Table of Contents

 

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

| **(Mark One)** | ** ** | ** **                                                                                              |
|----------------|------------|---------------------------------------------------------------------------------------------------------|
|           |       |                                                                                                    |
| **x**          | ** ** | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|           |       |                                                                                                    |
| ** **     | ** ** | **For the quarterly period ended  August 2, 2008**                                                 |
| ** **     | ** ** | ** **                                                                                              |
| ** **     | ** ** | **OR**                                                                                                  |
|           |       |                                                                                                    |
| **o**          | ** ** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from            to           **

 

**CommissionFile No. 1-3381**

 

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

(Exact name of registrant as specified inits charter)

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

 

**215-430-9000**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

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

 

Asof August 29, 2008 there were 51,838,961 shares of the registrant’s CommonStock outstanding.

 

 

 

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Tableof Contents

 

Index

 
| ** **                          | ** **                                                                                                                                                           | **Page** |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION |                                                                                                                                                                 |
|                                |                                                                                                                                                                 |     |
| Item 1.                             | Condensed Consolidated Financial Statements (Unaudited)                                                                                                              |     |
|                                |                                                                                                                                                                 |     |
|                                | Condensed Consolidated Balance Sheets - August 2, 2008 and  February 2, 2008                                                                               | 3        |
|                                |                                                                                                                                                                 |     |
|                                | Condensed Consolidated Statements of Operations and Changes in  Retained Earnings - Thirteen and Twenty-six Weeks Ended August 2, 2008  and August 4, 2007 | 4        |
|                                |                                                                                                                                                                 |     |
|                                | Condensed Consolidated Statements of Cash Flows - Twenty-six Weeks  Ended August 2, 2008 and August 4, 2007                                                | 5        |
|                                |                                                                                                                                                                 |     |
|                                | Notes to Condensed Consolidated Financial  Statements                                                                                                                | 6 - 20   |
|                                |                                                                                                                                                                 |     |
| Item 2.                             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                          | 21       |
|                                |                                                                                                                                                                 |     |
| Item 3.                             | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                          | 27       |
|                                |                                                                                                                                                                 |     |
| Item 4.                             | Controls and Procedures                                                                                                                                              | 27       |
|                                |                                                                                                                                                                 |     |
| Item 5.                             | Other Information                                                                                                                                                    | 27       |
|                                |                                                                                                                                                                 |     |
| PART II - OTHER INFORMATION    | 28                                                                                                                                                                   |
|                                |                                                                                                                                                                 |     |
| Item 1.                             | Legal Proceedings                                                                                                                                                    | 28       |
|                                |                                                                                                                                                                 |     |
| Item 1A.                            | Risk Factors                                                                                                                                                         | 28       |
|                                |                                                                                                                                                                 |     |
| Item 2.                             | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                         | 28       |
|                                |                                                                                                                                                                 |     |
| Item 3.                             | Defaults Upon Senior Securities                                                                                                                                      | 28       |
|                                |                                                                                                                                                                 |     |
| Item 4.                             | Submission of Matters to a Vote of Security  Holders                                                                                                                 | 28       |
|                                |                                                                                                                                                                 |     |
| Item 5.                             | Other Information                                                                                                                                                    | 29       |
|                                |                                                                                                                                                                 |     |
| Item 6.                             | Exhibits                                                                                                                                                             | 30       |
|                                |                                                                                                                                                                 |     |
| SIGNATURES                          | 31                                                                                                                                                                   |
|                                |                                                                                                                                                                 |     |
| INDEX TO EXHIBITS                   | 32                                                                                                                                                                   |

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated FinancialStatements (Unaudited)

 

THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(dollar amounts in thousands, exceptshare data)

UNAUDITED

 
| ** **                                                                           | ** ** | **August 2,  2008** | ** ** | **February 2,  2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                           |       |                     |       |                       |       |
| Current Assets:                                                                      |       |                     |       |                       |       |
| Cash and cash equivalents                                                            |       | $                        | 56,215     |                       | $          | 20,926 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $1,805 and $1,937 |       | 28,556                   |       | 29,450                     |       |
| Merchandise inventories                                                              |       | 560,209                  |       | 561,152                    |       |
| Prepaid expenses                                                                     |       | 36,245                   |       | 43,842                     |       |
| Other                                                                                |       | 47,907                   |       | 77,469                     |       |
| Assets held for disposal                                                             |       | 20,695                   |       | 16,918                     |       |
| Total Current Assets                                                                 |       | 749,827                  |       | 749,757                    |       |
|                                                                                 |       |                     |       |                       |       |
| Property and Equipment - net                                                         |       | 759,408                  |       | 780,779                    |       |
| Deferred income taxes                                                                |       | 41,328                   |       | 20,775                     |       |
| Other                                                                                |       | 30,011                   |       | 32,609                     |       |
| Total Assets                                                                         |       | $                        | 1,580,574  |                       | $          | 1,583,920 |   |
|                                                                                 |       |                     |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                       |       |                     |       |                       |       |
| Current Liabilities:                                                                 |       |                     |       |                       |       |
| Accounts payable                                                                     |       | $                        | 228,723    |                       | $          | 245,423 |   |
| Trade payable program liability                                                      |       | 28,212                   |       | 14,254                     |       |
| Accrued expenses                                                                     |       | 257,547                  |       | 292,623                    |       |
| Deferred income taxes                                                                |       | 9,453                    |       | —                     |       |
| Current maturities of long-term debt and  obligations under capital lease            |       | 2,304                    |       | 2,114                      |       |
| Total Current Liabilities                                                            |       | 526,239                  |       | 554,414                    |       |
|                                                                                 |       |                     |       |                       |       |
| Long-term debt and obligations under  capital lease, less current maturities         |       | 335,576                  |       | 400,016                    |       |
| Other long-term liabilities                                                          |       | 66,838                   |       | 72,183                     |       |
| Deferred gain from asset sales                                                       |       | 173,732                  |       | 86,595                     |       |
| Commitments and Contingencies                                                        |       |                     |       |                       |       |
| Stockholders’ Equity:                                                           |       |                     |       |                       |       |
| Common Stock, par value $1 per share:                                                |       |                     |       |                       |       |
| Authorized 500,000,000 shares; Issued  68,557,041 shares                             |       | 68,557                   |       | 68,557                     |       |
| Additional paid-in capital                                                           |       | 297,125                  |       | 296,074                    |       |
| Retained earnings                                                                    |       | 408,351                  |       | 406,819                    |       |
| Accumulated other comprehensive loss                                                 |       | (10,636                  | )          | (14,183                    | )          |
| Less cost of shares in treasury —  14,525,633 shares and 14,609,094 shares      |       | 225,944                  |       | 227,291                    |       |
| Less cost of shares in benefits trust -  2,195,270 shares                            |       | 59,264                   |       | 59,264                     |       |
| Total Stockholders’ Equity                                                      |       | 478,189                  |       | 470,712                    |       |
| Total Liabilities and Stockholders’ Equity                                      |       | $                        | 1,580,574  |                       | $          | 1,583,920 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONSAND CHANGES IN RETAINED EARNINGS

(dollar amounts in thousands, except pershare amounts)

UNAUDITED

 
| ** **                                                           | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                                           | ** ** | **August 2,  2008**           | ** ** | **August 4,  2007**             | ** ** | **August 2,  2008** | ** ** | **August 4,  2007** | ** ** |
| Merchandise Sales                                                    |       | $                                  | 408,077    |                                 | $          | 452,999 |   | $ | 811,411 |   | $ | 892,793 |   |
| Service Revenue                                                      |       | 91,966                             |       | 99,093                               |       | 186,675 |   | 198,882 |   |
| Total Revenues                                                       |       | 500,043                            |       | 552,092                              |       | 998,086 |   | 1,091,675 |   |
| Costs of Merchandise Sales                                           |       | 284,416                            |       | 315,895                              |       | 570,339 |   | 627,425 |   |
| Costs of Service Revenue                                             |       | 85,193                             |       | 87,481                               |       | 169,347 |   | 174,945 |   |
| Total Costs of Revenues                                              |       | 369,609                            |       | 403,376                              |       | 739,686 |   | 802,370 |   |
| Gross Profit from Merchandise Sales                                  |       | 123,661                            |       | 137,104                              |       | 241,072 |   | 265,368 |   |
| Gross Profit from Service Revenue                                    |       | 6,773                              |       | 11,612                               |       | 17,328 |   | 23,937 |   |
| Total Gross Profit                                                   |       | 130,434                            |       | 148,716                              |       | 258,400 |   | 289,305 |   |
| Selling, General and Administrative  Expenses                        |       | 122,603                            |       | 131,841                              |       | 241,618 |   | 258,951 |   |
| Net Gain (Loss) from Dispositions of Assets                          |       | 4,077                              |       | (15                                  | )          | 9,608 |   | 2,344 |   |
| Operating Profit                                                     |       | 11,908                             |       | 16,860                               |       | 26,390 |   | 32,698 |   |
| Non-operating Income                                                 |       | 1,162                              |       | 1,766                                |       | 1,492 |   | 3,671 |   |
| Interest Expense                                                     |       | 6,452                              |       | 12,331                               |       | 11,879 |   | 24,987 |   |
| Earnings From Continuing Operations Before  Income Taxes             |       | 6,618                              |       | 6,295                                |       | 16,003 |   | 11,382 |   |
| Income Tax Expense                                                   |       | 866                                |       | 2,348                                |       | 4,960 |   | 4,384 |   |
| Net Earnings From Continuing Operations                              |       | 5,752                              |       | 3,947                                |       | 11,043 |   | 6,998 |   |
| Discontinued Operations, Net of Tax                                  |       | (304                               | )          | 232                                  |       | (923 | ) | 356 |   |
| Net Earnings                                                         |       | 5,448                              |       | 4,179                                |       | 10,120 |   | 7,354 |   |
|                                                                 |       |                               |       |                                 |       |   |   |   |   |
| Retained Earnings, beginning of period                               |       | 406,819                            |       | 462,757                              |       | 406,819 |   | 463,797 |   |
| Cumulative effect adjustment for adoption  of EITF 06-10, net of tax |       | —                             |       | —                               |       | (1,165 | ) | — |   |
| Cumulative effect adjustment for adoption  of FIN 48                 |       | —                             |       | —                               |       | — |   | (155 | ) |
| Cash Dividends                                                       |       | (3,891                             | )          | (3,539                               | )          | (7,386 | ) | (7,120 | ) |
| Effect of Stock Options                                              |       | (25                                | )          | (782                                 | )          | (37 | ) | (1,261 | ) |
| Retained Earnings, end of period                                     |       | $                                  | 408,351    |                                 | $          | 462,615 |   | $ | 408,351 |   | $ | 462,615 |   |
|                                                                 |       |                               |       |                                 |       |   |   |   |   |
| Basic and Diluted Earnings Per Share:                                |       |                               |       |                                 |       |   |   |   |   |
|                                                                 |       |                               |       |                                 |       |   |   |   |   |
| Net Earnings from Continuing Operations                              |       | $                                  | 0.11       |                                 | $          | 0.07 |   | $ | 0.21 |   | $ | 0.13 |   |
| Discontinued Operations, Net of Tax                                  |       | (0.01                              | )          | 0.01                                 |       | (0.02 | ) | 0.01 |   |
| Earnings Per Share                                                   |       | $                                  | 0.10       |                                 | $          | 0.08 |   | $ | 0.19 |   | $ | 0.14 |   |
|                                                                 |       |                               |       |                                 |       |   |   |   |   |
| Cash Dividends Per Share                                             |       | $                                  | 0.0675     |                                 | $          | 0.0675 |   | $ | 0.1350 |   | $ | 0.1350 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS -MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amountsin thousands)

