**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

**(Mark One)**

 
| **x**                                                     | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                      |
| **For the quarterly period ended November 3,  2007** |
|                                                      |
| **OR**                                                    |
|                                                      |
| **o**                                                     | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from            to**

 

**CommissionFile No. 1-3381**

 

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

(Exact name of registrant as specified inits charter)

 

| **Pennsylvania**                                          | ** ** | **23-0962915**              |
|-----------------------------------------------------------|------------|-----------------------------|
| (State or other jurisdiction of                           |       | (I.R.S. Employer ID number) |
| incorporation or organization)                            |       |                        |
|                                                      |       |                        |
| **3111 W. Allegheny Ave. Philadelphia, PA**               | ** ** | **19132**                   |
| (Address of principal executive offices)                  |       | (Zip code)                  |
|                                                      |
| **215-430-9000**                                          |
| (Registrant’s telephone number, including area code) |

 

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

 

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

 

Large accelerated filer  o   Acceleratedfiler  x   Non-acceleratedfiler  o

 

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

Asof November 30, 2007 there were 51,729,983 shares of the registrant’sCommon Stock outstanding.

 

 

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Index

 
| ** **                          | ** ** | **Page**                                                                                                                                                                  |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| PART I - FINANCIAL INFORMATION |       |                                                                                                                                                                      |
|                                |       |                                                                                                                                                                      |   |   |
| Item 1.                             |       | Condensed Consolidated Financial Statements  (Unaudited)                                                                                                                  |   |   |
|                                |       |                                                                                                                                                                      |   |   |
|                                |       | Condensed Consolidated Balance Sheets – November 3,  2007 and February 3, 2007                                                                             |   | 3 |
|                                |       |                                                                                                                                                                      |   |   |
|                                |       | Condensed Consolidated Statements of  Operations and Changes in Retained Earnings - Thirteen and Thirty-nine Weeks  Ended November 3, 2007 and October 28, 2006 |   | 4 |
|                                |       |                                                                                                                                                                      |   |   |
|                                |       | Condensed Consolidated Statements of Cash  Flows – Thirty-nine Weeks Ended November 3, 2007 and October 28,  2006 (Restated)                               |   | 5 |
|                                |       |                                                                                                                                                                      |   |   |
|                                |       | Notes to Condensed Consolidated Financial  Statements                                                                                                                     |   | 6-22 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 2.                             |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                               |   | 23-30 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 3.                             |       | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                               |   | 30 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 4.                             |       | Controls and Procedures                                                                                                                                                   |   | 31 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 5.                             |       | Other Information                                                                                                                                                         |   | 31 |
|                                |       |                                                                                                                                                                      |   |   |
| PART II - OTHER INFORMATION    |       |                                                                                                                                                                      |
|                                |       |                                                                                                                                                                      |   |   |
| Item 1.                             |       | Legal Proceedings                                                                                                                                                         |   | 32 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 1A.                            |       | Risk Factors                                                                                                                                                              |   | 32 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 2.                             |       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                              |   | 32 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 3.                             |       | Defaults Upon Senior Securities                                                                                                                                           |   | 32 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 4.                             |       | Submission of Matters to a Vote of Security  Holders                                                                                                                      |   | 32 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 5.                             |       | Other Information                                                                                                                                                         |   | 32 |
|                                |       |                                                                                                                                                                      |   |   |
| Item 6.                             |       | Exhibits                                                                                                                                                                  |   | 32 |
|                                |       |                                                                                                                                                                      |   |   |
| SIGNATURES                          |       | 33                                                                                                                                                                        |
|                                |       |                                                                                                                                                                      |   |   |
| INDEX TO EXHIBITS                   |       | 34                                                                                                                                                                        |
|                                     |            |                                                                                                                                                                           |  |  |  |

 

2

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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

 
| ** **                                                                    | ** ** | **November 3,  2007** | ** ** | **February 3,  2007** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                    | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current  Assets:                                                              |       |                       |       |                       |       |
| Cash and cash equivalents                                                     |       | $                          | 26,200     |                       | $          | 21,884 |   |
| Accounts receivable, net                                                      |       | 28,325                     |       | 29,582                     |       |
| Merchandise inventories                                                       |       | 589,916                    |       | 607,042                    |       |
| Prepaid expenses                                                              |       | 27,894                     |       | 39,264                     |       |
| Deferred income taxes                                                         |       | 28,669                     |       | —                     |       |
| Other                                                                         |       | 65,751                     |       | 70,368                     |       |
| Total Current Assets                                                          |       | 766,755                    |       | 768,140                    |       |
| Property and  Equipment - at cost:                                            |       |                       |       |                       |       |
| Land                                                                          |       | 251,705                    |       | 251,705                    |       |
| Buildings and improvements                                                    |       | 927,134                    |       | 929,225                    |       |
| Furniture, fixtures and equipment                                             |       | 697,660                    |       | 684,042                    |       |
| Construction in progress                                                      |       | 5,894                      |       | 3,464                      |       |
|                                                                          |       | 1,882,393                  |       | 1,868,436                  |       |
| Less accumulated depreciation and  amortization                               |       | 1,019,633                  |       | 962,189                    |       |
| Property and Equipment - net                                                  |       | 862,760                    |       | 906,247                    |       |
| Deferred  income taxes                                                        |       | —                     |       | 24,828                     |       |
| Other                                                                         |       | 23,472                     |       | 67,984                     |       |
| Total Assets                                                                  |       | $                          | 1,652,987  |                       | $          | 1,767,199 |   |
|                                                                          |       |                       |       |                       |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current  Liabilities:                                                         |       |                       |       |                       |       |
| Accounts payable                                                              |       | $                          | 226,535    |                       | $          | 265,489 |   |
| Trade payable program liability                                               |       | 21,596                     |       | 13,990                     |       |
| Accrued expenses                                                              |       | 276,429                    |       | 292,280                    |       |
| Deferred income taxes                                                         |       | —                     |       | 28,931                     |       |
| Current maturities of long-term debt and  obligations under capital leases    |       | 3,445                      |       | 3,490                      |       |
| Total Current Liabilities                                                     |       | 528,005                    |       | 604,180                    |       |
|                                                                          |       |                       |       |                       |       |
| Long-term  debt and obligations under capital leases, less current maturities |       | 549,751                    |       | 535,031                    |       |
| Other  long-term liabilities                                                  |       | 78,930                     |       | 60,233                     |       |
| Commitments  and Contingencies                                                |       |                       |       |                       |       |
| Stockholders’  Equity:                                                   |       |                       |       |                       |       |
| Common Stock, par value $1 per share:                                         |       |                       |       |                       |       |
| Authorized 500,000,000 shares; Issued  68,557,041 shares                      |       | 68,557                     |       | 68,557                     |       |
| Additional paid-in capital                                                    |       | 294,911                    |       | 289,384                    |       |
| Retained earnings                                                             |       | 431,088                    |       | 463,797                    |       |
| Accumulated other comprehensive loss                                          |       | (11,299                    | )          | (9,380                     | )          |
| Less cost of shares in treasury -  14,633,938 shares and 12,427,687 shares    |       | 227,692                    |       | 185,339                    |       |
| Less cost of shares in benefits trust -  2,195,270 shares                     |       | 59,264                     |       | 59,264                     |       |
| Total Stockholders’ Equity                                               |       | 496,301                    |       | 567,755                    |       |
| Total  Liabilities and Stockholders’ Equity                              |       | $                          | 1,652,987  |                       | $          | 1,767,199 |   |

 

Seenotes to condensed consolidated financial statements.

