 6,953                          |       | 29,309                          |       | —                             |       | 48,281           |       |
| Cash and Cash  Equivalents at End of Year                                                                  |       | $                 | 13,010     |                           | $          | 7,482                           |       | $                                  | 31,206     |             | $          | — |   | $ | 51,698 |   |

 

----

(1) As restated, see Note 14 

 

15

----

 

NOTE 11. Contingencies

 

Duringthe fourth quarter of 2006 and first quarter of 2007, the Company was servedwith four separate lawsuits brought by former associates employed inCalifornia, each of which lawsuits purports to be a class action on behalf ofall current and former California store associates. One or more of the lawsuitsclaim that the plaintiff was not paid for (i) overtime, (ii) accrued vacationtime, (iii) all time worked (i.e. “off the clock” work) and/or (iv) late ormissed meal periods or rest breaks. The plaintiffs also allege that the Companyviolated certain record keeping requirements arising out of the foregoingalleged violations. The lawsuits (i) claim these alleged practices are unfairbusiness practices, (ii) request back pay, restitution, penalties, interest andattorney fees and (iii) request that the Company be enjoined from committingfurther unfair business practices. The Company believes that it has meritoriousdefenses to all of these claims and intends to defend these claims vigorously.The resolution of these claims cannot be predicted and there is no reasonable estimateof the amount or range of potential loss. Accordingly, the Company has notrecorded any provision for loss associated with these claims. However, anadverse determination of these claims could have a material effect on theCompany’s results of operations and cash flows in the period(s) during whichthey are determined.

 

TheCompany is also party to various actions and claims arising in the normalcourse of business. The Company believes that amounts accrued for awards orassessments in connection with such matters are adequate and that the ultimateresolution of these matters will not have a material adverse effect on theCompany’s financial position, results of operations or cash flows.

 

NOTE12. Other Comprehensive Income (Loss) and Stockholders’ Equity 

 

Followingare the components of comprehensive income (loss): 

 
| ** **                                       | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **May 5,**                    | ** ** | **April 29,** | ** ** |
| **(dollar amounts in thousands)** | ** ** | **2007**                           | ** ** | **2006** | ** ** |
|                                             |       |                               |       |   |   |
| Net earning (loss)                               |       | $                                  | 3,175      |   | $ | (703 | ) |
|                                             |       |                               |       |   |   |
| Other comprehensive  (loss) income, net of tax:  |       |                               |       |   |   |
|                                             |       |                               |       |   |   |
| Derivative financial  instrument adjustments     |       | (916                               | )          | 336 |   |
|                                             |       |                               |       |   |   |
| Comprehensive income  (loss)                     |       | $                                  | 2,259      |   | $ | (367 | ) |

 

Thecomponents of Accumulated Other Comprehensive Loss are:

 
| ** **                                              | ** ** | **May 5,** | ** ** | **February 3,** | ** ** |
|---------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| **(dollar amounts in thousands)**        | ** ** | **2007**        | ** ** | **2007**             | ** ** |
|                                                    |       |            |       |                 |       |
| Derivative financial  instrument adjustment, net of tax |       | $               | (916       | )                    | $          | — |   |
|                                                    |       |            |       |                 |       |
| Defined benefit plan  adjustment, net of tax            |       | (8,990          | )          | (9,380               | )          |
|                                                    |       |            |       |                 |       |
| Accumulated Other  Comprehensive Loss                   |       | $               | (9,906     | )                    | $          | (9,380 | ) |

 

 

OnSeptember 7, 2006, the Company renewed its share repurchase program and resetthe authority back to $100,000,000 for repurchases to be made from time to timein the open market or in privately negotiated transactions through September30, 2007. During the first quarter of fiscal 2007, the Company repurchased  2,702,460 shares of  Common Stock for $50,841,000. These shareswere placed into the Company’s treasury. The Company also disbursed $7,311,000for 494,800 shares of Common Stock repurchased during the fourth quarter of2006.

 

16

----

 

NOTE 13. Interest Rate Swap Agreements 

 

On June 3, 2003, the Company entered intoan interest rate swap which was designated as a cash flow hedge of the Company’sreal estate operating lease payments. During the fourth quarter 2006, theCompany removed the designation as a cash flow hedge and records the change infair value of the swap through the operating statement through its terminationdate on July 1, 2008. During the thirteen weeks ended May 5, 2007, an$829,000 expense was recorded in cost of merchandise sales for the change infair value of this swap. 

 

On November 2, 2006, the Company enteredinto an interest rate swap for a notional amount of $200,000,000. The Companyhas designated the swap a cash flow hedge on the first $200,000,000 of theCompany’s $320,000,000 senior secured notes. The interest rate swap convertsthe variable LIBOR portion of the interest payments to a fixed rate of 5.036%and terminates in October 2013. The Company, from inception through April 8,2007, reflected the change in fair value in Interest Expense. The Companydocumented that the swap met the requirements of SFAS No. 133 for hedgeaccounting on April 9, 2007, and prospectively recorded the effectiveportion of the change in fair value of the swap through Accumulated OtherComprehensive Loss. During the period from February 4, 2007 through April 8,2007, a $974,000 expense was recorded in interest expense for the change infair value of this swap. 