UNAUDITED

 
| **Twenty-six weeks ended**                                                  | ** ** | **August 2,  2008** | ** ** | **August 4,  2007** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                            | ** ** | ** **               | ** ** | ** **               | ** ** |
| Cash Flows from Operating Activities:                                                 |       |                     |       |                     |       |
| Net Earnings                                                                          |       | $                        | 10,120     |                     | $          | 7,354 |   |
| Adjustments to reconcile net earnings to  net cash provided by continuing operations: |       |                     |       |                     |       |
| Discontinued operations                                                               |       | 923                      |       | (356                     | )          |
| Depreciation and amortization                                                         |       | 36,928                   |       | 41,248                   |       |
| Amortization of deferred gain from asset  sales                                       |       | (4,297                   | )          | —                   |       |
| Accretion of asset retirement obligation                                              |       | 149                      |       | 147                      |       |
| Stock compensation expense                                                            |       | 1,872                    |       | 6,053                    |       |
| Gain from debt retirement                                                             |       | (3,460                   | )          |                     |       |
| Deferred income taxes                                                                 |       | (670                     | )          | 6,283                    |       |
| Gain from dispositions of assets and  insurance recoveries                            |       | (9,608                   | )          | (2,344                   | )          |
| Change in fair value of derivative                                                    |       | 102                      |       | 2,622                    |       |
| Loss from asset impairment                                                            |       | 370                      |       | —                   |       |
| Excess tax benefits from stock based awards                                           |       | (3                       | )          | (609                     | )          |
| Increase in cash surrender value of life  insurance policies                          |       | (140                     | )          | (846                     | )          |
| Changes in Operating Assets and  Liabilities:                                         |       |                     |       |                     |       |
| Decrease in accounts receivable, prepaid  expenses and other                          |       | 26,024                   |       | 28,556                   |       |
| Decrease (increase) in merchandise  inventories                                       |       | 943                      |       | (8,043                   | )          |
| Decrease in accounts payable                                                          |       | (16,700                  | )          | (21,874                  | )          |
| Decrease in accrued expenses                                                          |       | (34,449                  | )          | (16,380                  | )          |
| (Decrease) increase in other long-term  liabilities                                   |       | (475                     | )          | 1,856                    |       |
| Net cash provided by continuing operations                                            |       | 7,629                    |       | 43,667                   |       |
| Net cash (used in) provided by discontinued  operations                               |       | (415                     | )          | 737                      |       |
| Net Cash Provided by Operating Activities                                             |       | 7,214                    |       | 44,404                   |       |
|                                                                                  |       |                     |       |                     |       |
| Cash Flows from Investing Activities:                                                 |       |                     |       |                     |       |
| Cash paid for master lease properties                                                 |       | (117,121                 | )          | —                   |       |
| Cash paid for property and equipment                                                  |       | (13,989                  | )          | (19,715                  | )          |
| Proceeds from dispositions of assets                                                  |       | 208,211                  |       | 2,376                    |       |
| Proceeds from surrender of life insurance  policies                                   |       | —                   |       | 26,129                   |       |
| Net cash provided by continuing operations                                            |       | 77,101                   |       | 8,790                    |       |
| Net cash used in discontinued operations                                              |       | —                   |       | (245                     | )          |
| Net Cash Provided by Investing Activities                                             |       | 77,101                   |       | 8,545                    |       |
|                                                                                  |       |                     |       |                     |       |
| Cash Flows from Financing Activities:                                                 |       |                     |       |                     |       |
| Borrowings under line of credit agreements                                            |       | 98,504                   |       | 306,305                  |       |
| Payments under line of credit agreements                                              |       | (140,019                 | )          | (290,718                 | )          |
| Excess tax benefits from stock based awards                                           |       | 3                        |       | 609                      |       |
| Borrowings on trade payable program  liability                                        |       | 85,408                   |       | 37,790                   |       |
| Payments on trade payable program liability                                           |       | (71,450                  | )          | (38,764                  | )          |
| Payment for finance issuance cost                                                     |       | (182                     | )          | —                   |       |
| Proceeds from lease financing                                                         |       | 8,661                    |       | —                   |       |
| Reduction of long-term debt                                                           |       | (23,292                  | )          | (1,628                   | )          |
| Payments on capital lease obligations                                                 |       | (47                      | )          | (129                     | )          |
| Dividends paid                                                                        |       | (7,028                   | )          | (7,120                   | )          |
| Repurchase of common stock                                                            |       | —                   |       | (58,152                  | )          |
| Proceeds from exercise of stock options                                               |       | 23                       |       | 3,154                    |       |
| Proceeds from dividend reinvestment plan                                              |       | 393                      |       | 395                      |       |
| Net Cash Used in Financing Activities                                                 |       | (49,026                  | )          | (48,258                  | )          |
| Net Increase in Cash and Cash Equivalents                                             |       | 35,289                   |       | 4,691                    |       |
| Cash and Cash Equivalents at Beginning of  Period                                     |       | 20,926                   |       | 21,884                   |       |
| Cash and Cash Equivalents at End of Period                                            |       | $                        | 56,215     |                     | $          | 26,575 |   |
|                                                                                  |       |                     |       |                     |       |
| Supplemental Disclosure of Cash Flow  Information:                                    |       |                     |       |                     |       |
| Cash paid for income taxes                                                            |       | $                        | 558        |                     | $          | — |   |
| Cash paid for interest                                                                |       | $                        | 13,859     |                     | $          | 23,208 |   |
| Accrued purchases of property and equipment                                           |       | $                        | 1,075      |                     | $          | 2,346 |   |

 

Seenotes to condensed consolidated financial statements.

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THEPEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

(DollarAmounts in Thousands)

 

NOTE1. Condensed Consolidated Financial Statements

 

Thecondensed consolidated balance sheet as of August 2, 2008, the condensedconsolidated statements of operations and changes in retained earnings for thethirteen and twenty-six week periods ended August 2, 2008 and August 4,2007 and the condensed consolidated statements of cash flows for the twenty-sixweek periods ended August 2, 2008 and August 4, 2007 are unaudited.In the opinion of management, all adjustments necessary to present fairly thefinancial position, results of operations and cash flows at August 2, 2008and for all periods presented have been made.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted, as permitted by Rule 10-01of the Securities and Exchange Commission’s Regulation S-X, “Interim FinancialStatements”. It is suggested that these condensed consolidated financialstatements be read in conjunction with the financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for thefiscal year ended February 2, 2008. The results of operations for thethirteen and twenty-six week periods ended August 2, 2008 are not necessarilyindicative of the operating results for the full fiscal year.

 

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

 

NOTE2. New Accounting Standards

 

Adopted:

 

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

 

InMarch 2007, the Emerging Issues Task Force (EITF) reached a consensus onIssue Number 06-10, “Accounting for Deferred Compensation andPostretirement Benefit Aspects of Collateral Assignment Split-Dollar LifeInsurance Arrangements” (EITF 06-10). EITF 06-10 provides guidance tohelp companies determine whether a liability for the postretirement benefitassociated with a collateral assignment split-dollar life insurance arrangementshould be recorded in accordance with either SFAS No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions” (if, in substance,a postretirement benefit plan exists), or Accounting Principles Board Opinion No. 12(if the arrangement is, in substance, an individual deferred compensationcontract). EITF 06-10 also provides guidance on how a company shouldrecognize and measure the asset in a collateral assignment split-dollar lifeinsurance contract. EITF 06-10 is effective for fiscal years beginningafter December 15, 2007, although early adoption is permitted. On February 3,2008, the Company adopted EITF 06-10, which resulted in a $1,855 pretaxcharge to retained earnings for its only existing collateral assignment split-dollarlife insurance arrangement – an arrangement in place for a former CEO whoretired in fiscal 2003.

 

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

 

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financial statements.

 

To be adopted:

 

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

 

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

 

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

 

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

 

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

 

NOTE3. Merchandise Inventories

 

Merchandise inventories are valued at the lowerof cost or market. Cost is determined by using the last-in, first-out (LIFO)method. An actual valuation of inventory under the LIFO method can be made onlyat the end of each fiscal year based on inventory and costs at that time.Accordingly, interim LIFO calculations must be based on management’s estimatesof expected fiscal year-end inventory levels and costs. If the first-in,first-out (FIFO) method of costing inventory had been used by the Company,inventory would have been $552,742 and $555,188 as of August 2, 2008 and February 2,2008, respectively. Inventory levels remained relatively flat during thecurrent quarter.

 

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

 

The Company also provides for potentially excessand obsolete inventories based on current inventory levels, the historicalanalysis of product sales and current market conditions. The nature of theCompany’s inventory is such that the risk of obsolescence is minimal and excessinventory has historically been returned to the Company’s vendors for credit.The Company records a provision when less than full credit is expected from avendor or when market is lower than recorded costs. These provisions arerevised, if necessary, on a 

 

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quarterly basis for adequacy. The Company’sinventory is recorded net of provisions for these matters which were $11,877and $11,167 at August 2, 2008 and February 2, 2008.

 

During the third quarter of fiscal 2007, theCompany recorded a $32,803 inventory write-down for the discontinuance andplanned exit of certain non-core merchandise adopted as one of the initialsteps in the Company’s long-term strategic plan. The write-down reduced thecarrying value of the discontinued merchandise from $74,080 to $41,277. Thecarrying value of the discontinued merchandise will be evaluated quarterly ascompared to the estimated sell through that was utilized in determining theimpairment. The inventory impairment was recorded in cost of merchandise saleson the consolidated statement of operations. The carrying value of thediscontinued merchandise was $1,158 at August 2, 2008 and $8,612 at February 2,2008.

 

NOTE4. Property and Equipment

 

TheCompany’s property and equipment as of August 2, 2008 and February 2,2008, respectively, was as follows:

 
| **(dollar amounts in thousands)** | ** ** | **August 2, 2008** | ** ** | **February 2, 2008** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
|                                             |       |                         |       |                           |       |
| Property and  Equipment - at cost:               |       |                         |       |                           |       |
| Land                                             |       | $                            | 203,131    |                           | $          | 213,962 |   |
| Buildings and  improvements                      |       | 837,379                      |       | 858,699                        |       |
| Furniture,  fixtures and equipment               |       | 671,634                      |       | 699,303                        |       |
| Construction in  progress                        |       | 2,580                        |       | 3,992                          |       |
|                                             |       | 1,714,724                    |       | 1,775,956                      |       |
| Less accumulated  depreciation and amortization  |       | 955,316                      |       | 995,177                        |       |
| Total Property  and Equipment - Net              |       | $                            | 759,408    |                           | $          | 780,779 |   |

 

OnJuly 30, 2008, the Company settled an outstanding contractual obligationto purchase 29 properties that were previously leased under a master operatinglease for $117,121, including $803 of fees. The Company allocated the acquisition cost to these properties basedupon a preliminary estimate of relative fair values.  The acquisition cost was lower than theaggregate fair value for these properties.

 

Alsoon this date, we completed a sale-leaseback transaction for a total of 22properties. The $75,951 proceeds from the July 30, 2008, sale-leasebacktransaction together with $41,170 cash on hand were used to purchase the masterlease properties (see note 8).

 

Duringthe second quarter of fiscal 2008, we also sold one property that wasclassified as held for sale for proceeds of $1,350 and recognized a gain of$254.

 

NOTE5. Income Taxes

 

As of August 2, 2008, the Company hadrecorded unrecognized tax benefits of $4,727 which includes approximately$1,409 of accrued interest and penalties related to uncertain tax positions.The Company recognizes interest and penalties related to uncertain taxpositions in income tax expense.

 

Includedin the unrecognized tax benefits of $3,318 at August 2, 2008 was $1,899 oftax benefits that, if recognized, would affect our annual effective taxrate.  We are undergoing examinations ofour tax returns in certain jurisdictions. We have uncertain liabilities of approximately $2,129 for which it isreasonably possible that the amount will increase or decrease within the nexttwelve months.  However, based on theuncertainties associated with settlements and the status of examination, it isnot possible to estimate the impact of the change.