 

3

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THE PEP BOYS - MANNY, MOE & JACKAND SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

AND CHANGES IN RETAINEDEARNINGS

(dollar amounts in thousands, except pershare amounts)

UNAUDITED

 
| ** **                                                                                                   | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                   | ** ** | **November 3,  2007**         | ** ** | **October 28,  2006**            | ** ** | **November 3,  2007** | ** ** | **October 28,  2006** | ** ** |
| Merchandise  Sales                                                                                           |       | $                                  | 435,725    |                                  | $          | 453,711 |   | $ | 1,339,329 |   | $ | 1,393,023 |   |
| Service  Revenue                                                                                             |       | 99,651                             |       | 97,138                                |       | 300,949 |   | 292,992 |   |
| Total  Revenues                                                                                              |       | 535,376                            |       | 550,849                               |       | 1,640,278 |   | 1,686,015 |   |
| Costs of  Merchandise Sales                                                                                  |       | 350,398                            |       | 323,025                               |       | 985,508 |   | 995,447 |   |
| Costs of  Service Revenue                                                                                    |       | 89,370                             |       | 90,131                                |       | 267,232 |   | 268,895 |   |
| Total Costs  of Revenues                                                                                     |       | 439,768                            |       | 413,156                               |       | 1,252,740 |   | 1,264,342 |   |
| Gross Profit  from Merchandise Sales                                                                         |       | 85,327                             |       | 130,686                               |       | 353,821 |   | 397,576 |   |
| Gross Profit  from Service Revenue                                                                           |       | 10,281                             |       | 7,007                                 |       | 33,717 |   | 24,097 |   |
| Total Gross Profit                                                                                           |       | 95,608                             |       | 137,693                               |       | 387,538 |   | 421,673 |   |
| Selling,  General and Administrative Expenses                                                                |       | 134,542                            |       | 139,255                               |       | 395,459 |   | 410,020 |   |
| Net (Loss)  Gain from Dispositions of Assets                                                                 |       | (515                               | )          | 213                                   |       | 1,829 |   | 6,229 |   |
| **Operating  (Loss) Profit**                                                                                 | ** ** | **(39,449**                        | **)**      | **(1,349**                            | **)**      | **(6,092** | **)** | **17,882** | ** ** |
| Non-operating  Income                                                                                        |       | 1,032                              |       | 1,017                                 |       | 4,703 |   | 5,294 |   |
| Interest  Expense                                                                                            |       | 11,501                             |       | 15,581                                |       | 36,488 |   | 37,886 |   |
| Loss From Continuing Operations Before  Income Taxes and Cumulative Effect of Change in Accounting Principle |       | (49,918                            | )          | (15,913                               | )          | (37,877 | ) | (14,710 | ) |
| Income Tax Benefit                                                                                           |       | (21,837                            | )          | (5,200                                | )          | (17,212 | ) | (4,600 | ) |
| Net Loss From Continuing Operations Before  Cumulative Effect of Change in Accounting Principle              |       | (28,081                            | )          | (10,713                               | )          | (20,665 | ) | (10,110 | ) |
| Gain (Loss) From Discontinued Operations,  Net of Tax                                                        |       | 91                                 |       | (205                                  | )          | 29 |   | (338 | ) |
| Cumulative Effect of Change in Accounting  Principle, Net of Tax                                             |       | —                             |       | 4                                     |       | — |   | 183 |   |
| **Net Loss**                                                                                                 | ** ** | **(27,990**                        | **)**      | **(10,914**                           | **)**      | **(20,636** | **)** | **(10,265** | **)** |
|                                                                                                         |       |                               |       |                                  |       |   |   |   |   |
| Retained Earnings, beginning of period                                                                       |       | 462,615                            |       | 474,858                               |       | 463,797 |   | 481,926 |   |
| Cumulative effect adjustment for adoption  of FIN 48                                                         |       | —                             |       | —                                |       | (155 | ) | — |   |
| Cash Dividends                                                                                               |       | (3,510                             | )          | (3,691                                | )          | (10,630 | ) | (11,207 | ) |
| Effect of Stock Options                                                                                      |       | —                             |       | (209                                  | )          | (1,261 | ) | (285 | ) |
| Dividend Reinvestment Plan                                                                                   |       | (27                                | )          | (31                                   | )          | (27 | ) | (156 | ) |
| Retained Earnings, end of period                                                                             |       | $                                  | 431,088    |                                  | $          | 460,013 |   | $ | 431,088 |   | $ | 460,013 |   |
|                                                                                                         |       |                               |       |                                  |       |   |   |   |   |
| Basic and Diluted Loss Per Share:                                                                            |       |                               |       |                                  |       |   |   |   |   |
|                                                                                                         |       |                               |       |                                  |       |   |   |   |   |
| Net Loss from Continuing Operations Before  Cumulative Effect of Change in Accounting Principle              |       | $                                  | (0.54      | )                                     | $          | (0.20 | ) | $ | (0.40 | ) | $ | (0.19 | ) |
| Discontinued Operations, Net of Tax                                                                          |       | —                             |       | —                                |       | — |   | — |   |
| Cumulative Effect of Change in Accounting  Principle, Net of Tax                                             |       | —                             |       | —                                |       | — |   | — |   |
| Loss Per Share                                                                                               |       | $                                  | (0.54      | )                                     | $          | (0.20 | ) | $ | (0.40 | ) | $ | (0.19 | ) |
|                                                                                                         |       |                               |       |                                  |       |   |   |   |   |
| Cash Dividends Per Share                                                                                     |       | $                                  | 0.0675     |                                  | $          | 0.0675 |   | $ | 0.2025 |   | $ | 0.2025 |   |

 

Seenotes to condensed consolidated financial statements.

 

4

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts inthousands)