 

As of May 5, 2007and February 3, 2007, the fair values of the interest rate swaps were$2,254,000 and $5,522,000, respectively.  $1,465,000 ($916,000, net oftax) of the $3,268,000 decline in fair value was included in Accumulated OtherComprehensive Loss on the condensed consolidated balance sheet. 

 

NOTE14.  Restatement of Previously IssuedFinancial Statements 

 

Subsequentto the issuance of the Company’s condensed consolidated financial statementsfor the quarterly period ended May 5, 2007, the Company determined that certaininformation presented in the condensed consolidating balance sheet as of May 5,2007 and the related condensed consolidating statements of operations and cashflows for the thirteen weeks ended May 5, 2007 and April 29, 2006 presented inthe supplemental guarantor information note (Note 10) contained errors. The errors resulted from (i) the failure to correctly record consolidatingintercompany journal entries between Pep Boys and Subsidiary Guarantors (ii)the failure to correctly record certain reclassification entries tointercompany receivables and liabilities and (iii) the failure to consolidatePBY Corporation’s wholly owned subsidiary, The Pep Boys Manny Moe & Jack ofCalifornia in the Subsidiary Guarantors column.  The Company has correctedthe errors and restated the condensed consolidating balance sheet, as of May 5,2007, and the related condensed consolidating statements of operations and cashflows for the thirteen weeks ended May 5, 2007 and April 29, 2006 included inNote 10.  The correction of these errors did not affect the Company’spreviously reported interim or annual consolidated balance sheets, consolidatedstatements of operations, consolidated statements of stockholders’ equity orconsolidated statements of cash flows. 

 

Thefollowing table reflects the effects of the restatement on the condensedconsolidating financial statements as of May 5, 2007 and for the thirteen weeksended May 5, 2007 and April 29, 2006: 

 
| ** **                                       | ** ** | **Pep Boys**             | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|---------------------------------|------------|
| **(dollars in thousands)**                       | ** ** | **Previously  Reported** | ** ** | **Restated**              | ** ** | **Previously  Reported**        | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed  Consolidated Balance Sheet**        | ** ** | ** **               | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **As of  May 5, 2007**                           | ** ** | ** **               | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment in  subsidiaries                      |       | $                        | 1,558,353  |                      | $          | 1,598,807                       |       | $ | 1,384,492 |   | $ | — |   | $ | (2,942,845 | ) | $ | (1,598,807 | ) |
| Intercompany  receivable                         |       | —                   |       | —                    |       | 823,495                         |       | 769,697 |   | (901,586 | ) | (847,788 | ) |
| Total Assets                                     |       | 2,250,186                |       | 2,290,640                 |       | 3,214,605                       |       | 1,776,315 |   | (3,891,716 | ) | (2,493,880 | ) |
| Accrued expenses                                 |       | —                   |       | 53,794                    |       | 144,407                         |       | 69,006 |   | (42,700 | ) | (21,093 | ) |
| Total Current  Liabilities                       |       | 253,754                  |       | 307,548                   |       | 172,028                         |       | 96,627 |   | (48,468 | ) | (26,861 | ) |
| Intercompany  liabilities                        |       | 901,585                  |       | 847,788                   |       | —                          |       | — |   | (901,585 | ) | (847,788 | ) |
| Common stock                                     |       | —                   |       | —                    |       | 1,502                           |       | 2 |   | (1,602 | ) | (102 | ) |
| Additional  paid-in capital                      |       | 292,836                  |       | 292,837                   |       | 436,858                         |       | 386,857 |   | (440,757 | ) | (390,757 | ) |
| Retained  earnings                               |       | 422,301                  |       | 462,757                   |       | 2,507,532                       |       | 1,196,144 |   | (2,478,880 | ) | (1,207,948 | ) |
| Total  Stockholders’ Equity                 |       | 481,008                  |       | 521,465                   |       | 2,945,892                       |       | 1,583,003 |   | (2,921,239 | ) | (1,598,807 | ) |
| Total  Liabilities and Stockholders’ Equity |       | 2,250,186                |       | 2,290,640                 |       | 3,214,605                       |       | 1,776,315 |   | (3,891,716 | ) | (2,493,880 | ) |
|                                                  |            |                          |            |                           |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**17**