 

TheCompany files U.S., state and Puerto Rico income tax returns in jurisdictionswith varying statutes of limitations. The 2004 through 2007 tax years generally remain subject to examinationby federal and most state tax authorities. The Company and its subsidiaries have various state income tax returnsin the process of examination, appeals and settlement.  In Puerto Rico, the 1998 and 2002 through2007 tax years generally remain subject to examination by their respective taxauthorities.

 

Thetemporary differences between the book and tax treatment of income and expensesresult in deferred tax assets and liabilities, which are included within theconsolidated balance sheets. The Company must then assess the likelihood thatthe deferred tax assets will be recovered from future taxable income. To theextent the Company believes that recovery is not more likely than not, avaluation allowance must be established. In this regard when determiningwhether or not a valuation allowance should be established, the Companyconsiders various tax planning strategies, including potential real estatetransactions, as future taxable income.  As of 

 

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August 2,2008, the Company had valuation allowances for these matters of $3,451 and at February 2,2008 a valuation allowance of $4,077.

 

UnderFAS 109, the Company is required to project the deferred tax effects ofexpected year-end temporary differences. Based on the projections, as of January 31, 2009 the Company willnot have any federal net operating loss carryforwards, and will have $69,000 ofstate net operating loss carryforwards and $322 of Puerto Rico net operatingloss carryforwards.  As of February 2,2008, the Company had $46,716 of federal net operating loss carryforwards,$180,411 of state net operating loss carryforwards and $768 of Puerto Rico netoperating loss carryforwards.  The statenet operating loss carryforwards will expire in various years beginning in 2008and the Puerto Rico net operating loss carryforwards will expire in 2014.

 

Duringthe second quarter of fiscal 2008, the Company identified an error anddetermined it should have recognized a deferred tax asset in a prior period dueto a state legislative change that occurred in June 2007.  The recording of this deferred tax asset inthe second quarter of fiscal 2008 resulted in a one-time tax benefit of approximately$2,400 affecting our results for the thirteen weeks and twenty-six weeks ended August 2,2008.

 

NOTE 6. Discontinued Operations

 

In the third quarter of fiscal 2007, the Companyadopted its long-term strategic plan. One of the initial steps in this plan wasthe identification of 31 low-return stores for closure. The Company isaccounting for these store closures in accordance with the provisions of SFAS No. 146“Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 144“Accounting for Impairment or Disposal of Long-Lived Assets.” In accordancewith SFAS No. 144, discontinued operations for all periods presentedreflect the operating results for 11 of the 31 closed stores because theCompany does not believe that the customers of these stores are likely tobecome customers of other Pep Boys stores due to geographical considerations.The operating results for the other 20 closed stores are included in continuingoperations because the Company believes that the customers of these stores arelikely to become customers of other Pep Boys stores that are in closeproximity.  Below is a summary of thesediscontinued stores’ operations for the thirteen and twenty-six weeks ended August 2,2008 and August 4, 2007:

 
| ** **                                                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(dollar amounts in thousands)**               | ** ** | **August 2, 2008**       | ** ** | **August 4, 2007**         | ** ** | **August 2, 2008** | ** ** | **August 4, 2007** | ** ** |
|                                                           |       |                               |       |                                 |       |   |   |   |   |
| Revenues in discontinued operations                            |       |                               |       |                                 |       |   |   |   |   |
| Merchandise Sales                                              |       | $                                  | —     |                                 | $          | 5,571 |   | $ | — |   | $ | 10,812 |   |
| Service Revenue                                                |       | —                             |       | 1,227                                |       | — |   | 2,416 |   |
| Total revenues, discontinued operations                        |       | $                                  | —     |                                 | $          | 6,798 |   | $ | — |   | $ | 13,228 |   |
|                                                           |       |                               |       |                                 |       |   |   |   |   |
| (Loss) gain from discontinued operations,  before income taxes |       | $                                  | (432       | )                                    | $          | 370 |   | $ | (1,420 | ) | $ | 547 |   |

 

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

 
| **(dollar amounts in thousands)** | ** ** | **August 2, 2008** | ** ** | **February 2, 2008** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
|                                             |       |                         |       |                           |       |
| Land                                             |       | $                            | 12,950     |                           | $          | 9,976 |   |
| Buildings and  improvements                      |       | 16,608                       |       | 15,805                         |       |
|                                             |       | 29,558                       |       | 25,781                         |       |
| Less accumulated  depreciation and amortization  |       | (8,863                       | )          | (8,863                         | )          |
| Assets held for  disposal                        |       | $                            | 20,695     |                           | $          | 16,918 |   |

 

Three properties purchased on July 30, 2008have been classified as held for sale.

 

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The following details the reserve balances as ofAugust 2, 2008.  The reserveincludes remaining rent on leases net of sublease income, other contractualobligations associated with leased properties and employee severance.

 
| **(dollar amount in thousands)**                                                                | ** ** | **Severance** | ** ** | **Lease  Expenses** | ** ** | **Other Costs and  Contractual Obligations** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------------|------------|-------------------------------------------------------------|------------|-----------|------------|
| Balance at  February 2, 2008                                                                              | ** ** | **$**         | **58**     | ** **          | **$**      | **3,574**                                                   | ** ** | **$**     | **109**    | ** ** | **$** | **3,741** | ** ** |
| Provision for  present value of liabilities                                                                    |       | —        |       | 233                 |       | —                                                      |       | 233       |       |
| Change in  assumptions about future sublease income, lease termination, contractual  obligations and severance |       | —        |       | (62                 | )          | —                                                      |       | (62       | )          |
| Cash payments                                                                                                  |       | (58           | )          | (906                | )          | (109                                                        | )          | (1,073    | )          |
| Balance at  August 2, 2008                                                                                | ** ** | **$**         | **—** | ** **          | **$**      | **2,839**                                                   | ** ** | **$**     | **—** | ** ** | **$** | **2,839** | ** ** |

 

NOTE7. Pension and Savings Plan

 

Pensionexpense includes the following:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **August 2, 2008**       | ** ** | **August 4, 2007**         | ** ** | **August 2, 2008** | ** ** | **August 4, 2007** | ** ** |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Service cost                                     |       | $                                  | 17         |                                 | $          | 51 |   | $ | 60 |   | $ | 102 |   |
| Interest cost                                    |       | 859                                |       | 836                                  |       | 1,744 |   | 1,672 |   |
| Expected return on plan assets                   |       | (610                               | )          | (587                                 | )          | (1,225 | ) | (1,174 | ) |
| Amortization of transition obligation            |       | 41                                 |       | 41                                   |       | 82 |   | 82 |   |
| Amortization of prior service cost               |       | 93                                 |       | 91                                   |       | 185 |   | 182 |   |
| Amortization of net loss                         |       | 205                                |       | 488                                  |       | 508 |   | 976 |   |
| Net periodic benefit cost                        |       | $                                  | 605        |                                 | $          | 920 |   | $ | 1,354 |   | $ | 1,840 |   |

 

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

 

TheCompany has a non-qualified Executive Supplemental Retirement Plan (SERP) thatis an unfunded defined benefit plan. This plan was closed to new participantson January 31, 2004. As of August 2, 2008, the Company contributed$2,924 of an anticipated $3,100 contribution during fiscal 2008 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 $202 and $209 for the thirteen weeks ended August 2,2008 and August 4, 2007, respectively, and approximately $307 and $421 forthe twenty-six weeks ended August 2, 2008 and August 4, 2007,respectively.

 

The Company has two 401(k) savings plans,which cover all full-time employees who are at least 21 years of age with oneor more years of service. The Company contributes the lesser of 50% of thefirst 6% of a participant’s contributions or 3% of the participant’scompensation. The Company’s savings plans’ contribution expense wasapproximately $991 and $652 for the thirteen weeks ended August 2, 2008and August 4, 2007, respectively, and approximately $2,043 and $1,628 forthe twenty-six weeks ended August 2, 2008 and August 4, 2007,respectively.

 

NOTE 8. Sale-Leaseback Transactions

 

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

 

On April 10, 2008, the Company sold 23 ownedproperties to an independent third party. Net proceeds from this sale were$72,977. 

 

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Concurrent with the sale, the Company enteredinto agreements to lease the properties back from the purchaser over a minimumlease term of 15 years. The Company classified 22 of these leases asoperating leases. The leases have an initial term of 15 years with four five-yearrenewal options. The leases have yearly incremental rental increases that are1.5% of the prior year’s rentals. These leases result in approximately $92,000in future minimum rental payments during the initial non-cancelable lease term.The second through the fourth renewal options are at fair market rents. A$5,522 gain on the sale of these properties was recognized immediately uponexecution of the sale and a $34,483 gain was deferred. The deferred gain isbeing recognized over 15 years. The Company initially had continuinginvolvement in one property and, accordingly, recorded $4,583 of thetransaction’s total net proceeds as a debt borrowing and as a financingactivity in the Statement of Cash Flows. During the second quarter of 2008, theCompany determined it no longer had continuing involvement with this propertyand recorded the sale of this property as a sale-leaseback transaction,removing the asset and related lease financing and recording a $1,515 deferredgain.

 

On July 30, 2008, the Company sold 22properties to an independent third party. Net proceeds from this sale were$75,951. Concurrent with the sale, the Company entered into agreements to leasethe properties back from the purchaser over a minimum lease term of15 years. The Company classified 21 of these leases as operating leases.The leases have an initial term of 15 years with four five-year renewaloptions. The leases have yearly incremental rental increases that are 1.5% ofthe prior year’s rentals. These leases result in approximately $97,000 infuture minimum rental payments during the initial non-cancelable lease term.The second through the fourth renewal options are at fair market rents. A$2,124 gain on the sale of these properties was recognized immediately uponexecution of the sale and a $28,638 gain was deferred. The deferred gain isbeing recognized over 15 years. The Company has continuing involvement in oneproperty and, accordingly, has recorded $3,896 of the transaction’s total netproceeds as a debt borrowing and as a financing activity in the Statement ofCash Flows. The Company continues to reflect the property on its balance sheetin accordance with Statement of Financial Accounting Standards No. 13, “Accountingfor Leases.”

 

The Company recognized $1,913 and $3,251 in Costof Merchandise Sales, and $573 and $1,058 in Costs of Service Revenue of thedeferred gain generated from the sale-leaseback transactions for the thirteenweeks and twenty-six weeks ended August 2, 2008, respectively.

 

Of the 562 store locations operated by theCompany at August 2, 2008, 235 are owned and 327 are now leased.

 

 NOTE9. Debt and Financing Arrangements

 
| **(dollar amounts in thousands)**                              | ** ** | **August 2, 2008** | ** ** | **February 2, 2008** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| 7.50% Senior Subordinated Notes, due  December 2014                      |       | $                            | 174,535    |                           | $          | 200,000 |   |
| Senior Secured Term Loan, due  October 2013                              |       | 153,870                      |       | 154,652                        |       |
| Other notes payable, 8.0%                                                     |       | —                       |       | 248                            |       |
| Lease financing obligations, payable  through October 2022               |       | 8,593                        |       | 4,786                          |       |
| Capital lease obligations payable through  October 2009                  |       | 352                          |       | 399                            |       |
| Line of credit agreement, through  December 2009                         |       | 530                          |       | 42,045                         |       |
|                                                                          |       | 337,880                      |       | 402,130                        |       |
| Less current maturities                                                       |       | 2,304                        |       | 2,114                          |       |
| Long-term debt and obligations under  capital leases, less current maturities |       | $                            | 335,576    |                           | $          | 400,016 |   |

 

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

 

The Company used the proceeds from its March 25,2008 sale-leaseback transaction to repay the $49,915 then drawn on its line ofcredit agreement and to repurchase $20,965 principal amount of its 7.50% SeniorSubordinated Notes for $18,082.  The gainon the retirement of debt is included in interest expense.