UNAUDITED

 
| **Thirty-nine weeks ended**                                             | ** ** | **November 3,  2007** | ** ** | **October 28,  2006**                     | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                 | ** ** | **(as restated,  see Note 16)** | ** ** |
| Cash Flows  from Operating Activities:                                            |       |                       |       |                                           |       |
| Net Loss                                                                          |       | $                          | (20,636    | )                                              | $          | (10,265 | ) |
| Adjustments to reconcile net loss to net  cash provided by continuing operations: |       |                       |       |                                           |       |
| Net (earnings) loss from discontinued  operations                                 |       | (29                        | )          | 338                                            |       |
| Depreciation and amortization                                                     |       | 62,416                     |       | 62,546                                         |       |
| Inventory impairment                                                              |       | 32,803                     |       | —                                         |       |
| Cumulative effect of change in accounting  principle, net of tax                  |       | —                     |       | (183                                           | )          |
| Accretion of asset disposal obligation                                            |       | 194                        |       | 203                                            |       |
| Loss on defeasance of convertible debt                                            |       | —                     |       | 755                                            |       |
| Stock compensation expense                                                        |       | 8,529                      |       | 2,611                                          |       |
| Cancellation of vested stock options                                              |       | —                     |       | (1,056                                         | )          |
| Deferred income taxes                                                             |       | (11,812                    | )          | (7,366                                         | )          |
| Gain from dispositions of assets &  insurance recoveries                 |       | (1,829                     | )          | (6,229                                         | )          |
| Change in fair value of derivatives                                               |       | 3,665                      |       | —                                         |       |
| Loss from asset impairment                                                        |       | 10,963                     |       | 550                                            |       |
| Excess tax benefits from stock based awards                                       |       | (687                       | )          | (37                                            | )          |
| Increase in cash surrender value of life  insurance policies                      |       | (5,423                     | )          | (1,593                                         | )          |
| Changes in Operating Assets and  Liabilities:                                     |       |                       |       |                                           |       |
| Decrease in accounts receivable, prepaid  expenses and other                      |       | 32,004                     |       | 50,150                                         |       |
| Increase in merchandise inventories                                               |       | (15,677                    | )          | (29,102                                        | )          |
| (Decrease) increase in accounts payable                                           |       | (38,954                    | )          | 46,743                                         |       |
| Decrease in accrued expenses                                                      |       | (5,911                     | )          | (24,998                                        | )          |
| Increase in other long-term liabilities                                           |       | 682                        |       | 1,281                                          |       |
| Net cash  provided by continuing operations                                       |       | 50,298                     |       | 84,348                                         |       |
| Net cash  provided by (used in) discontinued operations                           |       | 25                         |       | (367                                           | )          |
| Net Cash  Provided by Operating Activities                                        |       | 50,323                     |       | 83,981                                         |       |
|                                                                              |       |                       |       |                                           |       |
| Cash Flows  from Investing Activities:                                            |       |                       |       |                                           |       |
| Cash paid for property and equipment                                              |       | (33,506                    | )          | (25,092                                        | )          |
| Proceeds from dispositions of assets                                              |       | 2,376                      |       | 1,598                                          |       |
| Proceeds (payments) on life insurance  policies                                   |       | 26,714                     |       | (24,669                                        | )          |
| Proceeds from sales of assets held for  disposal                                  |       | —                     |       | 6,981                                          |       |
| Net Cash  Used in Investing Activities                                            |       | (4,416                     | )          | (41,182                                        | )          |
|                                                                              |       |                       |       |                                           |       |
| Cash Flows  from Financing Activities:                                            |       |                       |       |                                           |       |
| Borrowings under line of credit agreements                                        |       | 436,584                    |       | 434,020                                        |       |
| Payments under line of credit agreements                                          |       | (419,267                   | )          | (494,062                                       | )          |
| Excess tax benefits from stock based awards                                       |       | 687                        |       | 37                                             |       |
| Borrowings on trade payable program  liability                                    |       | 87,578                     |       | 54,083                                         |       |
| Payments on trade payable program liability                                       |       | (79,972                    | )          | (51,955                                        | )          |
| Proceeds from term loan                                                           |       | —                     |       | 121,000                                        |       |
| Reduction of long-term debt                                                       |       | (2,432                     | )          | (2,259                                         | )          |
| Defeasance of convertible debt                                                    |       | —                     |       | (119,000                                       | )          |
| Payments on capital lease obligations                                             |       | (210                       | )          | (167                                           | )          |
| Dividends paid                                                                    |       | (10,630                    | )          | (11,207                                        | )          |
| Repurchase of common stock                                                        |       | (58,152                    | )          | —                                         |       |
| Proceeds from exercise of stock options                                           |       | 3,632                      |       | 242                                            |       |
| Proceeds from dividend reinvestment plan                                          |       | 591                        |       | 680                                            |       |
| Net Cash  Used in Financing Activities                                            |       | (41,591                    | )          | (68,588                                        | )          |
| Net Increase  (Decrease) in Cash and Cash Equivalents                             |       | 4,316                      |       | (25,789                                        | )          |
| Cash and  Cash Equivalents at Beginning of Period                                 |       | 21,884                     |       | 48,281                                         |       |
| Cash and  Cash Equivalents at End of Period                                       |       | $                          | 26,200     |                                           | $          | 22,492 |   |
|                                                                              |       |                       |       |                                           |       |
| Supplemental  Disclosure of Cash Flow Information:                                |       |                       |       |                                           |       |
| Cash paid for interest, net of amounts  capitalized                               |       | $                          | 30,100     |                                           | $          | 34,246 |   |
| Cash paid for income taxes                                                        |       | $                          | 214        |                                           | $          | 730 |   |
| Non-cash  investing activities:                                                   |       |                       |       |                                           |       |
| Accrued purchases of property and equipment                                       |       | $                          | 258        |                                           | $          | 757 |   |
| Non-cash  financing activities:                                                   |       |                       |       |                                           |       |
| Equipment capital leases                                                          |       | $                          | —     |                                           | $          | 84 |   |

 

See notes to condensed consolidated financialstatements.

 

5

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THEPEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

 

NOTE1. Condensed Consolidated Financial Statements

 

Thecondensed consolidated balance sheet as of November 3, 2007, the condensedconsolidated statements of operations and changes in retained earnings for thethirteen and thirty-nine week periods ended November 3, 2007 and October 28,2006 and the condensed consolidated statements of cash flows for thethirty-nine week periods ended November 3, 2007 and October 28, 2006are unaudited. In the opinion of management, all adjustments, consisting ofnormal recurring adjustments and accruals, necessary to present fairly thefinancial position, results of operations and cash flows at November 3,2007 and for all periods presented have been made.

 

Certaininformation and note 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/A for thefiscal year ended February 3, 2007. The results of operations for thethirteen and thirty-nine week periods ended November 3, 2007 are notnecessarily indicative of the operating results for the full fiscal year.

 

NOTE2. New Accounting Standards

 

Adopted:

 

InJune 2006, the Financial Accounting Standards Board (FASB) issuedFinancial Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes” (FIN 48), which clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements in accordance with the FASBStatement of Financial Accounting Standards (SFAS) No. 109, “Accountingfor Income Taxes.”  The interpretationprescribes a recognition threshold and measurement attribute criteria for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition.

 

TheCompany and its subsidiaries file income tax returns in the U.S. federal,various states and Puerto Rico jurisdictions. The Company’s U.S. federal returns for tax years 2004 and forward aresubject to examination.  The federalaudit of tax years 2001, 2002 and 2003 was closed during the second quarter offiscal 2007 resulting in the recognition of a $4,227,000 additional income taxbenefit. The impact of this recognition remains subject to examination by thevarious states through fiscal 2008. State and local income tax returns are generally subject to examinationfor a period of three to five years after filing of the respective return.  The Company has various state income taxreturns in the process of examination, appeals and litigation.

 

TheCompany adopted the provisions of FIN 48 on February 4, 2007.  In connection with the adoption, the Companyrecorded a net decrease to retained earnings of $155,000 and reclassifiedcertain previously recognized deferred tax attributes as FIN 48liabilities.  The amount of unrecognizedtax benefits at February 4, 2007 was $7,126,000 of which $2,216,000 wouldimpact the Company’s tax rate, if recognized. At November 3, 2007, the amountof the unrecognized tax benefit was $3,037,000.

 

TheCompany recognizes potential interest and penalties for unrecognized taxbenefits in income tax expense and, accordingly, during the thirteen weeks andthirty-nine weeks ended November 3, 2007, the Company recognizedapproximately $9,000 and $59,000, respectively, in potential interestassociated with uncertain tax positions. At February 4, 2007, the Company has recorded approximately$734,000 for the payment of interest and penalties, which is included in the$7,126,000 unrecognized tax benefit noted above.  The Company does not expect the total amountof unrecognized tax benefits will significantly change in the next twelvemonths.