----

** **
| ** **                                                                                                  | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| **(dollars in thousands)**                                                                                  | ** ** | **Previously  Reported**  | ** ** | **Restated**                    | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed  Consolidating Statement of Operations**                                                        | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Thirteen  weeks ended May 5, 2007**                                                                       |       |                      |       |                            |       |   |   |   |   |
| Equity in  Earnings of Subsidiaries                                                                         |       | $                         | 18,849     |                            | $          | — |   | $ | (28,994 | ) | $ | (10,145 | ) |
| Net Earnings  (Loss) from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle |       | 27,442                    |       | 8,593                           |       | (28,994 | ) | (10,145 | ) |
| Net Earnings  (Loss)                                                                                        |       | 27,442                    |       | 8,593                           |       | (28,994 | ) | (10,145 | ) |
|                                                                                                        |       |                      |       |                            |       |   |   |   |   |
| **Thirteen  weeks ended April 29, 2006**                                                                    | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity in  Earnings of Subsidiaries                                                                         |       | $                         | 33,026     |                            | $          | — |   | $ | (55,050 | ) | $ | (22,024 | ) |
| Net Earnings  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle        |       | 55,214                    |       | 22,188                          |       | (55,050 | ) | (22,024 | ) |
| Net Earnings                                                                                                |       | 55,116                    |       | 22,090                          |       | (55,050 | ) | (22,024 | ) |

 
| ** **                                                                                                  | ** ** | **Pep Boys**             | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **                                                                                                  | ** ** | **Previously  Reported** | ** ** | **Restated**              | ** ** | **Previously  Reported**        | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed  Consolidating Statement of Cash Flows**                                                        | ** ** | ** **               | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Thirteen  weeks ended May 5, 2007**                                                                       | ** ** | ** **               | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Net Earnings                                                                                          |       | $                        | —     |                      | $          | —                          |       | $ | 27,442 |   | $ | 8,593 |   | $ | (28,994 | ) | $ | (10,145 | ) |
|  Adjustments to Reconcile Net Earnings to Net  Cash (Used in) Provided By Continuing Operations        |       | (1,962                   | )          | 3,760                     |       | (3,019                          | )          | 10,725 |   | 28,943 |   | 9,477 |   |
|  Changes in operating assets and liabilities                                                           |       | (71,707                  | )          | (59,878                   | )          | 37,342                          |       | 25,513 |   | — |   | — |   |
|  Net cash (used in) provided by continuing  operations                                                 |       | (70,494                  | )          | (52,943                   | )          | 61,765                          |       | 44,831 |   | — |   | (617 | ) |
|  Net Cash (Used in) Provided by Operating  Activities                                                  |       | (70,584                  | )          | (53,033                   | )          | 61,765                          |       | 44,831 |   | — |   | (617 | ) |
|  Net Cash Provided by (Used in) Financing  Activities                                                  |       | 72,747                   |       | 55,196                    |       | (46,887                         | )          | (29,953 | ) | — |   | 617 |   |
|                                                                                                        |       |                     |       |                      |       |                            |       |   |   |   |   |   |   |
| **Thirteen  weeks ended April 29, 2006**                                                                    | ** ** | ** **               | ** ** | ** **                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  Net (Loss) Earnings                                                                                   |       | $                        | —     |                      | $          | —                          |       | $ | 55,116 |   | $ | 22,090 |   | $ | (55,050 | ) | $ | (22,024 | ) |
|  Adjustments to Reconcile Net (Loss) Earnings  to Net Cash (Used in) Provided By Continuing Operations |       | (13,311                  | )          | (14,425                   | )          | (20,110                         | )          | 14,030 |   | 55,050 |   | 22,024 |   |
|  Net cash (used in) provided by continuing  operations                                                 |       | (12,713                  | )          | (13,827                   | )          | 34,529                          |       | 35,643 |   | — |   | — |   |
|  Net Cash (Used in) Provided by Operating  Activities                                                  |       | (12,759                  | )          | (13,873                   | )          | 34,410                          |       | 35,524 |   | — |   | — |   |
|  Net Cash Provided by (Used in) Financing  Activities                                                  |       | 14,123                   |       | 15,237                    |       | (28,761                         | )          | (29,875 | ) | — |   | — |   |

 

Additionally,the Company incorrectly presented borrowings and payments under its line ofcredit agreement and vendor financing trade payable program on a net basisrather than a gross basis in the financing activities section of the condensedconsolidated statements of cash flows for the thirteen weeks ended May 5, 2007and April 29, 2006. The corrections did not affect the Company’s previouslyreported net cash used in financing activities on the condensed consolidatedstatements of cash flows for the periods presented in this Quarterly Report onForm 10-Q/A. 

 

18

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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 Form10-Q/A and (ii) theconsolidated financial statements and the notes to such financial statementsincluded in Item 8, “Financial Statements and Supplementary Data” of our AnnualReport on Form10-K/A for the fiscal year ended February 3, 2007. 

 

OVERVIEW

 

ThePep Boys - Manny, Moe & Jack is a leader in the automotive aftermarketwith 593 stores located throughout 36 states and Puerto Rico. All of our storesfeature the nationally-recognized Pep Boys brand name, established through morethan 80 years of providing high-quality automotive merchandise and services,and are company-owned, ensuring chain-wide consistency for our customers. Weare the only national chain offering automotive service, accessories, tires andparts under one roof, positioning us to achieve our goal of becoming thecategory dominant one-stop shop for automotive maintenance products andservices.