 

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

 

As part of the July 30, 2008 sale-leasebacktransaction, the Company determined that it has continuing involvement in oneproperty and has recorded the $3,896 proceeds, net of execution costs, as adebt borrowing and continues to reflect the property on its balance sheet inaccordance with Statement of Financial Accounting Standards No. 13, “Accountingfor Leases.”

 

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The Company had $233,341 of availability underits line of credit agreement on August 2, 2008.

 

NOTE10. Warranty Reserve

 

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

 

Componentsof the reserve for warranty costs for the twenty-six weeks period ended August 2,2008 and August 4, 2007 were as follows:

 
| **(dollar amounts in thousands)** | ** ** | **Twenty-six Weeks  Ended August 2,  2008** | ** ** | **Twenty-six Weeks  Ended August 4,  2007** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                                 | ** ** | ** **                                                 | ** ** |
| Beginning balance                                |       | $                                                          | 247        |                                                       | $          | 645 |   |
|                                             |       |                                                       |       |                                                       |       |
| Additions related to current period sales        |       | 7,641                                                      |       | 5,359                                                      |       |
|                                             |       |                                                       |       |                                                       |       |
| Warranty costs incurred in current period        |       | (7,266                                                     | )          | (5,525                                                     | )          |
|                                             |       |                                                       |       |                                                       |       |
| Ending balance                                   |       | $                                                          | 622        |                                                       | $          | 479 |   |

 

NOTE11. Earnings Per Share

 
| ** **                                                            | ** ** | ** **                                                                                                                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **August 2,  2008**                                                                                                       | ** ** | **August 4,  2007**           | ** ** | **August 2,  2008**             | ** ** | **August 4,  2007** | ** ** |
| * *                                                              | * *   | * *                                                                                                                       | * *   | * *                           | * *   | * *                             | * *   | * * | * * | * * | * * |
| (a)                                                                   |       | Net Earnings  From Continuing Operations                                                                                       |       | $                                  | 5,752      |                                 | $          | 3,947 |   | $ | 11,043 |   | $ | 6,998 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|                                                                  |       | Discontinued Operations, Net of Tax                                                                                            |       | (304                               | )          | 232                                  |       | (923 | ) | 356 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|                                                                  |       | Net Earnings                                                                                                                   |       | $                                  | 5,448      |                                 | $          | 4,179 |   | $ | 10,120 |   | $ | 7,354 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
| (b)                                                                   |       | Basic average number of common shares  outstanding during period                                                               |       | 52,153                             |       | 51,652                               |       | 52,109 |   | 52,387 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|                                                                  |       | Common shares assumed issued upon exercise  of dilutive stock options, net of assumed repurchase, at the average market  price |       | 83                                 |       | 612                                  |       | 95 |   | 562 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
| (c)                                                                   |       | Diluted average number of common shares  assumed outstanding during period                                                     |       | 52,236                             |       | 52,264                               |       | 52,204 |   | 52,949 |   |
|                                                                  |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
| ** **                                                            | ** ** | **Basic Earnings per Share:**                                                                                                  | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  |       | Net Earnings From Continuing Operations  (a/b)                                                                                 |       | $                                  | 0.11       |                                 | $          | 0.07 |   | $ | 0.21 |   | $ | 0.13 |   |
|                                                                  |       | Discontinued Operations, Net of Tax                                                                                            |       | (0.01                              | )          | 0.01                                 |       | (0.02 | ) | 0.01 |   |
|                                                                  |       | Basic Earnings per Share                                                                                                       |       | $                                  | 0.10       |                                 | $          | 0.08 |   | $ | 0.19 |   | $ | 0.14 |   |
| ** **                                                            | ** ** | **Diluted Earnings per Share:**                                                                                                | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|                                                                  |       | Net Earnings From Continuing Operations  (a/c)                                                                                 |       | $                                  | 0.11       |                                 | $          | 0.07 |   | $ | 0.21 |   | $ | 0.13 |   |
|                                                                  |       | Discontinued Operations, Net of Tax                                                                                            |       | (0.01                              | )          | 0.01                                 |       | (0.02 | ) | 0.01 |   |
|                                                                  |       | Diluted Earnings per Share                                                                                                     |       | $                                  | 0.10       |                                 | $          | 0.08 |   | $ | 0.19 |   | $ | 0.14 |   |

 

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AtAugust 2, 2008 and August 4, 2007, respectively, there were 2,459,000and 3,620,000 outstanding options and restricted stock units. Certain stockoptions were excluded from the calculation of diluted earnings per sharebecause their exercise prices were greater than the average market price of thecommon shares for the periods then ended and therefore would be anti-dilutive. Thetotal numbers of such shares excluded from the diluted earnings per sharecalculation are 1,833,000 and 980,000 for the thirteen weeks ended August 2,2008 and August 4, 2007, respectively. The total numbers of such sharesexcluded from the diluted earnings per share calculation are 1,781,000 and1,059,000 for the twenty-six weeks ended August 2, 2008 and August 4,2007, respectively.

 

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NOTE12. Supplemental Guarantor Information

 

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

 

Thefollowing condensed consolidating information presents, in separate columns,the condensed consolidating balance sheets as of August 2, 2008 and February 2,2008 and the related condensed consolidating statements of operations for thethirteen and twenty-six weeks ended August 2, 2008 and August 4, 2007and condensed consolidating statements of cash flows for the twenty-six weeksended August 2, 2008 and August 4, 2007 for (i) the Company (“PepBoys”) on a parent only basis, with its investment in subsidiaries recordedunder the equity method, (ii) the Subsidiary Guarantors on a combinedbasis including the consolidation by PBY Corporation of its wholly ownedsubsidiary, Pep Boys Manny Moe & Jack of California, (iii) thesubsidiary of the Company that does not guarantee the Notes, and (iv) theCompany on a consolidated basis.

 

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 
| **As of August 2, 2008**                                  | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Current Assets:                                                               |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Cash and cash  equivalents                                                    |       | $                 | 42,759     |                       | $          | 6,318                                |       | $                                     | 7,138      |             | $          | — |   | $ | 56,215 |   |
| Accounts  receivable, net                                                     |       | 15,009            |       | 13,547                     |       | —                               |       | —                                |       | 28,556           |       |
| Merchandise  inventories                                                      |       | 192,980           |       | 367,229                    |       | —                               |       | —                                |       | 560,209          |       |
| Prepaid expenses                                                              |       | 27,986            |       | 16,205                     |       | 5,781                                |       | (13,727                               | )          | 36,245           |       |
| Other                                                                         |       | 5,020             |       | 13                         |       | 52,626                               |       | (9,752                                | )          | 47,907           |       |
| Assets held for disposal                                                      |       | 4,990             |       | 15,705                     |       | —                               |       |                                  |       | 20,695           |       |
| Total Current  Assets                                                         |       | 288,744           |       | 419,017                    |       | 65,545                               |       | (23,479                               | )          | 749,827          |       |
| Property and  Equipment—Net                                              |       | 242,741           |       | 503,969                    |       | 32,567                               |       | (19,869                               | )          | 759,408          |       |
| Investment in  subsidiaries                                                   |       | 1,692,892         |       | —                     |       | —                               |       | (1,692,892                            | )          | —           |       |
| Intercompany  receivable                                                      |       | —            |       | 969,904                    |       | 78,241                               |       | (1,048,145                            | )          | —           |       |
| Deferred income  taxes                                                        |       | 5,799             |       | 35,529                     |       | —                               |       | —                                |       | 41,328           |       |
| Other                                                                         |       | 28,778            |       | 1,233                      |       | —                               |       | —                                |       | 30,011           |       |
| Total Assets                                                                  |       | $                 | 2,258,954  |                       | $          | 1,929,652                            |       | $                                     | 176,353    |             | $          | (2,784,385 | ) | $ | 1,580,574 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                 | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** **                            | ** ** | ** **       | ** ** |
| Current  Liabilities:                                                         |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Accounts payable                                                              |       | $                 | 228,714    |                       | $          | 9                                    |       | $                                     | —     |             | $          | — |   | $ | 228,723 |   |
| Trade payable  program liability                                              |       | 28,212            |       | —                     |       | —                               |       | —                                |       | 28,212           |       |
| Accrued expenses                                                              |       | 40,118            |       | 77,983                     |       | 153,174                              |       | (13,728                               | )          | 257,547          |       |
| Deferred income  taxes                                                        |       | —            |       | 19,204                     |       |                                 |       | (9,751                                | )          | 9,453            |       |
| Current  maturities of long-term debt and obligations under capital leases    |       | 1,891             |       | 413                        |       | —                               |       | —                                |       | 2,304            |       |
| Total Current  Liabilities                                                    |       | 298,935           |       | 97,609                     |       | 153,174                              |       | (23,479                               | )          | 526,239          |       |
| Long-term debt  and obligations under capital leases, less current maturities |       | 327,049           |       | 8,527                      |       | —                               |       | —                                |       | 335,576          |       |
| Other long-term  liabilities                                                  |       | 33,849            |       | 32,989                     |       | —                               |       | —                                |       | 66,838           |       |
| Deferred gain  from asset sales                                               |       | 72,787            |       | 120,814                    |       | —                               |       | (19,869                               | )          | 173,732          |       |
| Intercompany  liabilities                                                     |       | 1,048,145         |       | —                     |       | —                               |       | (1,048,145                            | )          | —           |       |
| Total  Stockholders’ Equity                                              |       | 478,189           |       | 1,669,713                  |       | 23,179                               |       | (1,692,892                            | )          | 478,189          |       |
| Total Liabilities  and Stockholders’ Equity                              |       | $                 | 2,258,954  |                       | $          | 1,929,652                            |       | $                                     | 176,353    |             | $          | (2,784,385 | ) | $ | 1,580,574 |   |

 

14

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Table of Contents

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

 

15

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Table of Contents

 

CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS

(dollarsin thousands)