 

InFebruary 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements No. 133 and140” (SFAS No. 155). SFAS No. 155 simplifies accounting for certainhybrid instruments currently governed by SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” or SFAS No. 133, byallowing fair value remeasurement of hybrid instruments that contain anembedded derivative that otherwise would require bifurcation. SFAS No. 155is effective for all financial instruments acquired or issued in fiscal yearsbeginning after September 15, 2006. The Company adopted this standard on February 4,2007, which did not affect our consolidated financial statements.

 

6

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InMarch 2006, the FASB issued SFAS No. 156, “Accounting for Servicingof Financial Assets—an amendment of FASB Statement No. 140” (SFAS No. 156).SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities,” with respectto the accounting for separately recognized servicing assets and servicingliabilities. SFAS No. 156 is effective for fiscal years beginning after September 15,2006. The Company adopted this standard on February 4, 2007, which did notaffect our consolidated financial statements.

 

InJune of 2006, the FASB ratified the consensus reached by the EmergingIssues Task Force (EITF) on Issue 06-3, “How Taxes Collected from Customers andRemitted to Governmental Authorities Should be Presented in the IncomeStatement (That Is, Gross versus Net Presentation).” The Company presentssales, net of sales taxes, in its consolidated statement of operations and theadoption of this EITF did not affect our consolidated financial statements.

 

Tobe adopted:

 

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

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactof SFAS No. 159 on our consolidated financial statements.

 

InMarch 2007, the EITF reached a consensus on Issue Number 06-10, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of CollateralAssignment Split-Dollar Life Insurance Arrangements” (EITF 06-10). EITF 06-10provides guidance to help companies determine whether a liability for thepostretirement benefit associated with a collateral assignment split-dollarlife insurance arrangement should be recorded in accordance with either SFAS No. 106,“Employers’ Accounting for Postretirement Benefits Other Than Pensions” (if, insubstance, a postretirement benefit plan exists), or Accounting PrinciplesBoard Opinion No. 12 (if the arrangement is, in substance, an individualdeferred compensation contract). EITF 06-10 also provides guidance on how acompany should recognize and measure the asset in a collateral assignmentsplit-dollar life insurance contract. EITF 06-10 is effective for fiscal yearsbeginning after December 15, 2007, although early adoption is permitted.We are currently evaluating the impact of EITF 06-10 on our consolidatedfinancial statements.

 

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 arrangements with dividend protectionfeatures that entitle employees to receive (a) dividends onequity-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 benefits thatresult from dividends on equity-classified employee share-based payment awardsthat are declared in fiscal years beginning after December 15, 2007, andinterim periods within those fiscal years. We are currently evaluating theimpact of EITF 06-11 on our consolidated financial statements.

 

NOTE3. Accounting for Stock-Based Compensation

 

TheCompany has stock-based compensation plans, under which it grants stock optionsand restricted stock units to key employees and members of its Board of Directors.Generally, new stock option grants vest over a four-year period, with one-fifthvesting on each of the grant date and the next four anniversaries thereof andhave an expiration date of seven years. Generally, new restricted stock unit grants vest over a four-yearperiod, with one-fourth vesting on each of the first four anniversaries of thegrant date. During the third quarter ended November 3, 2007, we granted6,000 stock options with a weighted average fair value of $5.12 per option and74,000 restricted stock units with a weighted average fair value of $15.30 perunit.

 

Inaccordance with SFAS No. 123(R), we recognize compensation expense on astraight-line basis over the vesting period. We recognized $2,476,000 and$893,000 of stock-based compensation expense during the thirteen weeks ended November 3,2007 

 

7

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andOctober 28, 2006, respectively, and $8,529,000 and $2,611,000 ofstock-based compensation expense during the thirty-nine weeks ended November 3,2007 and October 28, 2006, respectively.

 

NOTE4. Merchandise Inventories

 

Merchandiseinventories are valued at the lower of cost or market. Cost is determined byusing the last-in, first-out (LIFO) method. An actual valuation of inventoryunder the LIFO method can be made only at the end of each fiscal year based oninventory and costs at that time. Accordingly, interim LIFO calculations mustbe based on management’s estimates of expected fiscal year-end inventory levelsand costs. If the first-in, first-out (FIFO) method of costing inventory hadbeen used by the Company, inventory would have been $573,700,000 and$593,265,000 as of November 3, 2007 and February 3, 2007,respectively.

 

TheCompany establishes reserves for estimated inventory shrinkage based uponhistorical levels and the results of its cycle counting program.

 

TheCompany also records valuation adjustments (reserves) for potentially excessand obsolete inventories based on current inventory levels, the historicalanalysis of product sales and current market conditions. The nature of theCompany’s inventory is such that the risk of obsolescence is minimal and excessinventory has historically been returned to the Company’s vendors for credit.The Company provides reserves when less than full credit is expected from avendor or when market is lower than recorded costs. The reserves are revised,if necessary, on a quarterly basis for adequacy. The Company’s reserves againstinventory for these matters were $15,464,000 and $13,462,000 at November 3,2007 and February 3, 2007, respectively.

 

Duringthe third quarter of fiscal 2007, the Company recorded a $32,803,000 inventoryimpairment for the discontinuance and planned exit of certain non-coremerchandise products adopted as one of the initial steps in the Company’sfive-year strategic plan. The carrying value of the discontinued merchandisewill be evaluated quarterly as compared to the estimated sell through that wasutilized in determining the impairment.

 

NOTE5. Deferred Income Taxes

 

Asof February 3, 2007, the Company had available federal net operatinglosses that can be carried forward to future years. The Company now expects toutilize these operating loss carryforwards within the next twelve months,principally as a result of real estate sales. The deferred tax asset primarilyrelating to these operating loss carryforwards has been reclassified to currentfrom long term deferred tax asset during the third quarter of fiscal 2007.

 

Asa result, consistent with the requirement of FASB No. 109, Accounting forIncome Taxes, current deferred tax liabilities are presented on a net basis inthe line item current deferred tax assets as of November 3, 2007.  Also, long term deferred tax liabilities of$13,800,000 as of November 3, 2007, shown net in prior periods withlong-term deferred tax assets, are presented in the line item other long-termliabilities.

 

NOTE6. Other Current Assets

 

TheCompany’s other current assets as of November 3, 2007 and February 3,2007, respectively, were as follows:

 
| **(dollar amounts in thousands)** | ** ** | **November 3, 2007** | ** ** | **February 3, 2007** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                             |       |                           |       |                           |       |
| Reinsurance  premiums and receivable             |       | $                              | 51,714     |                           | $          | 69,239 |   |
| Insurance  benefit receivable                    |       | 11,479                         |       | —                         |       |
| Income taxes  receivable                         |       | 1,588                          |       | —                         |       |
| Other                                            |       | 970                            |       | 1,129                          |       |
| Total                                            |       | $                              | 65,751     |                           | $          | 70,368 |   |

 

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

 

8

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Duringthe third quarter of fiscal 2007, the Company recorded a $3,900,000 benefit ona company-owned life insurance policy to reflect the current value of theinsurance receivable of $11,479,000.

 

NOTE7. Discontinued Operations

 

Inaccordance with SFAS No. 144, discontinued operations continue to reflectthe remaining costs associated with the 33 stores closed on July 31, 2003as part of our corporate restructuring. The remaining reserve balance is notmaterial.