 

Forthe thirteen weeks ended May 5, 2007, our comparable sales (sales generated bylocations in operation during the same period) decreased by 2.3% compared to adecrease of 0.9% for the thirteen weeks ended April 29, 2006. Thisdecrease in comparable sales was comprised of a 3.1% decrease in comparablemerchandise sales partially offset by a 1.5% increase in comparable servicerevenue. Comparable merchandise sales were reduced due to the elimination ofcommercial delivery in fifty-five locations and fewer promotional events.

 

Ournet earnings for the first quarter of 2007 were $3,175,000 or $3,878,000 higherthan the $703,000 loss incurred in the first quarter of 2006. This increase inprofitability was the result of a focus on more profitable sales (higher grossmargin) and expense control initiatives resulting in lower Selling, General andAdministrative expenses.

 

Thefollowing discussion explains the material changes in our results of operationsfor the thirteen weeks ended May 5, 2007 and the significant developmentsaffecting our financial condition since February 3, 2007. We strongly recommendthat you read the audited consolidated financial statements and footnotes andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K/A for the fiscal yearended February 3, 2007. 

 

LIQUIDITYAND CAPITAL RESOURCES — May 5, 2007

 

Ourcash requirements arise principally from the purchase of inventory, capitalexpenditures related to existing stores, offices and warehouses and informationsystems. The primary capital expenditures for the thirteen weeks ended May 5,2007 were primarily for store maintenance and improvements. During the thirteenweeks ended May 5, 2007, we invested approximately $10,453,000 in property andequipment versus $6,300,000 invested in the first quarter of fiscal 2006. We estimatethat capital expenditures related to existing stores, warehouses and officesduring fiscal 2007 will be approximately $45,000,000 and $55,000,000, relatedprimarily to the redesign of our existing stores.

 

Weanticipate that our net cash provided by operating activities and our existingrevolving credit facility will exceed our principal cash requirements forcapital expenditures and inventory purchases in fiscal 2007. We have nomaterial debt maturities due within the next twelve months.

 

OnSeptember 7, 2006, the Company renewed its share repurchase program and resetthe authority back to $100,000,000 for repurchases to be made from time to timein the open market or in privately negotiated transactions through September30, 2007. During the first quarter of fiscal 2007, the Company repurchased  2,702,460 shares of Common Stock for$50,841,000. These shares were placed into the Company’s treasury. The Companyalso disbursed $7,311,000 for 494,800 shares of Common Stock repurchased duringthe fourth quarter of 2006.

 

WorkingCapital increased from $163,960,000 at February 3, 2007 to $226,416,000 at May5, 2007. At May 5, 2007, we had stockholders’ equity of $521,465,000 andlong-term debt, net of current maturities, of $623,761,000. Our long-term debtwas approximately 55% of our total capitalization at May 5, 2007 and 49% atFebruary 3, 2007. As of May 5, 2007, we had further undrawn availability underour revolving credit facility totaling $107,000,000.

 

19

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CONTRACTUALOBLIGATIONS

 

The following chartsrepresent our total contractual obligations and commercial commitments as ofMay 5, 2007:

 
| **Contractual Obligations (2)(3)**                | ** ** | ** ** | ** ** | **Due in less** | ** ** | **Due in**         | ** ** | **Due in**         | ** ** | **Due after** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|
| **(dollar amounts in thousands)**            | ** ** | **Total**  | ** ** | **than 1 year** | ** ** | **1–3 years** | ** ** | **3–5 years** | ** ** | **5 years**   | ** ** |
| Long-term debt (1)                                          |       | $          | 626,632    |                      | $          | 3,219                   |       | $                       | 113,245    |               | $          | 6,400 |   | $ | 503,768 |   |
| Operating leases                                            |       | 457,563    |       | 62,936                    |       | 97,773                  |       | 83,961                  |       | 212,893            |       |
| Expected scheduled  interest payments on all long-term debt |       | 294,170    |       | 46,975                    |       | 91,774                  |       | 74,623                  |       | 80,798             |       |
| Capital leases                                              |       | 603        |       | 255                       |       | 348                     |       | —                  |       | —             |       |
| Total cash obligations                                      |       | $          | 1,378,968  |                      | $          | 113,385                 |       | $                       | 303,140    |               | $          | 164,984 |   | $ | 797,459 |   |

 

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(1) Long-term debtincludes current maturities.

(2) The contractualobligations table excludes our defined benefit pension obligation. Future plancontributions are dependent upon actual plan asset returns and interest rates.For the thirteen weeks ended May 5, 2007, the Company contributed $200,000 ofan anticipated $1,000,000 contribution during fiscal 2007, to its non-qualifieddefined benefit pension plan. 