(unaudited)

 
| ** **                                                       | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Thirteen weeks Ended August 2, 2008** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                             |       |              |       |           |       |                     |       |                     |       |             |       |
| Merchandise Sales                                                |       | $                 | 139,512    |           | $          | 268,565                  |       | $                        | —     |             | $          | — |   | $ | 408,077 |   |
| Service Revenue                                                  |       | 31,870            |       | 60,096         |       | —                   |       | —                   |       | 91,966           |       |
| Other Revenue                                                    |       | —            |       | —         |       | 5,703                    |       | (5,703                   | )          | —           |       |
| Total Revenues                                                   |       | 171,382           |       | 328,661        |       | 5,703                    |       | (5,703                   | )          | 500,043          |       |
| Costs of Merchandise Sales                                       |       | 96,714            |       | 188,112        |       | —                   |       | (410                     | )          | 284,416          |       |
| Costs of Service Revenue                                         |       | 28,467            |       | 56,763         |       | —                   |       | (37                      | )          | 85,193           |       |
| Costs of Other Revenue                                           |       | —            |       | —         |       | 3,485                    |       | (3,485                   | )          | —           |       |
| Total Costs of Revenues                                          |       | 125,181           |       | 244,875        |       | 3,485                    |       | (3,932                   | )          | 369,609          |       |
| Gross Profit from Merchandise Sales                              |       | 42,798            |       | 80,453         |       | —                   |       | 410                      |       | 123,661          |       |
| Gross Profit from Service Revenue                                |       | 3,403             |       | 3,333          |       | —                   |       | 37                       |       | 6,773            |       |
| Gross Profit from Other Revenue                                  |       | —            |       | —         |       | 2,218                    |       | (2,218                   | )          | —           |       |
| Total Gross Profit                                               |       | 46,201            |       | 83,786         |       | 2,218                    |       | (1,771                   | )          | 130,434          |       |
| Selling, General and Administrative  Expenses                    |       | 46,963            |       | 77,958         |       | 70                       |       | (2,388                   | )          | 122,603          |       |
| Net Gain from Dispositions of Assets                             |       | 2,747             |       | 1,330          |       | —                   |       | —                   |       | 4,077            |       |
| Operating Profit                                                 |       | 1,985             |       | 7,158          |       | 2,148                    |       | 617                      |       | 11,908           |       |
| Non-Operating (Expense) Income                                   |       | (3,851            | )          | 33,015         |       | 636                      |       | (28,638                  | )          | 1,162            |       |
| Interest Expense (Income)                                        |       | 27,277            |       | 8,025          |       | (829                     | )          | (28,021                  | )          | 6,452            |       |
| (Loss) Earnings from Continuing Operations  Before Income Taxes  |       | (29,143           | )          | 32,148         |       | 3,613                    |       | —                   |       | 6,618            |       |
| Income Tax (Benefit) Expense                                     |       | (6,017            | )          | 5,979          |       | 904                      |       | —                   |       | 866              |       |
| Equity in Earnings of Subsidiaries                               |       | 28,646            |       | —         |       | —                   |       | (28,646                  | )          | —           |       |
| Net Earnings from Continuing Operations                          |       | 5,520             |       | 26,169         |       | 2,709                    |       | (28,646                  | )          | 5,752            |       |
| Discontinued Operations, Net of Tax                              |       | (72               | )          | (232           | )          | —                   |       | —                   |       | (304             | )          |
| Net Earnings                                                     |       | $                 | 5,448      |           | $          | 25,937                   |       | $                        | 2,709      |             | $          | (28,646 | ) | $ | 5,448 |   |

 
| ** **                                                       | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary**     | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------|------------|--------------------------|------------|------------------|------------|
| **Thirteen weeks ended August 4, 2007** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                             |       |              |       |           |       |               |       |                     |       |             |       |
| Merchandise Sales                                                |       | $                 | 156,348    |           | $          | 296,651            |       | $                        | —     |             | $          | — |   | $ | 452,999 |   |
| Service Revenue                                                  |       | 34,277            |       | 64,816         |       | —             |       | —                   |       | 99,093           |       |
| Other Revenue                                                    |       | —            |       | —         |       | 6,212              |       | (6,212                   | )          | —           |       |
| Total Revenues                                                   |       | 190,625           |       | 361,467        |       | 6,212              |       | (6,212                   | )          | 552,092          |       |
| Costs of Merchandise Sales                                       |       | 109,330           |       | 206,565        |       | —             |       | —                   |       | 315,895          |       |
| Costs of Service Revenue                                         |       | 29,404            |       | 58,077         |       | —             |       | —                   |       | 87,481           |       |
| Costs of Other Revenue                                           |       | —            |       | —         |       | 4,272              |       | (4,272                   | )          | —           |       |
| Total Costs of Revenues                                          |       | 138,734           |       | 264,642        |       | 4,272              |       | (4,272                   | )          | 403,376          |       |
| Gross Profit from Merchandise Sales                              |       | 47,018            |       | 90,086         |       | —             |       | —                   |       | 137,104          |       |
| Gross Profit from Service Revenue                                |       | 4,873             |       | 6,739          |       | —             |       | —                   |       | 11,612           |       |
| Gross Profit from Other Revenue                                  |       | —            |       | —         |       | 1,940              |       | (1,940                   | )          | —           |       |
| Total Gross Profit                                               |       | 51,891            |       | 96,825         |       | 1,940              |       | (1,940                   | )          | 148,716          |       |
| Selling, General and Administrative  Expenses                    |       | 42,891            |       | 90,831         |       | 72                 |       | (1,953                   | )          | 131,841          |       |
| Net Loss from Dispositions of Assets                             |       | (13               | )          | (2             | )          | —             |       | —                   |       | (15              | )          |
| Operating Profit                                                 |       | 8,987             |       | 5,992          |       | 1,868              |       | 13                       |       | 16,860           |       |
| Non-Operating (Expense) Income                                   |       | (4,036            | )          | 31,863         |       | 3,325              |       | (29,386                  | )          | 1,766            |       |
| Interest Expense                                                 |       | 29,609            |       | 10,770         |       | 1,325              |       | (29,373                  | )          | 12,331           |       |
| (Loss) Earnings from Continuing Operations  Before Income Taxes  |       | (24,658           | )          | 27,085         |       | 3,868              |       | —                   |       | 6,295            |       |
| Income Tax (Benefit) Expense                                     |       | (732              | )          | 1,631          |       | 1,449              |       | —                   |       | 2,348            |       |
| Equity in Earnings of Subsidiaries                               |       | 27,998            |       | —         |       | —             |       | (27,998                  | )          | —           |       |
| Net Earnings from Continuing Operations                          |       | 4,072             |       | 25,454         |       | 2,419              |       | (27,998                  | )          | 3,947            |       |
| Discontinued Operations, Net of Tax                              |       | 107               |       | 125            |       | —             |       | —                   |       | 232              |       |
| Net Earnings                                                     |       | $                 | 4,179      |           | $          | 25,579             |       | $                        | 2,419      |             | $          | (27,998 | ) | $ | 4,179 |   |

 

16

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Table of Contents

 
| ** **                                                         | ** ** | ** **        | ** ** | ** **     | ** ** | **Subsidiary** | ** ** | ** **             | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Non-**       | ** ** | **Consolidation**      | ** ** | ** **       | ** ** |
| **Twenty-six weeks ended August 2, 2008** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **/ Elimination** | ** ** | **Consolidated** | ** ** |
| Merchandise Sales                                                  |       | $                 | 278,125    |           | $          | 533,286        |       | $                      | —     |             | $          | — |   | $ | 811,411 |   |
| Service Revenue                                                    |       | 65,243            |       | 121,432        |       | —         |       | —                 |       | 186,675          |       |
| Other Revenue                                                      |       | —            |       | —         |       | 11,370         |       | (11,370                | )          | —           |       |
| Total Revenues                                                     |       | 343,368           |       | 654,718        |       | 11,370         |       | (11,370                | )          | 998,086          |       |
| Costs of Merchandise Sales                                         |       | 195,048           |       | 376,109        |       | —         |       | (818                   | )          | 570,339          |       |
| Costs of Service Revenue                                           |       | 57,081            |       | 112,341        |       | —         |       | (75                    | )          | 169,347          |       |
| Costs of Other Revenue                                             |       | —            |       | —         |       | 9,291          |       | (9,291                 | )          | —           |       |
| Total Costs of Revenues                                            |       | 252,129           |       | 488,450        |       | 9,291          |       | (10,184                | )          | 739,686          |       |
| Gross Profit from Merchandise Sales                                |       | 83,077            |       | 157,177        |       | —         |       | 818                    |       | 241,072          |       |
| Gross Profit from Service Revenue                                  |       | 8,162             |       | 9,091          |       | —         |       | 75                     |       | 17,328           |       |
| Gross Profit from Other Revenue                                    |       | —            |       | —         |       | 2,079          |       | (2,079                 | )          | —           |       |
| Total Gross Profit                                                 |       | 91,239            |       | 166,268        |       | 2,079          |       | (1,186                 | )          | 258,400          |       |
| Selling, General and Administrative  Expenses                      |       | 89,416            |       | 154,462        |       | 160            |       | (2,420                 | )          | 241,618          |       |
| Net Gain from Dispositions of Assets                               |       | 3,303             |       | 6,305          |       | —         |       | —                 |       | 9,608            |       |
| Operating Profit                                                   |       | 5,126             |       | 18,111         |       | 1,919          |       | 1,234                  |       | 26,390           |       |
| Non-Operating (Expense) Income                                     |       | (7,955            | )          | 61,490         |       | 1,284          |       | (53,327                | )          | 1,492            |       |
| Interest Expense (Income)                                          |       | 51,113            |       | 14,735         |       | (1,876         | )          | (52,093                | )          | 11,879           |       |
| (Loss) Earnings from Continuing Operations  Before Income Taxes    |       | (53,942           | )          | 64,866         |       | 5,079          |       | —                 |       | 16,003           |       |
| Income Tax (Benefit) Expense                                       |       | (16,490           | )          | 19,896         |       | 1,554          |       | —                 |       | 4,960            |       |
| Equity in Earnings of Subsidiaries                                 |       | 47,777            |       | —         |       | —         |       | (47,777                | )          | —           |       |
| Net Earnings from Continuing Operations                            |       | 10,325            |       | 44,970         |       | 3,525          |       | (47,777                | )          | 11,043           |       |
| Discontinued Operations, Net of Tax                                |       | (205              | )          | (718           | )          | —         |       | —                 |       | (923             | )          |
| Net Earnings                                                       |       | $                 | 10,120     |           | $          | 44,252         |       | $                      | 3,525      |             | $          | (47,777 | ) | $ | 10,120 |   |

 
| ** **                                                         | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary**      | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|---------------------|------------|--------------------------|------------|------------------|------------|
| **Twenty-six weeks ended August 4, 2007** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Non- Guarantors** | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                               |       |              |       |           |       |                |       |                     |       |             |       |
| Merchandise Sales                                                  |       | $                 | 308,939    |           | $          | 583,854             |       | $                        | —     |             | $          | — |   | $ | 892,793 |   |
| Service Revenue                                                    |       | 69,424            |       | 129,458        |       | —              |       | —                   |       | 198,882          |       |
| Other Revenue                                                      |       | —            |       | —         |       | 12,472              |       | (12,472                  | )          | —           |       |
| Total Revenues                                                     |       | 378,363           |       | 713,312        |       | 12,472              |       | (12,472                  | )          | 1,091,675        |       |
| Costs of Merchandise Sales                                         |       | 217,613           |       | 409,812        |       | —              |       | —                   |       | 627,425          |       |
| Costs of Service Revenue                                           |       | 59,085            |       | 115,860        |       | —              |       | —                   |       | 174,945          |       |
| Costs of Other Revenue                                             |       | —            |       | —         |       | 9,838               |       | (9,838                   | )          | —           |       |
| Total Costs of Revenues                                            |       | 276,698           |       | 525,672        |       | 9,838               |       | (9,838                   | )          | 802,370          |       |
| Gross Profit from Merchandise Sales                                |       | 91,326            |       | 174,042        |       | —              |       | —                   |       | 265,368          |       |
| Gross Profit from Service Revenue                                  |       | 10,339            |       | 13,598         |       | —              |       | —                   |       | 23,937           |       |
| Gross Profit from Other Revenue                                    |       | —            |       | —         |       | 2,634               |       | (2,634                   | )          | —           |       |
| Total Gross Profit                                                 |       | 101,665           |       | 187,640        |       | 2,634               |       | (2,634                   | )          | 289,305          |       |
| Selling, General and Administrative  Expenses                      |       | 84,865            |       | 176,813        |       | 158                 |       | (2,885                   | )          | 258,951          |       |
| Net Gain (Loss) from Dispositions of Assets                        |       | 2,354             |       | (10            | )          | —              |       | —                   |       | 2,344            |       |
| Operating Profit                                                   |       | 19,154            |       | 10,817         |       | 2,476               |       | 251                      |       | 32,698           |       |
| Non-Operating (Expense) Income                                     |       | (7,937            | )          | 65,582         |       | 3,965               |       | (57,939                  | )          | 3,671            |       |
| Interest Expense                                                   |       | 61,522            |       | 21,153         |       | —              |       | (57,688                  | )          | 24,987           |       |
| (Loss) Earnings from Continuing Operations  Before Income Taxes    |       | (50,305           | )          | 55,246         |       | 6,441               |       | —                   |       | 11,382           |       |
| Income Tax (Benefit) Expense                                       |       | (19,382           | )          | 21,296         |       | 2,470               |       | —                   |       | 4,384            |       |
| Equity in Earnings of Subsidiaries                                 |       | 38,143            |       | —         |       | —              |       | (38,143                  | )          | —           |       |
| Net Earnings from Continuing Operations                            |       | 7,220             |       | 33,950         |       | 3,971               |       | (38,143                  | )          | 6,998            |       |
| Discontinued Operations, Net of Tax                                |       | 134               |       | 222            |       | —              |       | —                   |       | 356              |       |
| Net Earnings                                                       |       | $                 | 7,354      |           | $          | 34,172              |       | $                        | 3,971      |             | $          | (38,143 | ) | $ | 7,354 |   |