 

9

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NOTE8. Pension and Savings Plan

 

Pensionexpense includes the following:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **November   3, 2007**   | ** ** | **October   28, 2006**      | ** ** | **November   3, 2007** | ** ** | **October   28, 2006** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Service cost                                     |       | $                                  | 22         |                                  | $          | 58 |   | $ | 124 |   | $ | 188 |   |
| Interest cost                                    |       | 893                                |       | 772                                   |       | 2,565 |   | 2,300 |   |
| Expected return  on plan assets                  |       | (566                               | )          | (532                                  | )          | (1,740 | ) | (1,645 | ) |
| Amortization of  transition obligation           |       | 40                                 |       | 41                                    |       | 122 |   | 122 |   |
| Amortization of  prior service cost              |       | 95                                 |       | 91                                    |       | 277 |   | 269 |   |
| Amortization of  net loss                        |       | 385                                |       | 602                                   |       | 1,361 |   | 1,733 |   |
| Net periodic benefit  cost                       |       | $                                  | 869        |                                  | $          | 1,032 |   | $ | 2,709 |   | $ | 2,967 |   |

 

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 2007.

 

TheCompany has an unfunded, non-qualified Executive Supplemental Retirement Plan(SERP) defined benefit plan that was closed to new participants on January 31,2004. As of November 3, 2007, the Company contributed $368,000 of ananticipated $1,000,000 contribution during fiscal 2007 to this plan.

 

TheCompany has a non-qualified SERP defined contribution plan for key employeeswho were designated by the Board of Directors after January 31, 2004. TheCompany recorded a benefit for the defined contribution portion of the plan ofapproximately $158,000 and $9,000 for the thirteen weeks ended November 3,2007 and October 28, 2006, respectively, and recorded contribution expenseof approximately $263,000 and $479,000 for the thirty-nine weeks ended November 3,2007 and October 28, 2006, respectively.

 

TheCompany has two 401(k) savings plans, which cover all full-time employees whoare at least 21 years of age with one or more years of service. The Companycontributes the lesser of 50% of the first 6% of a participant’s contributionsor 3% of the participant’s compensation. The Company’s savings plans’contribution expense was approximately $961,000 and $359,000 for the thirteenweeks ended November 3, 2007 and October 28, 2006, respectively, andapproximately $2,589,000 and $2,110,000 for the thirty-nine weeks ended November 3,2007 and October 28, 2006, respectively.

 

NOTE9. Debt and Financing Arrangements

 

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

 

OnOctober 27, 2006, the Company amended and restated its Senior Secured TermLoan Facility to increase its size from $200,000,000 to $320,000,000. Proceedsfrom the facility were used to satisfy and discharge the Company’s outstanding$119,000,000 4.25% Convertible Senior Notes due June 1, 2007 by depositinto an escrow fund with an independent trustee. The right of the holders ofthe convertible notes to convert them into shares of the Company’s commonstock, at any time until the June 1, 2007 maturity date, survived suchsatisfaction and discharge, although no notes were converted prior to maturity.The conversion price was approximately $22.40 per share.  The Companyrecorded a non-cash charge for the value of such conversion right,approximately $755,000 as determined by the Black-Scholes method, in itsconsolidated statement of operations for the thirteen and thirty-nine weeksended October 28, 2006.

 

NOTE10. Warranty Reserve

 

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

 

Componentsof the reserve for warranty costs for the thirty-nine week periods ended November 3,2007 and October 28, 2006, respectively, are as follows:

 

10

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| **(dollar amounts in thousands)** | ** ** | **Thirty-nine  Weeks Ended  November 3, 2007** | ** ** | **Thirty-nine  Weeks Ended   October 28, 2006** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                          | ** ** | ** **                                                | ** ** |
| Beginning  balance                               |       | $                                                   | 645        |                                                      | $          | 1,477 |   |
|                                             |       |                                                |       |                                                      |       |
| Additions  related to current period sales       |       | 7,774                                               |       | 15,751                                                    |       |
|                                             |       |                                                |       |                                                      |       |
| Warranty  costs incurred in current period       |       | (7,993                                              | )          | (15,824                                                   | )          |
| Ending  balance                                  |       | $                                                   | 426        |                                                      | $          | 1,404 |   |

 

11

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NOTE11. Loss Per Share

 

(inthousands, except per share amounts)

 
| ** **   | ** **   | ** **                                                                                                                     | ** **   | **Thirteen Weeks Ended** | ** **   | **Thirty-nine Weeks Ended** | ** **   |
|--------------|--------------|--------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------------------|--------------|---------------------------------------|--------------|
| ** **   | ** **   | ** **                                                                                                                     | ** **   | **November 3,   2007**        | ** **   | **October 28,   2006**           | ** **   | **November 3,   2007** | ** ** | **October 28,   2006** | ** ** |
| *** *** | *** *** | *** ***                                                                                                                   | *** *** | *** ***                       | *** *** | *** ***                          | *** *** | *** *** | *** *** | *** *** | *** *** |
| (a)          |         | Net Loss From Continuing Operations Before  Cumulative Effect of Change in Accounting Principle                                |         | $                                  | (28,081      | )                                     | $            | (10,713 | ) | $ | (20,665 | ) | $ | (10,110 | ) |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         |         | Discontinued  Operations, Net of Tax                                                                                           |         | 91                                 |         | (205                                  | )            | 29 |   | (338 | ) |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         |         | Cumulative Effect of Change in Accounting  Principle, Net of Tax                                                               |         | —                             |         | 4                                     |         | — |   | 183 |   |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         |         | Net Loss                                                                                                                       |         | $                                  | (27,990      | )                                     | $            | (10,914 | ) | $ | (20,636 | ) | $ | (10,265 | ) |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
| (b)          |         | Basic average number of common shares  outstanding during period                                                               |         | 51,844                             |         | 54,313                                |         | 52,206 |   | 54,264 |   |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         |         | Common shares assumed issued upon exercise  of dilutive stock options, net of assumed repurchase, at the average market  price |         | —                             |         | —                                |         | — |   | — |   |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
| (c)          |         | Diluted average number of common shares  assumed outstanding during period                                                     |         | 51,844                             |         | 54,313                                |         | 52,206 |   | 54,264 |   |
|         |         |                                                                                                                           |         |                               |         |                                  |         |   |   |   |   |
|         | ** **   | **Basic  Loss per Share:**                                                                                                     | ** **   | ** **                         | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
|         |         | Net Loss From Continuing Operations Before  Cumulative Effect of Change in Accounting Principle (a/b)                          |         | $                                  | (0.54        | )                                     | $            | (0.20 | ) | $ | (0.40 | ) | $ | (0.19 | ) |
|         |         | Discontinued Operations, Net of Tax                                                                                            |         | —                             |         | —                                |         | — |   | — |   |
|         |         | Cumulative Effect of Change in Accounting  Principle, Net of Tax                                                               |         | —                             |         | —                                |         | — |   | — |   |
|         |         | Basic Loss  per Share                                                                                                          |         | $                                  | (0.54        | )                                     | $            | (0.20 | ) | $ | (0.40 | ) | $ | (0.19 | ) |
|         | ** **   | ** **                                                                                                                     | ** **   | ** **                         | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
|         | ** **   | **Diluted  Loss per Share:**                                                                                                   | ** **   | ** **                         | ** **   | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
|         |         | Net Loss From Continuing Operations Before  Cumulative Effect of Change in Accounting Principle (a/c)                          |         | $                                  | (0.54        | )                                     | $            | (0.20 | ) | $ | (0.40 | ) | $ | (0.19 | ) |
|         |         | Discontinued Operations, Net of Tax                                                                                            |         | —                             |         | —                                |         | — |   | — |   |
|         |         | Cumulative Effect of Change in Accounting  Principle, Net of Tax                                                               |         | —                             |         | —                                |         | — |   | — |   |
|         |         | Diluted Loss  per Share                                                                                                        |         | $                                  | (0.54        | )                                     | $            | (0.20 | ) | $ | (0.40 | ) | $ | (0.19 | ) |