(3) The contractualobligations table excludes the Company’s FIN 48 liabilities of $7,126,000because the Company cannot make a reliable estimate of the timing of cashpayments.

 
| **Commercial Commitments**                  | ** ** | ** ** | ** ** | **Due in less** | ** ** | **Due in**         | ** ** | **Due in**         | ** ** | **Due after** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **Total**  | ** ** | **than 1 year** | ** ** | **1–3 years** | ** ** | **3–5 years** | ** ** | **5 years**   | ** ** |
| Import letters of  credit                        |       | $          | 511        |                      | $          | 511                     |       | $                       | —     |               | $          | — |   | $ | — |   |
| Standby letters of  credit                       |       | 55,859     |       | 42,784                    |       | 13,075                  |       | —                  |       | —             |       |
| Surety bonds                                     |       | 10,497     |       | 5,810                     |       | 4,687                   |       | —                  |       | —             |       |
| Purchase obligations  (1) (2)                    |       | 14,838     |       | 12,463                    |       | 1,900                   |       | 475                     |       | —             |       |
| Total commercial commitments                     |       | $          | 81,705     |                      | $          | 61,568                  |       | $                       | 19,662     |               | $          | 475 |   | $ | — |   |

 

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(1)                                  Ouropen purchase orders are based on current inventory or operational needs andare fulfilled by our vendors within short periods of time. We currently do nothave minimum purchase commitments under our vendor supply agreements andgenerally our open purchase orders (orders that have not been shipped) are notbinding agreements. Those purchase obligations that are in transit from ourvendors at May 5, 2007 are considered to be a contractual obligation.

 

(2)                                  Inthe first quarter of fiscal 2005, we entered into a contractual commitment topurchase approximately $4,800,000 of products over a six-year period. Thecommitment for years two through five is approximately $950,000 per year, whilethe final year’s commitment is approximately half that amount. Following yeartwo, we are obligated to pay the vendor a per unit fee if there is a shortfallbetween our cumulative purchases during the two year period and the minimumpurchase requirement. For years three through six, we are obligated to pay thevendor a per unit fee for any annual shortfall. The maximum annual obligationunder any shortfall is approximately $950,000. At May 5, 2007, we expect tomeet the cumulative minimum purchase requirements under this contract. 

 

DISCONTINUEDOPERATIONS

 

In accordance with SFASNo. 144, our discontinued operations continues to reflect the costsassociated with the stores remaining from the 33 stores closed on July 31,2003 as part of our corporate restructuring. The remaining reserve balance isnot material.

During the secondquarter of fiscal 2006, we sold a store that we have leased back and willcontinue to operate. Due to our significant continuing involvement with thisstore following the sale, we reclassified back into continuing operations, forall periods presented, this store’s revenues and costs that had been previouslyclassified into discontinued operations during the third quarter of fiscal2005, in accordance with SFAS No. 144 and EITF No. 03-13.

 

20

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RESULTSOF OPERATIONS

 

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

 
| ** **                                                                                                               | ** ** | ** **                                      | ** ** | ** **                   | ** ** | **Percentage**                | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                               | ** ** | **Percentage of Total Revenues** | ** ** | **Change**                   | ** ** |
| ** **                                                                                                               | ** ** | **May 5, 2007**                       | ** ** | **April 29, 2006** | ** ** | **Fiscal 2007 vs.** | ** ** |
| **Thirteen weeks ended**                                                                                       | ** ** | **(Fiscal 2007)**                          | ** ** | **(Fiscal 2006)**       | ** ** | **Fiscal 2006**          | ** ** |
| Merchandise Sales                                                                                                        |       | 81.5                                            | %          | 82.2                         | %          | (2.7                          | )%         |
| Service Revenue (1)                                                                                                      |       | 18.5                                            |       | 17.8                         |       | 1.7                           |       |
| Total Revenues                                                                                                           |       | 100.0                                           |       | 100.0                        |       | (1.9                          | )          |
| Costs of Merchandise  Sales (2)                                                                                          |       | 70.9                                            | (3)        | 72.1                         | (3)        | 4.3                           |       |
| Costs of Service  Revenue (2)                                                                                            |       | 88.0                                            | (3)        | 88.8                         | (3)        | 0.8                           |       |
| Total Costs of Revenues                                                                                                  |       | 74.0                                            |       | 75.0                         |       | (3.2                          | )          |
| Gross Profit from  Merchandise Sales                                                                                     |       | 29.1                                            | (3)        | 27.9                         | (3)        | 1.5                           |       |
| Gross Profit from  Service Revenue                                                                                       |       | 12.0                                            | (3)        | 11.2                         | (3)        | 8.6                           |       |
| Total Gross Profit                                                                                                       |       | 26.0                                            |       | 25.0                         |       | 2.1                           |       |
| Selling, General and  Administrative Expenses                                                                            |       | 23.5                                            |       | 23.6                         |       | (2.4                          | )          |
| Net Gain (Loss) from  Dispositions of Assets                                                                             |       | 0.4                                             |       | (0.1                         | )          | 668.4                         |       |
| Operating Profit                                                                                                         |       | 2.9                                             |       | 1.3                          |       | 122.0                         |       |
| Non-operating Income                                                                                                     |       | 0.3                                             |       | 0.4                          |       | (15.7                         | )          |
| Interest Expense                                                                                                         |       | 2.3                                             |       | 1.9                          |       | 22.4                          |       |
| Earnings (Loss) from  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       | 1.0                                             |       | (0.2                         | )          | 737.3                         |       |
| Income Tax (Benefit)  Expense                                                                                            |       | 39.6                                            | (4)        | (3.7                         | )(4)       | 6,700.0                       |       |
| Net Earnings (Loss)  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | 0.6                                             |       | (0.2                         | )          | 471.4                         |       |
| Discontinued  Operations, Net of Tax                                                                                     |       | —                                          |       | —                       |       | 56.3                          |       |
| Cumulative Effect of  Change in Accounting Principle, Net of Tax                                                         |       | —                                          |       | —                       |       | (100.0                        | )          |
| Net Earnings (Loss)                                                                                                      |       | 0.6                                             |       | (0.2                         | )          | 551.6                         |       |