 

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CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS

(dollarsin thousands)

(unaudited)

 
| **Twenty-six weeks ended August 2, 2008**                             | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **SubsidiaryNon-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash Flows from Operating Activities:**                                                      |       |              |       |                       |       |                           |       |                                  |       |             |       |
| Net Earnings                                                                                   |       | $                 | 10,120     |                       | $          | 44,252                         |       | $                                     | 3,525      |             | $          | (47,777 | ) | $ | 10,120 |   |
| Adjustments to Reconcile Net Earnings to  Net Cash (Used in) Provided By Continuing Operations |       | (36,176           | )          | 10,648                     |       | 534                            |       | 47,160                                |       | 22,166           |       |
| Changes in operating assets and liabilities                                                    |       | (24,557           | )          | 1,242                      |       | (1,342                         | )          | —                                |       | (24,657          | )          |
| Net cash (used in) provided by continuing  operations                                          |       | (50,613           | )          | 56,142                     |       | 2,717                          |       | (617                                  | )          | 7,629            |       |
| Net cash used in discontinued operations                                                       |       | (133              | )          | (282                       | )          | —                         |       | —                                |       | (415             | )          |
| Net Cash (Used in) Provided by Operating  Activities                                           |       | (50,746           | )          | 55,860                     |       | 2,717                          |       | (617                                  | )          | 7,214            |       |
|                                                                                           |       |              |       |                       |       |                           |       |                                  |       |             |       |
| Net Cash Provided in Investing Activities                                                      |       | 27,584            |       | 49,517                     |       | —                         |       | —                                |       | 77,101           |       |
|                                                                                           |       |              |       |                       |       |                           |       |                                  |       |             |       |
| Net Cash Provided by (Used in) Financing  Activities                                           |       | 53,713            |       | (105,714                   | )          | 2,358                          |       | 617                                   |       | (49,026          | )          |
|                                                                                           |       |              |       |                       |       |                           |       |                                  |       |             |       |
| Net Increase (Decrease) in Cash and Cash  Equivalents                                          |       | 30,551            |       | (337                       | )          | 5,075                          |       | —                                |       | 35,289           |       |
| Cash and Cash Equivalents at Beginning of  Period                                              |       | 12,208            |       | 6,655                      |       | 2,063                          |       | —                                |       | 20,926           |       |
| Cash and Cash Equivalents at End of Period                                                     |       | $                 | 42,759     |                       | $          | 6,318                          |       | $                                     | 7,138      |             | $          | — |   | $ | 56,215 |   |

 
| **Twenty-six weeks ended August 4, 2007**                             | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash Flows from Operating Activities:**                                                      |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Earnings                                                                                   |       | $                 | 7,354      |                       | $          | 34,172                           |       | $                                     | 3,971      |             | $          | (38,143 | ) | $ | 7,354 |   |
| Adjustments to Reconcile Net Earnings to  Net Cash (Used in) Provided By Continuing Operations |       | (9,136            | )          | 23,968                     |       | 1,188                            |       | 36,178                                |       | 52,198           |       |
| Changes in operating assets and liabilities                                                    |       | (40,621           | )          | 26,893                     |       | (2,889                           | )          | 732                                   |       | (15,885          | )          |
| Net cash (used in) provided by continuing  operations                                          |       | (42,403           | )          | 85,033                     |       | 2,270                            |       | (1,233                                | )          | 43,667           |       |
| Net cash provided  by discontinued operations                                                  |       | 150               |       | 587                        |       | —                           |       | —                                |       | 737              |       |
| Net Cash (Used  in) Provided by Operating Activities                                           |       | (42,253           | )          | 85,620                     |       | 2,270                            |       | (1,233                                | )          | 44,404           |       |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net cash used in  investing activities                                                         |       | 22,988            |       | (14,198                    | )          | —                           |       | —                                |       | 8,790            |       |
| Net cash used in  discontinued operations                                                      |       | (130              | )          | (115                       | )          | —                           |       | —                                |       | (245             | )          |
| Net Cash Provided  by (Used in) Investing Activities                                           |       | 22,858            |       | (14,313                    | )          | —                           |       | —                                |       | 8,545            |       |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Cash Provided  by (Used in) Financing Activities                                           |       | 20,216            |       | (70,691                    | )          | 984                              |       | 1,233                                 |       | (48,258          | )          |
|                                                                                           |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Increase in  Cash and Cash Equivalents                                                     |       | 821               |       | 616                        |       | 3,254                            |       | —                                |       | 4,691            |       |
| Cash and Cash  Equivalents at Beginning of Period                                              |       | 13,581            |       | 7,946                      |       | 357                              |       | —                                |       | 21,884           |       |
| Cash and Cash  Equivalents at End of Period                                                    |       | $                 | 14,402     |                       | $          | 8,562                            |       | $                                     | 3,611      |             | $          | — |   | $ | 26,575 |   |

 

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NOTE13. Commitments and Contingencies

 

Duringthe fourth quarter of 2006 and the first quarter of 2007, the Company wasserved 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) accruedvacation time, (iii) all time worked (i.e. “off the clock” work) and/or (iv) lateor missed meal periods or rest breaks. The plaintiffs also allege that theCompany violated certain record keeping requirements arising out of theforegoing alleged violations. The lawsuits (i) claim these allegedpractices are unfair business practices, (ii) request back pay,restitution, penalties, interest and attorney fees and (iii) request thatthe Company be enjoined from committing further unfair business practices.  The initial accrued vacation time claims werefiled in California state court and subsequently removed by the Company toFederal court on jurisdictional grounds. During the third quarter of 2007, the Company reached a settlement inprinciple regarding the accrued vacation time claims, which was subject tocourt approval.  Following the Federalcourt approval hearing on May 5, 2008, the Federal court reversed its earlierfinding of proper Federal jurisdiction and remanded the case back to Californiastate court.  On July 22, 2008, theCompany agreed to a restructured settlement in principle with the plaintiffsregarding the accrued vacation time claims and subsequently submitted suchsettlement to the California state court for approval.  On May 8, 2008, the Company reached asettlement in principle with respect to the remaining purported class actionclaims, which is subject to court approval.

 

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

 

TheCompany believes that amounts accrued for awards or assessments in connectionwith all such matters, which amounts were increased by $1,200 and $3,100 in thethirteen weeks and twenty-six weeks ended August 2, 2008, respectively,are adequate and that the ultimate resolution of these matters will not have amaterial adverse effect on the Company’s financial position.  However, there exists a reasonablepossibility of loss in excess of the amounts accrued, the amount of whichcannot currently be estimated.  While theCompany does not believe that the amount of such excess loss could be materialto the Company’s financial position, any such loss could have a materialadverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

NOTE14. Other Comprehensive Income

 

Thefollowing are the components of comprehensive income:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **August 2,  2008**           | ** ** | **August 4,  2007**             | ** ** | **August 2,  2008** | ** ** | **August 4,  2007** | ** ** |
| Net earnings                                     |       | $                                  | 5,448      |                                 | $          | 4,179 |   | $ | 10,120 |   | $ | 7,354 |   |
| Other comprehensive income (loss), net of  tax:  |       |                               |       |                                 |       |   |   |   |   |
| Defined benefit plan adjustment                  |       | 213                                |       | 389                                  |       | 487 |   | 779 |   |
| Derivative financial instrument adjustment  (1)  |       | 1,637                              |       | 1,633                                |       | 3,060 |   | 717 |   |
| Comprehensive income                             |       | $                                  | 7,298      |                                 | $          | 6,201 |   | $ | 13,667 |   | $ | 8,850 |   |

 

Thecomponents of accumulated other comprehensive loss are:

 
| **(dollar amounts in thousands)**        | ** ** | **August 2,  2008** | ** ** | **February 2,  2008** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Derivative financial instrument adjustment,  net of tax |       | $                        | 5,522      |                       | $          | 2,462 |   |
| Defined benefit plan adjustment, net of tax             |       | (16,158                  | )          | (16,645                    | )          |
| Accumulated other comprehensive loss                    |       | $                        | (10,636    | )                          | $          | (14,183 | ) |

 

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(1)                                Of the net $4,767increase in fair value during the twenty-six weeks ended August 2, 2008,$4,869 ($3,061 net of tax) is included in Accumulated Other Comprehensive Losson the condensed consolidated balance sheet and a $102 expense was recordedthrough the condensed consolidated statement of operations.

 

NOTE15. Fair Value Measurements

 

The Company adopted SFAS No. 157,(as impacted by FSP Nos. 157-1 and 157-2) effective February 3, 2008, withrespect to fair value measurements of (a) nonfinancial assets and liabilitiesthat are recognized or disclosed at fair value in the Company’s financialstatements on a recurring basis (at least annually) and (b) all financialassets and liabilities.

 

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

 

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requiring that the mostobservable inputs be used when available. Observable inputs are inputs marketparticipants would use in valuing the asset or liability developed based onmarket data obtained from sources independent of the Company. Unobservableinputs are inputs that reflect the Company’s assumptions about the factorsmarket participants would use in valuing the asset or liability developed basedupon the best information available in the circumstances. The hierarchy isbroken down into three levels. Level 1 inputs are quoted prices (unadjusted) inactive markets for identical assets or liabilities. Level 2 inputs includequoted prices for similar assets or liabilities in active markets. Level 3inputs are unobservable inputs for the asset or liability.

 

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

 

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

 

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

 

Long-term investments:

 

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

 

Derivative liability:

 

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

 

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

 
| **(dollar amounts in thousands)** | ** ** | **Fair Value  at**      | ** ** | **Fair Value Measurements   Using Inputs Considered as** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **Description**                                  | ** ** | **August 2, 2008** | ** ** | **Level 1**                                                                  | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:                                          |       |                         |       |                                                                              |       |   |   |   |   |
| Other long-term assets                           |       |                         |       |                                                                              |       |   |   |   |   |
| Long-term investments                            |       | $                            | 7,561      |                                                                              | $          | 7,561 |   |   |   |   |   |
|                                             |       |                         |       |                                                                              |       |   |   |   |   |
| Liabilities:                                     |       |                         |       |                                                                              |       |   |   |   |   |
| Other long-term liabilities                      |       |                         |       |                                                                              |       |   |   |   |   |
| Derivative liability                             |       | $                            | 6,196      |                                                                              |       |   | $ | 6,196 |   |   |   |
|                                                  |            |                              |            |                                                                                   |            |  |  |  |  |  |  |  |

 

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

 

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

 

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

 

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

 

OVERVIEW

 

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

 

Forthe thirteen weeks ended August 2, 2008, our comparable sales (salesgenerated by locations in operation during the same period) decreased by7.5%.  This decrease in comparable saleswas comprised of a 8.0% decrease in comparable merchandise sales and 5.2%decrease in comparable service revenue. Merchandise sales were negatively affected by the discontinuance andplanned exit of certain non-core merchandise offset in part by increased tiresales.  Both comparable merchandise salesand service revenue were affected by decreasing customer count.