 

AtNovember 3, 2007 and October 28, 2006, respectively, there were3,397,000 and 3,594,000 outstanding options and non-vested restricted stockunits. All outstanding options and non-vested restricted stock units wereexcluded from the diluted average number of common shares outstanding duringthe thirteen and thirty-nine week periods ended November 3, 2007 due totheir anti-dilutive nature.

 

NOTE12. Supplemental Guarantor Information

 

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

 

12

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The following condensed consolidating information presents, in separatecolumns, the condensed consolidating balance sheets as of November 3, 2007and February 3, 2007 and the related condensed consolidating statements ofoperations for the thirteen and thirty-nine weeks ended November 3, 2007and October 28, 2006 and condensed consolidating statements of cash flowsfor the thirty-nine weeks ended November 3, 2007 and October 28, 2006for (i) the Company (“Pep Boys”) on a parent only basis, with itsinvestment in subsidiaries recorded under the equity method, (ii) theSubsidiary Guarantors on a combined basis including the consolidation by PBYCorporation of its wholly owned subsidiary, The Pep Boys Manny Moe &Jack of California, (iii) the subsidiary of the Company that does notguarantee the Notes, and (iv) the Company on a consolidated basis.

 

CONDENSED CONSOLIDATING BALANCE SHEETS

**(dollarsin thousands)**

 
| **As of November 3, 2007**                                     | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantor** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |              |       |                       |       |                                |       |                                  |       |             |       |
| Current Assets:                                                               |       |              |       |                       |       |                                |       |                                  |       |             |       |
| Cash and cash  equivalents                                                    |       | $                 | 13,863     |                       | $          | 10,812                              |       | $                                     | 1,525      |             | $          | — |   | $ | 26,200 |   |
| Accounts  receivable, net                                                     |       | 13,645            |       | 14,680                     |       | —                              |       | —                                |       | 28,325           |       |
| Merchandise  inventories                                                      |       | 223,258           |       | 366,658                    |       | —                              |       | —                                |       | 589,916          |       |
| Prepaid  expenses                                                             |       | 26,004            |       | 6,723                      |       | 3,061                               |       | (7,894                                | )          | 27,894           |       |
| Deferred  income taxes                                                        |       | 41,029            |       | 3,455                      |       | 5,488                               |       | (21,303                               | )          | 28,669           |       |
| Other                                                                         |       | 14,289            |       | 1                          |       | 51,461                              |       | —                                |       | 65,751           |       |
| Total  Current Assets                                                         |       | 332,088           |       | 402,329                    |       | 61,535                              |       | (29,197                               | )          | 766,755          |       |
| Property and Equipment—at cost:                                          |       |              |       |                       |       |                                |       |                                  |       |             |       |
| Land                                                                          |       | 78,508            |       | 166,766                    |       | 12,893                              |       | (6,462                                | )          | 251,705          |       |
| Buildings  and improvements                                                   |       | 309,090           |       | 607,719                    |       | 20,937                              |       | (10,612                               | )          | 927,134          |       |
| Furniture,  fixtures and equipment                                            |       | 292,360           |       | 405,300                    |       | —                              |       | —                                |       | 697,660          |       |
| Construction  in progress                                                     |       | 3,727             |       | 2,167                      |       | —                              |       | —                                |       | 5,894            |       |
|                                                                          |       | 683,685           |       | 1,181,952                  |       | 33,830                              |       | (17,074                               | )          | 1,882,393        |       |
| Less  accumulated depreciation and amortization                               |       | 403,395           |       | 612,381                    |       | 752                                 |       | 3,105                                 |       | 1,019,633        |       |
| Total  Property and Equipment—Net                                        |       | 280,290           |       | 569,571                    |       | 33,078                              |       | (20,179                               | )          | 862,760          |       |
| Investment  in subsidiaries                                                   |       | 1,615,001         |       | —                     |       | —                              |       | (1,615,001                            | )          | —           |       |
| Intercompany  receivable                                                      |       | —            |       | 781,262                    |       | 77,637                              |       | (858,899                              | )          | —           |       |
| Other                                                                         |       | 23,093            |       | 379                        |       | —                              |       | —                                |       | 23,472           |       |
| Total  Assets                                                                 |       | $                 | 2,250,472  |                       | $          | 1,753,541                           |       | $                                     | 172,250    |             | $          | (2,523,276 | ) | $ | 1,652,987 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                          | ** ** | ** **                            | ** ** | ** **       | ** ** |
| Current Liabilities:                                                          |       |              |       |                       |       |                                |       |                                  |       |             |       |
| Accounts  payable                                                             |       | $                 | 226,526    |                       | $          | 9                                   |       | $                                     | —     |             | $          | — |   | $ | 226,535 |   |
| Trade  payable program liability                                              |       | 21,596            |       | —                     |       | —                              |       | —                                |       | 21,596           |       |
| Accrued  expenses                                                             |       | 46,569            |       | 83,557                     |       | 154,197                             |       | (7,894                                | )          | 276,429          |       |
| Current  deferred taxes                                                       |       | —            |       | 21,303                     |       | —                              |       | (21,303                               | )          | —           |       |
| Current  maturities of long-term debt and obligations under capital leases    |       | 3,445             |       | —                     |       | —                              |       | —                                |       | 3,445            |       |
| Total  Current Liabilities                                                    |       | 298,136           |       | 104,869                    |       | 154,197                             |       | (29,197                               | )          | 528,005          |       |
| Long-term  debt and obligations under capital leases, less current maturities |       | 528,069           |       | 21,682                     |       | —                              |       | —                                |       | 549,751          |       |
| Other  long-term liabilities                                                  |       | 69,067            |       | 30,042                     |       | —                              |       | (20,179                               | )          | 78,930           |       |
| Intercompany  liabilities                                                     |       | 858,899           |       | —                     |       | —                              |       | (858,899                              | )          | —           |       |
| Stockholders’ Equity:                                                    |       |              |       |                       |       |                                |       |                                  |       |             |       |
| Common  stock                                                                 |       | 68,557            |       | 2                          |       | 100                                 |       | (102                                  | )          | 68,557           |       |
| Additional  paid-in capital                                                   |       | 294,911           |       | 386,857                    |       | 3,900                               |       | (390,757                              | )          | 294,911          |       |
| Retained  earnings                                                            |       | 431,088           |       | 1,210,089                  |       | 14,053                              |       | (1,224,142                            | )          | 431,088          |       |
| Accumulated  other comprehensive loss                                         |       | (11,299           | )          | —                     |       | —                              |       | —                                |       | (11,299          | )          |
| Less:                                                                         |       |              |       |                       |       |                                |       |                                  |       |             |       |
| Cost of shares in treasury                                                    |       | 227,692           |       | —                     |       | —                              |       | —                                |       | 227,692          |       |
| Cost of shares in benefits trust                                              |       | 59,264            |       | —                     |       | —                              |       | —                                |       | 59,264           |       |
| Total  Stockholders’ Equity                                              |       | 496,301           |       | 1,596,948                  |       | 18,053                              |       | (1,615,001                            | )          | 496,301          |       |
| Total  Liabilities and Stockholders’ Equity                              |       | $                 | 2,250,472  |                       | $          | 1,753,541                           |       | $                                     | 172,250    |             | $          | (2,523,276 | ) | $ | 1,652,987 |   |
|                                                                               |            |                   |            |                            |            |                                     |            |                                       |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