 

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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 (Loss) from Continuing Operations Before Income Taxes and  Cumulative Effect of Change in Accounting Principle.                                                                                                                                                                                                                                              |

 

ThirteenWeeks Ended May 5, 2007 vs. Thirteen Weeks Ended April 29, 2006

 

Totalrevenues for the first quarter decreased 1.9% and comparable store revenuesdecreased 2.3% primarily due to reduced retail and commercial merchandisesales. Comparable merchandise sales decreased 3.1%, while comparable servicerevenue increased 1.5%. Merchandise sales were affected by the removal ofcommercial delivery from fifty-five stores and fewer promotional sales.

 

Grossprofit from merchandise sales increased as a percentage of merchandise sales,to 29.1% in fiscal 2007 from 27.9% in fiscal 2006. Gross profit frommerchandise sales increased 1.5% or $1,958,000 from the comparative period inthe prior year. Our product margin improved due to improved acquisition costs,reduced inventory shrinkage and a $1,300,000 gain on the settlement of aninventory insurance claim resulting from Hurricane Katrina. In addition to ourimproving product margin, our merchandise margin was favorably impacted byreduced warehousing and distribution costs which was offset slightly byincreased rental expense within our occupancy cost. 

 

21

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Gross profit fromservice revenue increased, as a percentage of service revenue to 12.0% infiscal 2007 from 11.2% in fiscal 2006. Gross profit from service revenueincreased 8.6% or $956,000 from the comparative period in the prior year. Thisincrease, as a percentage of service revenue, was due to reduced depreciationand employee benefit expenses. 

 

Selling, general andadministrative expenses, as a percentage of total revenues, were 23.5% and23.6% in fiscal 2007 and fiscal 2006, respectively. Selling, general andadministrative expenses decreased 2.4% or $3,149,000 from the comparativeperiod in the prior year. Fiscal year 2007 reflects a $3,900,000 CEO transitioncharge and fiscal year 2006 reflects a favorable $2,300,000 insurancesettlement. Also contributing to the decrease in selling, general andadministrative expense was lower payroll and media expenses. 

 

Net gain (loss) fromdispositions of assets favorably increased from the prior year, principallyfrom a $2,400,000 gain, recorded in the first quarter of fiscal 2007, for thesettlement of an insurance claim relating to stores impaired during HurricaneKatrina in 2005.

 

Interest expenseincreased $2,319,000 primarily due to higher incurred interest rates and a $974,000expense for changes in the fair value of an interest rate swap agreement thatexchanges floating rate payments for a fixed rate on a $200,000,000 notionalamount. On April 9, 2007, the Company documented that the swap qualifies forhedge accounting treatment and prospectively recorded the effective portion ofthe change in fair value through Accumulated Other Comprehensive Loss. 

 

Net earnings of  $3,175,000 for the first quarter of fiscal2007, improved $3,878,000 from the prior fiscal year principally from improvedmargins and lower selling, general and administrative expenses which werepartially offset by higher interest expense and income tax expense.

 

INDUSTRYCOMPARISON

 

We operate in the U.S.automotive aftermarket, which has two general competitive arenas: Do-It-For-Me(“DIFM”) (service labor, installed merchandise and tires) market and theDo-It-Yourself (“DIY”) (retail merchandise) market. Generally, the specializedautomotive retailers focus on either the “DIY” or “DIFM” areas of the business.We believe that our operation in both the “DIY” and “DIFM” areas of thebusiness positively differentiates us from most of our competitors. Although wemanage our store performance at a store level in aggregation, we believe thatthe following presentation shows a representative comparison againstcompetitors within the two sales arenas. We compete in the “DIY” area of thebusiness through our retail sales floor and commercial sales business (RetailSales). Our Service Center Business (labor and installed merchandise and tires)competes in the “DIFM” area of the industry.