 

Ournet earnings for the thirteen weeks ended August 2, 2008 were $5,448,000or $1,269,000 higher than the $4,179,000 of earnings reported in the thirteenweeks ended August 4, 2007.  Thisincrease in profitability resulted primarily from reduced selling, general andadministrative expenses, real estate gains generated from our sale-leasebacktransaction and a one-time out of period (see note 5) income tax benefit, whichoffset lower gross margins due to our decreased revenues.

 

Forthe twenty-six weeks ended August 2, 2008, our comparable net salesdecreased 6.6% with comparable merchandise sales decreasing 7.1% and servicerevenue decreasing 4.0%.  Net earningsfor these twenty-six weeks were $10,120,000 versus $7,354,000 in the sameperiod of fiscal 2007. The increase was driven by the same factors as discussedabove.

 

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

 

LIQUIDITYAND CAPITAL RESOURCES – August 2, 2008

 

Ourcash requirements arise principally from the purchase of inventory and capitalexpenditures related to existing stores, offices, warehouses and informationsystems. The capital expenditures for the twenty-six weeks ended August 2,2008 were used primarily to purchase 29 properties for $117,121,000 that werepreviously leased under a master operating lease and for store capitalmaintenance and improvements. During the twenty-six weeks ended August 2,2008, we invested approximately $13,169,000 in store capital maintenance andimprovements versus the $18,345,000 invested during the same period for fiscal2007. We estimate that capital expenditures related to existing stores,warehouses and offices and information systems for the remaining six months offiscal 2008 will be approximately $30,000,000.

 

Weexpect inventory levels to remain constant for the balance of fiscal 2008.

 

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

 

OnJuly 30, 2008, the Company completed a sale-leaseback transaction for 22stores. The $75,951,000 net proceeds were used to finance, together with$41,170,000 of cash on hand, the purchase of the 29 properties for $117,121,000that were previously leased under a master operating lease.

 

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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 for the next 12 months. We have nomaterial debt maturities due within the next twelve months.

 

WorkingCapital increased from $195,343,000 at February 2, 2008 to $223,588,000 atAugust 2, 2008. At August 2, 2008, we had stockholders’ equity of$478,189,000 and long-term debt, net of current maturities, of $335,576,000.Our long-term debt was approximately 41% of our total capitalization at August 2,2008 and 46% at February 2, 2008. As of August 2, 2008, we hadfurther undrawn availability under our revolving credit facility totaling$233,341,000.

 

Duringthe second quarter of 2008, we amended our vendor financing program to reducethe availability to $30,000,000 reflecting current usage. Under this program,the Company’s factor makes accelerated and discounted payments to our vendorsand the Company, in turn, makes its regularly scheduled full vendor payments tothe factor. As of August 2, 2008, the Company had an outstanding balanceof $28,212,000 under these programs, classified as trade payable programliability in the consolidated balance sheet.

 

DISCONTINUEDOPERATIONS

 

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

 

RESULTSOF OPERATIONS

 

ThirteenWeeks Ended August 2, 2008 vs. Thirteen Weeks Ended August 4, 2007

 

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

 
| ** **                                               | ** ** | **Percentage of Total Revenues**  | ** ** | **Percentage Change**                             | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Thirteen weeks ended**                       | ** ** | **August 2, 2008  (Fiscal 2008)** | ** ** | **August 4, 2007   (Fiscal 2007)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                     |       |                                             |       |                                                   |       |   |   |
| Merchandise Sales                                        |       | 81.6                                             | %          | 82.1                                                   | %          | (9.9 | )% |
| Service Revenue (1)                                      |       | 18.4                                             |       | 17.9                                                   |       | (7.2 | ) |
| Total Revenue                                            |       | 100.0                                            |       | 100.0                                                  |       | (9.4 | ) |
| Costs of Merchandise Sales (2)                           |       | 69.7                                             | (3)        | 69.7                                                   | (3)        | 10.0 |   |
| Costs of Service Revenue (2)                             |       | 92.6                                             | (3)        | 88.3                                                   | (3)        | 2.6 |   |
| Total Costs of Revenue                                   |       | 73.9                                             |       | 73.1                                                   |       | 8.4 |   |
| Gross Profit from Merchandise Sales                      |       | 30.3                                             | (3)        | 30.3                                                   | (3)        | (9.8 | ) |
| Gross Profit from Service Revenue                        |       | 7.4                                              | (3)        | 11.7                                                   | (3)        | (41.7 | ) |
| Total Gross Profit                                       |       | 26.1                                             |       | 26.9                                                   |       | (12.3 | ) |
| Selling, General and Administrative  Expenses            |       | 24.5                                             |       | 23.9                                                   |       | 7.0 |   |
| Net (Loss) Gain from Dispositions of Assets              |       | 0.8                                              |       | —                                                 |       | NM |   |
| Operating Profit                                         |       | 2.4                                              |       | 3.1                                                    |       | (29.4 | ) |
| Non-operating Income                                     |       | 0.2                                              |       | 0.3                                                    |       | (34.2 | ) |
| Interest Expense                                         |       | 1.3                                              |       | 2.2                                                    |       | 47.7 |   |
| Earnings from Continuing Operations Before  Income Taxes |       | 1.3                                              |       | 1.1                                                    |       | 5.1 |   |
| Income Tax Expense                                       |       | 13.1                                             | (4)        | 37.3                                                   | (4)        | 63.1 |   |
| Net Earnings from Continuing Operations                  |       | 1.2                                              |       | 0.7                                                    |       | 45.7 |   |
| Discontinued Operations, Net of Tax                      |       | 0.1                                              |       | —                                                 |       | NM |   |
| Net Earnings                                             |       | 1.1                                              |       | 0.8                                                    |       | 30.4 |   |

 

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(1) Servicerevenue consists of the labor charge for installing merchandise or maintainingor repairing vehicles, excluding the sale of any installed parts or materials.

(2) Costsof merchandise sales include the cost of products sold, buying, warehousing andstore occupancy costs. Costs of service revenue include service center payrolland related employee benefits and service center occupancy costs. Occupancycosts include utilities, rents, real estate and property taxes, repairs andmaintenance and depreciation and amortization expenses.

(3) Asa percentage of related sales or revenue, as applicable.

(4) Asa percentage of Earnings from Continuing Operations Before Income Taxes andCumulative Effect of Change in Accounting Principle.

NM:Not Meaningful

 

Totalrevenue for the thirteen weeks ended August 2, 2008 decreased 9.4%, with a7.5% comparable revenue decrease resulting from the exiting of certain non-coremerchandise categories and a reduction in customer traffic versus the sameperiod last year. The reduction in revenues and customer count was affected bya reduction in our gross media spend of approximately 12% and a weakenedeconomic environment. Comparable merchandise sales decreased 8.0% and comparableservice revenues decreased 5.2%.

 

Grossprofit from merchandise as a percentage of sales was 30.3% or flat with thesecond quarter of fiscal 2007.  Indollars, merchandise gross profit decreased $13,443,000 or 9.8% due to reducedmerchandise sales.  Our product marginsimproved by 50 basis points to 45.5%, while our distribution costs decreased 30basis points, which improvements were offset by an 80 basis point increase inour occupancy costs due to increased rental obligations stemming from the recently-completedsale-leaseback transactions.

 

Ourgross profit from service revenue decreased $4,839,000 when compared to thethirteen weeks ended August 4, 2007. As a percentage of service revenue, it decreased to 7.4% from 11.7% inthe second quarter of fiscal 2007, due to increased payroll and relatedexpenses, and increased occupancy costs.

 

Selling,general and administrative expenses, as a percentage of total revenuesincreased to 24.5% from 23.9% in the second quarter of fiscal 2007.   In dollars, selling, general andadministrative expenses decreased $9,238,000 or 7.0%.  This decrease in dollars was the result ofexpense control initiatives, with major reductions in compensation andcompensation related benefits of $9,739,000 and gross media expenditures of$2,700,000, partially offset by increased legal and information system costs of$2,590,000 compared to the same period a year ago.

 

Netgain (loss) from dispositions of assets increased by $4,092,000 to a $4,077,000gain from a $15,000 loss in the comparable period a year ago, primarily as aresult of the sale-leaseback transaction on 22 stores during the quarter.

 

Interestexpense decreased $5,879,000 to $6,452,000 in the thirteen weeks ended August 2,2008 from the $12,331,000 recorded in the thirteen weeks ended August 4,2007 due to reduced debt levels.

 

Ourincome tax expense for second quarter of fiscal 2008 was $866,000 or aneffective rate of 13.1%.  This comparesto an expense in second quarter of fiscal 2007 of $2,348,000 or an effectiverate of 37.3%.  In the current quarter,the Company recorded a one-time benefit of approximately $2,400,000 resultingfrom the recording of a June 2007 state tax law change.

 

Netearnings of $5,448,000 for the second quarter of fiscal 2008 improved$1,269,000 from the comparative period prior fiscal year resulting primarilyfrom reduced selling, general and administrative expenses, increased realestate gains generated from our sale-leaseback transaction, lower interestexpense, and a one-time income tax benefit, which offset lower gross marginsdue to our decreased revenues.

 

Twenty-sixWeeks Ended August 2, 2008 vs. Twenty-six Weeks Ended August 4, 2007

 

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

 

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| ** **                                               | ** ** | **Percentage of Total Revenues**  | ** ** | **Percentage Change**                       | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **Twenty-six weeks ended**                     | ** ** | **August 2, 2008  (Fiscal 2008)** | ** ** | **August 4, 2007  (Fiscal 2007)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| Merchandise Sales                                        |       | 81.3                                             | %          | 81.8                                             | %          | (9.1 | )% |
| Service Revenue (1)                                      |       | 18.7                                             |       | 18.2                                             |       | (6.1 | ) |
| Total Revenue                                            |       | 100.0                                            |       | 100.0                                            |       | (8.6 | ) |
| Costs of Merchandise Sales (2)                           |       | 70.3                                             | (3)        | 70.3                                             | (3)        | 9.1 |   |
| Costs of Service Revenue (2)                             |       | 90.7                                             | (3)        | 88.0                                             | (3)        | 3.2 |   |
| Total Costs of Revenue                                   |       | 74.1                                             |       | 73.5                                             |       | 7.8 |   |
| Gross Profit from Merchandise Sales                      |       | 29.7                                             | (3)        | 29.7                                             | (3)        | (9.2 | ) |
| Gross Profit from Service Revenue                        |       | 9.3                                              | (3)        | 12.0                                             | (3)        | (27.6 | ) |
| Total Gross Profit                                       |       | 25.9                                             |       | 26.5                                             |       | (10.7 | ) |
| Selling, General and Administrative  Expenses            |       | 24.2                                             |       | 23.7                                             |       | 6.7 |   |
| Net Gain from Dispositions of Assets                     |       | 1.0                                              |       | 0.2                                              |       | NM |   |
| Operating Profit                                         |       | 2.6                                              |       | 3.0                                              |       | (19.3 | ) |
| Non-operating Income                                     |       | 0.1                                              |       | 0.3                                              |       | (59.4 | ) |
| Interest Expense                                         |       | 1.2                                              |       | 2.3                                              |       | 52.5 |   |
| Earnings from Continuing Operations Before  Income Taxes |       | 1.6                                              |       | 1.0                                              |       | 40.6 |   |
| Income Tax Expense                                       |       | 31.0                                             | (4)        | 38.5                                             | (4)        | (13.1 | )  |
| Net Earnings from Continuing Operations                  |       | 1.1                                              |       | 0.6                                              |       | 57.8 |   |
| Discontinued Operations, Net of Tax                      |       | (0.1                                             | )          | —                                           |       | NM |   |
| Net Earnings                                             |       | 1.0                                              |       | 0.7                                              |       | 37.6 |   |

 

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(1) Servicerevenue consists of the labor charge for installing merchandise or maintainingor repairing vehicles, excluding the sale of any installed parts or materials.