13

----

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

 

14

----

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(dollars in thousands)

 
| **Thirteen weeks ended November  3, 2007**                                                           | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantor** | ** ** | **Consolidation  / Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------------|------------|------------------|------------|
| Merchandise  Sales                                                                                                       |       | $                 | 148,517    |                       | $          | 287,208                         |       | $                                     | —     |             | $          | — |   | $ | 435,725 |   |
| Service Revenue                                                                                                          |       | 34,491            |       | 65,160                     |       | —                          |       | —                                |       | 99,651           |       |
| Other Revenue                                                                                                            |       | —            |       | —                     |       | 6,135                           |       | (6,135                                | )          | —           |       |
| Total Revenues                                                                                                           |       | 183,008           |       | 352,368                    |       | 6,135                           |       | (6,135                                | )          | 535,376          |       |
| Costs of  Merchandise Sales                                                                                              |       | 119,733           |       | 231,643                    |       | —                          |       | (978                                  | )          | 350,398          |       |
| Costs of Service  Revenue                                                                                                |       | 30,108            |       | 59,632                     |       | —                          |       | (370                                  | )          | 89,370           |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                     |       | 4,933                           |       | (4,933                                | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 149,841           |       | 291,275                    |       | 4,933                           |       | (6,281                                | )          | 439,768          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 28,784            |       | 55,565                     |       | —                          |       | 978                                   |       | 85,327           |       |
| Gross Profit  from Service Revenue                                                                                       |       | 4,383             |       | 5,528                      |       | —                          |       | 370                                   |       | 10,281           |       |
| Gross Profit  from Other Revenue                                                                                         |       | —            |       | —                     |       | 1,202                           |       | (1,202                                | )          | —           |       |
| Total Gross Profit                                                                                                       |       | 33,167            |       | 61,093                     |       | 1,202                           |       | 146                                   |       | 95,608           |       |
| Selling, General  and Administrative Expenses                                                                            |       | 41,430            |       | 94,481                     |       | 84                              |       | (1,453                                | )          | 134,542          |       |
| Net (Loss) Gain  from Dispositions of Assets                                                                             |       | (91               | )          | (424                       | )          | —                          |       | —                                |       | (515             | )          |
| Operating (Loss)  Profit                                                                                                 |       | (8,354            | )          | (33,812                    | )          | 1,118                           |       | 1,599                                 |       | (39,449          | )          |
| Non-Operating  (Expense) Income                                                                                          |       | (2,521            | )          | 32,846                     |       | (1,979                          | )          | (27,314                               | )          | 1,032            |       |
| Interest Expense  (Income)                                                                                               |       | 29,871            |       | 11,288                     |       | (3,943                          | )          | (25,715                               | )          | 11,501           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (40,746           | )          | (12,254                    | )          | 3,082                           |       | —                                |       | (49,918          | )          |
| Income Tax  (Benefit) Expense                                                                                            |       | (23,325           | )          | (531)                      |       | 2,019                           |       | —                                |       | (21,837          | )          |
| Equity in Loss  of Subsidiaries                                                                                          |       | (10,571           | )          | —                     |       | —                          |       | 10,571                                |       | —           |       |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | (27,992           | )          | (11,723                    | )          | 1,063                           |       | 10,571                                |       | (28,081          | )          |
| Gain From  Discontinued Operations, Net of Tax                                                                           |       | 2                 |       | 89                         |       | —                          |       | —                                |       | 91               |       |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | —            |       | —                     |       | —                          |       | —                                |       | —           |       |
| Net (Loss) Earnings                                                                                                      |       | $                 | (27,990    | )                          | $          | (11,634                         | )          | $                                     | 1,063      |             | $          | 10,571 |   | $ | (27,990 | ) |
|                                                                                                                          |            |                   |            |                            |            |                                 |            |                                       |            |                  |            |  |  |  |  |  |  |  |

 

 

15

----

 
| **Thirteen weeks ended October  28, 2006**                                                           | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors(1)** | ** ** | **Subsidiary  Non-  Guarantor** | ** ** | **Consolidation  / Elimination(1)** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------|------------|------------------------------------------|------------|------------------|------------|
| Merchandise  Sales                                                                                                       |       | $                 | 156,507    |                          | $          | 297,204                         |       | $                                        | —     |             | $          | — |   | $ | 453,711 |   |
| Service Revenue                                                                                                          |       | 33,748            |       | 63,390                        |       | —                          |       | —                                   |       | 97,138           |       |
| Other Revenue                                                                                                            |       | —            |       | —                        |       | 6,705                           |       | (6,705                                   | )          | —           |       |
| Total Revenues                                                                                                           |       | 190,255           |       | 360,594                       |       | 6,705                           |       | (6,705                                   | )          | 550,849          |       |
| Costs of  Merchandise Sales                                                                                              |       | 110,308           |       | 212,717                       |       | —                          |       | —                                   |       | 323,025          |       |
| Costs of Service  Revenue                                                                                                |       | 31,474            |       | 58,657                        |       | —                          |       | —                                   |       | 90,131           |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                        |       | 8,191                           |       | (8,191                                   | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 141,782           |       | 271,374                       |       | 8,191                           |       | (8,191                                   | )          | 413,156          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 46,199            |       | 84,487                        |       | —                          |       | —                                   |       | 130,686          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 2,274             |       | 4,733                         |       | —                          |       | —                                   |       | 7,007            |       |
| Gross Loss from  Other Revenue                                                                                           |       | —            |       | —                        |       | (1,486                          | )          | 1,486                                    |       | —           |       |
| Total Gross  Profit (Loss)                                                                                               |       | 48,473            |       | 89,220                        |       | (1,486                          | )          | 1,486                                    |       | 137,693          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 49,071            |       | 88,599                        |       | 99                              |       | 1,486                                    |       | 139,255          |       |
| Net Gain from  Dispositions of Assets                                                                                    |       | 25                |       | 188                           |       | —                          |       | —                                   |       | 213              |       |
| Operating (Loss)  Profit                                                                                                 |       | (573              | )          | 809                           |       | (1,585                          | )          | —                                   |       | (1,349           | )          |
| Non-Operating  (Expense) Income (1)                                                                                      |       | (4,564            | )          | 29,796                        |       | 433                             |       | (24,648                                  | )          | 1,017            |       |
| Interest Expense  (Income) (1)                                                                                           |       | 30,167            |       | 11,386                        |       | (1,324                          | )          | (24,648                                  | )          | 15,581           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (35,304           | )          | 19,219                        |       | 172                             |       | —                                   |       | (15,913          | )          |
| Income Tax  (Benefit) Expense                                                                                            |       | (3,623            | )          | (1,613                        | )          | 36                              |       | —                                   |       | (5,200           | )          |
| Equity in  Earnings of Subsidiaries(1)                                                                                   |       | 20,785            |       | —                        |       | —                          |       | (20,785                                  | )          | —           |       |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle(1)           |       | (10,896           | )          | 20,832                        |       | 136                             |       | (20,785                                  | )          | (10,713          | )          |
| Loss From  Discontinued Operations, Net of Tax                                                                           |       | (22               | )          | (183                          | )          | —                          |       | —                                   |       | (205             | )          |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | 4                 |       | —                        |       | —                          |       | —                                   |       | 4                |       |
| Net (Loss) Earnings(1)                                                                                                   |       | $                 | (10,914    | )                             | $          | 20,649                          |       | $                                        | 136        |             | $          | (20,785 | ) | $ | (10,914 | ) |
|                                                                                                                          |            |                   |            |                               |            |                                 |            |                                          |            |                  |            |  |  |  |  |  |  |  |  |  |

 

----

(1) As restated. See Note 16.