The following tablepresents the revenues and gross profit for each area of the business.

 
| ** **                                       | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **May 5,**                    | ** ** | **April 29,** | ** ** |
| **(dollar amounts in thousands)** | ** ** | **2007**                           | ** ** | **2006** | ** ** |
|                                             |       |                               |       |   |   |
| Retail Sales (1)                                 |       | $                                  | 314,704    |   | $ | 327,957 |   |
| Service Center  Revenue (2)                      |       | 231,309                            |       | 228,644 |   |
| Total Revenues                                   |       | $                                  | 546,013    |   | $ | 556,601 |   |
|                                             |       |                               |       |   |   |
| Gross Profit  from Retail Sales (3)              |       | $                                  | 89,743     |   | $ | 89,560 |   |
| Gross Profit  from Service Center Revenue (3)    |       | 52,049                             |       | 49,318 |   |
| Total Gross Profit                               |       | $                                  | 141,792    |   | $ | 138,878 |   |

 

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(1)                                  Excludesrevenues from installed products.

 

(2)                                  Includesrevenues from installed products.

 

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

 

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NEWACCOUNTING STANDARDS TO BE ADOPTED

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (SFAS No. 157). SFAS No. 157 defines the term fairvalue, establishes a framework for measuring it within generally acceptedaccounting principles and expands disclosures about its measurements. SFASNo. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactof SFAS No. 157 on our consolidated financial statements. 

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities.” SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. SFAS No. 159 is effective for fiscal years beginningafter November 15, 2007. We are currently evaluating the impact of SFAS No. 159on our consolidated financial statements. 

 

InMarch 2007, the Emerging Issues Task Force (“EITF”) reached a consensus onissue number 06-10, “Accounting for Deferred Compensation and PostretirementBenefit Aspects of Collateral Assignment Split-Dollar Life InsuranceArrangements”, (“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 be recordedin accordance with either SFAS No. 106, “Employers’ Accounting forPostretirement 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 should recognizeand measure the asset in a collateral assignment split-dollar life insurancecontract. EITF 06-10 is effective for fiscal years beginning afterDecember 15, 2007, though early adoption is permitted. We are currentlyevaluating the impact of EITF 06-10 on our consolidated financial statements. 

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported 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 and litigation.We base our estimates and judgments on historical experience and on variousother factors that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. For a detailed discussion of significant accounting policies thatmay involve a higher degree of judgment or complexity, refer to “CriticalAccounting Policies and Estimates” as reported in our Form 10-K/A for theyear ended February 3, 2007, which disclosures are hereby incorporated byreference. 

 

FORWARD-LOOKINGSTATEMENTS

 

Certain statementscontained herein constitute “forward-looking statements” within the meaning ofThe Private Securities Litigation Reform Act of 1995. The words “guidance,” “expect,”“anticipate,” “estimates,” “forecasts” and similar expressions are intended toidentify such forward-looking statements. Forward-looking statements includemanagement’s expectations regarding future financial performance, automotiveaftermarket trends, levels of competition, business development activities,future capital expenditures, financing sources and availability and the effectsof regulation and litigation. Although we believe that the expectationsreflected in such forward-looking statements are based on reasonableassumptions, we can give no assurance that our expectations will be achieved.Our actual results may differ materially from the results discussed in theforward-looking statements due to factors beyond our control, including thestrength of the national and regional economies, retail and commercialconsumers’ ability to spend, the health of the various sectors of theautomotive aftermarket, the weather in geographical regions with a highconcentration of our stores, competitive pricing, the location and number ofcompetitors’ stores, product and labor costs and the additional factors describedin our filings with the Securities and Exchange Commission (SEC). We assume noobligation to update or supplement forward-looking statements that becomeuntrue because of subsequent events.

 

23

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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 May 5, 2007, the Company had borrowings of $107,200,000under this facility. Additionally, the Company has a $320,000,000 SeniorSecured Term Loan facility that bears interest at LIBOR plus 2.0%, andapproximately $117,066,000 of real estate operating leases which vary based onchanges in LIBOR.

 

OnJune 3, 2003, we entered into an interest rate swap which was designated as acash flow hedge of the company’s real estate operating lease payments. Duringthe fourth quarter 2006, we removed the designation as a cash flow hedge andrecord the change in fair value through the operating statement until itstermination date on July 1, 2008. During the thirteen weeks ended May 5,2007, a $829,000 expense was recorded in cost of merchandise sales for thechange in fair value of this swap. 

 

OnNovember 2, 2006, the Company entered into an interest rate swap for a notionalamount of $200,000,000. The Company has designated the swap a cash flow hedgeon the first $200,000,000 of the Company’s $320,000,000 senior secured notes.The interest rate swap converts the variable LIBOR portion of the interestpayments to a fixed rate of 5.036% and terminates in October 2013. The Company,from inception through April 8, 2007, reflected the change in fair value inInterest Expense. The Company documented that the swap met the requirements ofSFAS No. 133 for hedge accounting on April 9, 2007, and prospectively recordedthe effective portion of the change in fair value through Accumulated OtherComprehensive Loss. During the period from February 4, 2007 through April 8,2007, a $974,000 expense was recorded in interest expense for the change infair value of this swap.