(2) Costsof merchandise sales include the cost of products sold, buying, warehousing andstore occupancy costs. Costs of service revenue include service center payrolland related employee benefits and service center occupancy costs. Occupancycosts include utilities, rents, real estate and property taxes, repairs andmaintenance and depreciation and amortization expenses.

(3) Asa percentage of related sales or revenue, as applicable.

(4) Asa percentage of Earnings from Continuing Operations Before Income Taxes andCumulative Effect of Change in Accounting Principle.

NM:Not Meaningful

 

Totalrevenues for the first twenty-six weeks of fiscal 2008 decreased 8.6% with a6.6% comparable revenue decrease, resulting primarily from a decline in retailand commercial merchandise sales compared to the first twenty-six weeks of2007.    Comparable merchandise salesdecreased 7.1% and comparable service revenue decreased 4.0%.  The decline in merchandise sales resultedprimarily from the exiting of certain non-core merchandise categories and areduction in customer traffic.

 

Grossprofit from merchandise as a percentage of merchandise sales was 29.7% for thetwenty-six week period of both fiscal 2008 and 2007.  In dollars, gross profit from merchandisesales decreased $24,296,000 or 9.2% due to reduced merchandise sales. While theproduct gross profit improved by 60 basis points and distribution costsimproved by 20 basis points, they were offset by an 80 basis point increase inour occupancy costs due to increased rental obligations stemming from therecently-completed sale-leaseback transactions.

 

Ourgross profit from service revenue as a percentage of service revenues decreasedto 9.3% from 12.0% in the first six months of fiscal 2007.  In dollars, for the twenty-six weeks ended August 2,2008, gross profit from service revenue was $17,328,000 or $6,609,000 less thanthe $23,937,000 recorded in the twenty-six weeks ended August 4, 2007.This 27.6% decrease resulted primarily from the following: a declining revenuebase, a semi-fixed payroll and benefits cost, and a fixed occupancy cost.

 

Selling,general and administrative expenses as a percentage of total revenues increasedfrom 23.7% in the first six months of fiscal 2007 to 24.2% in the same periodof fiscal 2008.  In dollars, this expensedecreased $17,333,000 or 6.7%.  Thisdecrease resulted from a $6,991,000 or 11.9% reduction in general andadministrative expenses due to decreased payroll offset by increasedinformation systems costs related to outsourcing our IT center.  In addition, we reduced our employee benefitscosts and incurred lower media expense.

 

Netgains from disposition of assets increased $7,264,000 to $9,608,000 in thetwenty-six weeks ended August 2, 2008 from $2,344,000.  The increase resulted principally from threesale-leaseback transactions completed during fiscal 2008.

 

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Interestexpense of $11,879,000 for the current period was $13,108,000 less than the$24,987,000 recorded in the first six months of fiscal 2007 due to a reduced debtlevel and gains resulting from the debt repurchases.

 

Incometax expense was $4,960,000 or an effective rate of 31.0% in the twenty-sixweeks ended August 2, 2008 as compared to $4,384,000 or an effective rateof 38.4% in the twenty-six weeks ended August 4, 2007.  During the first six months of fiscal 2008,the Company recorded a one-time benefit of approximately $2,400,000 resultingfrom the recording of a June 2007 state tax law change.

 

Netearnings improved to $10,120,000 in the current twenty-six weeks as compared to$7,354,000 in the prior year.  This$2,766,000 improvement resulting primarily from reduced selling, general andadministrative expenses, real estate gains generated from our sale-leasebacktransactions, lower interest expense, and a one-time out of period income taxbenefit, which offset lower gross margins due to our decreased revenues.

 

INDUSTRYCOMPARISON

 

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

 

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

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **August 2,**                 | ** ** | **August 4,**                   | ** ** | **August 2,** | ** ** | **August 4,** | ** ** |
| **(Dollar amounts in thousands)** | ** ** | **2008**                           | ** ** | **2007**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Retail Sales (1)                                 |       | $                                  | 275,890    |                                 | $          | 318,692 |   | $ | 549,215 |   | $ | 629,811 |   |
| Service Center Revenue (2)                       |       | 224,153                            |       | 233,400                              |       | 448,871 |   | 461,864 |   |
| Total Revenues                                   |       | $                                  | 500,043    |                                 | $          | 552,092 |   | $ | 998,086 |   | $ | 1,091,675 |   |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Gross Profit from Retail Sales (3)               |       | $                                  | 78,375     |                                 | $          | 91,763 |   | $ | 151,779 |   | $ | 180,529 |   |
| Gross Profit from Service Center Revenue  (3)    |       | 52,059                             |       | 56,953                               |       | 106,621 |   | 108,776 |   |
| Total Gross Profit                               |       | $                                  | 130,434    |                                 | $          | 148,716 |   | $ | 258,400 |   | $ | 289,305 |   |

 

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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.

 

NEWACCOUNTING STANDARDS TO BE ADOPTED

 

InDecember 2007, the Financial Accounting Standards Board (FASB) issued SFASNo. 141R, “Business Combinations,” which replaces SFAS No. 141, “BusinessCombinations.” SFAS No. 141R, among other things, establishes principlesand requirements for how an acquirer entity recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumedand any controlling interests in the acquired entity; recognizes and measuresthe goodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. Costs of the acquisition will be recognized separatelyfrom the business combination. SFAS No. 141R applies prospectively, exceptfor taxes, to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period on or after December 15,2008.

 

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

 

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

 

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

 

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

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

 

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

 

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

 

FORWARD-LOOKINGSTATEMENTS

 

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

 

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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 August 2, 2008, the Company had borrowings of$530,000 under this facility. Additionally, the Company has a $153,870,000Senior Secured Term Loan facility that bears interest at LIBOR plus 2.0%.

 

The Company has an interest rate swap for anotional amount of $145,000,000, which is designated as a cash flow hedge onits $153,870,000 Senior Secured Term Loan. The Company documented that thisswap met the requirements of SFAS No. 133 for hedge accounting on April 9,2007, and has since recorded the effective portion of the change in fair valuethrough Accumulated Other Comprehensive Loss.

 

The fair value of the interest rate swap was a$6,196,000 and $10,963,000 payable at August 2, 2008 and February 2,2008. Of the net $4,767,000 increase in fair value during the twenty-six weeksended August 2, 2008, $4,869,000 ($3,060,000 net of tax) was included inAccumulated Other Comprehensive Loss on the condensed consolidated balancesheet.

 

Item 4. Controls and Procedures.

 

EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES

 

Ourdisclosure controls and procedures (as defined in Rule 13a-15 of theSecurities Exchange Act of 1934 (the “Exchange Act”)) are designed to ensurethat information required to be disclosed is accumulated and communicated toour management, including our principal executive and principal financialofficers, as appropriate to allow timely decisions regarding requireddisclosure.  The Company’s management,with the participation of the Company’s chief executive officer and chieffinancial officer, evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report.Based on that evaluation, the chief executive officer and chief financial officerconcluded that our disclosure controls and procedures as of the end of theperiod covered by this report were not functioning effectively to providereasonable assurance that the information required to be disclosed by theCompany in reports filed under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms due to the fact that there was a material weakness in ourinternal control over financial reporting (which is a subset of disclosurecontrols and procedures) as described below.

 

CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Duringthe second quarter of fiscal 2007, the Company determined it had a materialweakness in its internal control over financial reporting related to itsfinancial close and reporting process. Since that time, the Company hascontinued to implement changes designed to enhance the effectiveness of itsfinancial close and reporting process including (i) hiring staff andproviding additional accounting research resources, (ii) improving processdocumentation and (iii) improving the review process by more senioraccounting personnel. However, as of August 2, 2008, the Company believesthat its ongoing efforts to hire and train additional staff are not yetcomplete. Accordingly, the Company cannot provide its constituents withreasonable assurance that the material weakness in the financial close andreporting process has been remediated. The Company has retained experiencedaccounting consultants, other than the Company’s independent registered publicaccounting firm, with relevant accounting experience, skills and knowledge, toprovide advice to the Company’s management in connection with the fiscal 2008financial reporting process.

 

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

 

Item 5.  Other Information

 

None.

 

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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 wasserved 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) accruedvacation time, (iii) all time worked (i.e. “off the clock” work) and/or (iv) lateor missed meal periods or rest breaks. The plaintiffs also allege that theCompany violated certain record keeping requirements arising out of theforegoing alleged violations. The lawsuits (i) claim these allegedpractices are unfair business practices, (ii) request back pay, restitution,penalties, interest and attorney fees and (iii) request that the Companybe enjoined from committing further unfair business practices.  The initial accrued vacation time claims werefiled in California state court and subsequently removed by the Company toFederal court on jurisdictional grounds. During the third quarter of 2007, the Company reached a settlement inprinciple regarding the accrued vacation time claims, which was subject tocourt approval.  Following the Federalcourt approval hearing on May 5, 2008, the Federal court reversed its earlier finding of proper Federaljurisdiction and remanded the case back to California state court.  On July 22, 2008, the Company agreed toa restructured settlement in principle with the plaintiffs regarding theaccrued vacation time claims and subsequently submitted such settlement to theCalifornia state court for approval.  On May 8,2008, the Company reached a settlement in principle with respect to theremaining purported class action claims, which is subject to court approval.

 

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

 

TheCompany believes that amounts accrued for awards or assessments in connectionwith all such matters, which amounts were increased by $1,200 and $3,100 in thethirteen weeks and twenty-six weeks ended August 2, 2008, respectively,are adequate and that the ultimate resolution of these matters will not have amaterial adverse effect on the Company’s financial position.  However, there exists a reasonablepossibility of loss in excess of the amounts accrued, the amount of whichcannot currently be estimated.  While theCompany does not believe that the amount of such excess loss could be materialto the Company’s financial position, any such loss could have a materialadverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

Item 1A.  Risk Factors

 

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

 

Item 2.  Unregistered Sales of EquitySecurities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Submission of Matters to a Vote ofSecurity Holders

 

An annual meeting ofshareholders was held on June 19, 2008. The shareholders elected thedirectors shown below.

 

DirectorsElected at Annual Meeting of Shareholders

 
| **Name**                   | ** ** | **Votes For** | ** ** | **Votes****Withheld** | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------|------------|
| William Leonard            |       | 44,729,966         |       | 4,076,705             |       |
| Peter A. Bassi             |       | 44,408,984         |       | 4,397,688             |       |
| Jane Scaccetti             |       | 44,665,591         |       | 4,141,080             |       |
| John T. Sweetwood          |       | 44,891,624         |       | 3,915,047             |       |
| M. Shân Atkins        |       | 44,217,164         |       | 4,589,508             |       |
| Robert H. Hotz             |       | 44,768,750         |       | 4,037,921             |       |
| James A. Mitarotonda       |       | 44,525,787         |       | 4,280,885             |       |
| Nick White                 |       | 44,828,850         |       | 3,977,821             |       |
| James A. Williams          |       | 43,058,268         |       | 5,748,404             |       |
| Thomas R. Hudson, Jr. |       | 45,341,388         |       | 3,465,284             |       |
| Irvin D. Reid              |       | 44,763,905         |       | 4,042,767             |       |

 

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The shareholders alsovoted on the appointment of the Company’s registered public accounting firm,Deloitte & Touche LLP, with 48,023,662 affirmative votes, 655,799negative votes and 127,207 abstentions.

 

The shareholders alsovoted to amend the Company’s Articles of Incorporation to provide for majorityvoting in uncontested elections of Directors, with 45,025,525 affirmativevotes, 3,545,133 negative votes and 236,005 abstentions.

 

Item 5.  Other Information

 

None.

 

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Item 6.  Exhibits

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

 

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SIGNATURES

 

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

 

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

 

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INDEX TO EXHIBITS

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

 

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