 

 As of May 5, 2007 and February 3, 2007, thefair value of the interest rate swaps were $2,254,000 and $5,522,000. $1,465,000of the $3,268,000 decline in fair value was included in Accumulated OtherComprehensive Loss on the condensed consolidated 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’schief executive officer and chief financial officer, re-evaluated theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report. Based on that re-evaluation, thechief executive officer and chief financial officer concluded that ourdisclosure controls and procedures as of the end of the period covered bythis report were not functioning effectively to provide reasonable assurancethat the information required to be disclosed by the Company in reports filedunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms, solely due to the fact that there was a material weakness in ourinternal control over financial reporting (which is a subset of disclosure controlsand procedures) as described below. 

 

CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

During the fiscal quartercovered by this report, a change in the Company’s internal control overfinancial reporting occurred that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting in that the Company determined it had a material weakness in its internalcontrol over financial reporting related to preparation and review of theCompany’s supplemental guarantor information note and condensed consolidatedstatements of cash flows presentation which resulted in the errors described inNote 14. 

 

Otherthan described above, no change in the Company’s internal control overfinancial reporting occurred during the fiscal quarter covered by this reportthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting. 

 

Item 5. Other Information

 

None.

 

24

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PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Duringthe fourth quarter of 2006 and the first quarter of 2007, the Company hasserved with four separate lawsuits brought by former associates employed inCalifornia, each of which lawsuits purports to be a class action on behalf ofall current and former California store associates. One or more of the lawsuitsclaim that the plaintiff was not paid for (i) overtime, (ii) accrued vacationtime, (iii) all time worked (i.e. “off the clock” work) and/or (iv) late ormissed meal periods or rest breaks. The plaintiffs also allege that the Companyviolated certain record keeping requirements arising out of the foregoingalleged violations. The lawsuits (i) claim these alleged practices are unfairbusiness practices, (ii) request back pay, restitution, penalties, interest andattorney fees and (iii) request that the Company be enjoined from committingfurther unfair business practices. The Company believes that it has meritoriousdefenses to all of these claims and intends to defend these claims vigorously. However,an adverse determination of these claims could have a material effect on theCompany’s results of operations in the period(s) during which they aredetermined.

 

TheCompany is also party to various actions and claims arising in the normalcourse of business. The Company believes that amounts accrued for awards orassessments in connection with such matters are adequate and that the ultimateresolution of these matters will not have a material adverse effect on theCompany’s financial position, results of operations or cash flows.

 

Item 1A.  Risk Factors

 

Therehave been no changes to the risks described in the Company’s Annual Report onForm 10-K/A for the fiscal year ended February 3, 2007.

 

Item 2.  Unregistered Sales of EquitySecurities and Use of Proceeds

 

CompanyPurchases of Equity Securities

 

OnSeptember 7, 2006, the Company renewed its share repurchase program and resetthe authority back to $100,000,000 for repurchases to be made from time to timein the open market or in privately negotiated transactions through September30, 2007. 

 
| **Fiscal Period**          | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share (1)** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Plans or  Programs (2)** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| February 4 - March 3,  2007 (3) |       | 544,900                                      |       | $                                                     | 14.80      |                                                                                                                             | $          | 544,900                                                                                                                                                     |       | $ | 91,950,000 |   |
| March 4 - April 7, 2007         |       | 1,378,675                                    |       | $                                                     | 18.38      |                                                                                                                             | 1,378,675  |                                                                                                                                                        | $          | 66,648,000 |   |
| April 8 - May 5, 2007           |       | 1,273,685                                    |       | $                                                     | 19.43      |                                                                                                                             | 1,273,685  |                                                                                                                                                        | $          | 41,945,000 |   |
| Total                           |       | 3,197,260                                    |       | $                                                     | 18.19      |                                                                                                                             | $          | 3,197,260                                                                                                                                                   |       |   |   |

 

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(1)All repurchases referenced in this table were made on the open market atprevailing market rates plus related expenses under our stock repurchaseprogram.

 

(2)Excludes expenses.

 

(3)Includes 494,800 shares, with an average price paid of $14.77 or $7,310,565,purchased in fiscal year 2006 and settled in this period.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Submission of Matters to a Vote ofSecurity Holders

 

None.

 

Item 5.  Other Information

 

None.

 

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Item 6.  Exhibits and Reports onForm 8-K

 
| **(a)  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 |

 

----

**- Filed herewith

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Amendment No. 1 to the Quarterly Report on Form 10-Q/A to besigned on its behalf by the undersigned thereunto duly authorized. 

 
|                   | THE PEP BOYS - MANNY, MOE & JACK |   |   |
|------------------------|-------------------------------------------|--------|--------|
|                   | (Registrant)                              |
|                   |                                      |
| Date: November 2, 2007 |                                      | by:    |   | /s/ Harry F. Yanowitz |
|                   |                                      |   |   | Harry F. Yanowitz |
|                   |                                      |   |   | Senior Vice President and |
|                   |                                      |   |   | Chief Financial Officer |
|                   |                                      |   |   |   |
|                        |                                           |        |        |  |  |  |

 

27

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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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**  Filedherewith

 

28

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