 

16

----

 

CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS

(dollars in thousands)

 
| **Thirty-nine weeks ended November  3, 2007**                                                        | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantor** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|------------------|------------|
|                                                                                                                     |       |              |       |                       |       |                                |       |                                  |       |             |       |
| Merchandise  Sales                                                                                                       |       | $                 | 460,898    |                       | $          | 878,431                             |       | $                                     | —     |             | $          | — |   | $ | 1,339,329 |   |
| Service Revenue                                                                                                          |       | 104,879           |       | 196,070                    |       | —                              |       | —                                |       | 300,949          |       |
| Other Revenue                                                                                                            |       | —            |       | —                     |       | 18,607                              |       | (18,607                               | )          | —           |       |
| Total Revenues                                                                                                           |       | 565,777           |       | 1,074,501                  |       | 18,607                              |       | (18,607                               | )          | 1,640,278        |       |
| Costs of  Merchandise Sales                                                                                              |       | 339,812           |       | 646,674                    |       | —                              |       | (978                                  | )          | 985,508          |       |
| Costs of Service  Revenue                                                                                                |       | 90,297            |       | 177,305                    |       | —                              |       | (370                                  | )          | 267,232          |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                     |       | 14,771                              |       | (14,771                               | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 430,109           |       | 823,979                    |       | 14,771                              |       | (16,119                               | )          | 1,252,740        |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 121,086           |       | 231,757                    |       | —                              |       | 978                                   |       | 353,821          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 14,582            |       | 18,765                     |       | —                              |       | 370                                   |       | 33,717           |       |
| Gross Profit  from Other Revenue                                                                                         |       | —            |       | —                     |       | 3,836                               |       | (3,836                                | )          | —           |       |
| Total Gross  Profit                                                                                                      |       | 135,668           |       | 250,522                    |       | 3,836                               |       | (2,488                                | )          | 387,538          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 126,925           |       | 272,630                    |       | 242                                 |       | (4,338                                | )          | 395,459          |       |
| Net (Loss) Gain  from Dispositions of Assets                                                                             |       | 2,263             |       | (434                       | )          | —                              |       | —                                |       | 1,829            |       |
| Operating Profit  (Loss)                                                                                                 |       | 11,006            |       | (22,542                    | )          | 3,594                               |       | 1,850                                 |       | (6,092           | )          |
| Non-Operating  (Expense) Income                                                                                          |       | (10,458           | )          | 98,428                     |       | 1,986                               |       | (85,253                               | )          | 4,703            |       |
| Interest Expense  (Income)                                                                                               |       | 91,393            |       | 32,441                     |       | (3,943                              | )          | (83,403                               | )          | 36,488           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (90,845           | )          | 43,445                     |       | 9,523                               |       | —                                |       | (37,877          | )          |
| Income Tax  (Benefit) Expense                                                                                            |       | (42,634           | )          | 20,933                     |       | 4,489                               |       | —                                |       | (17,212          | )          |
| Equity in  Earnings of Subsidiaries                                                                                      |       | 27,572            |       | —                     |       | —                              |       | (27,572                               | )          | —           |       |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | (20,639           | )          | 22,512                     |       | 5,034                               |       | (27,572                               | )          | (20,665          | )          |
| Gain From  Discontinued Operations, Net of Tax                                                                           |       | 3                 |       | 26                         |       | —                              |       | —                                |       | 29               |       |
| Net (Loss) Earnings                                                                                                      |       | $                 | (20,636    | )                          | $          | 22,538                              |       | $                                     | 5,034      |             | $          | (27,572 | ) | $ | (20,636 | ) |
|                                                                                                                          |            |                   |            |                            |            |                                     |            |                                       |            |                  |            |  |  |  |  |  |  |  |  |  |

 

17

----

 
| **Thirty-nine weeks ended October  28, 2006**                                                        | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors(1)** | ** ** | **Subsidiary Non-  Guarantor** | ** ** | **Consolidation /  Elimination(1)** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|-------------------------------------|------------|------------------------------------------|------------|------------------|------------|
|                                                                                                                     |       |              |       |                          |       |                                |       |                                     |       |             |       |
| Merchandise  Sales                                                                                                       |       | $                 | 484,535    |                          | $          | 908,488                             |       | $                                        | —     |             | $          | — |   | $ | 1,393,023 |   |
| Service Revenue                                                                                                          |       | 102,020           |       | 190,972                       |       | —                              |       | —                                   |       | 292,992          |       |
| Other Revenue                                                                                                            |       | —            |       | —                        |       | 20,845                              |       | (20,845                                  | )          | —           |       |
| Total Revenues                                                                                                           |       | 586,555           |       | 1,099,460                     |       | 20,845                              |       | (20,845                                  | )          | 1,686,015        |       |
| Costs of  Merchandise Sales                                                                                              |       | 343,075           |       | 652,372                       |       | —                              |       | —                                   |       | 995,447          |       |
| Costs of Service  Revenue                                                                                                |       | 94,210            |       | 174,685                       |       | —                              |       | —                                   |       | 268,895          |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                        |       | 24,155                              |       | (24,155                                  | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 437,285           |       | 827,057                       |       | 24,155                              |       | (24,155                                  | )          | 1,264,342        |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 141,460           |       | 256,116                       |       | —                              |       | —                                   |       | 397,576          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 7,810             |       | 16,287                        |       | —                              |       | —                                   |       | 24,097           |       |
| Gross Loss from  Other Revenue                                                                                           |       | —            |       | —                        |       | (3,310                              | )          | 3,310                                    |       | —           |       |
| Total Gross  Profit (Loss)                                                                                               |       | 149,270           |       | 272,403                       |       | (3,310                              | )          | 3,310                                    |       | 421,673          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 141,472           |       | 264,977                       |       | 261                                 |       | 3,310                                    |       | 410,020          |       |
| Net Gain from  Dispositions of Assets                                                                                    |       | 9                 |       | 6,220                         |       | —                              |       | —                                   |       | 6,229            |       |
| Operating Profit  (Loss)                                                                                                 |       | 7,807             |       | 13,646                        |       | (3,571                              | )          | —                                   |       | 17,882           |       |
| Non-Operating  (Expense) Income (1)                                                                                      |       | (14,026           | )          | 87,191                        |       | 1,158                               |       | (69,029                                  | )          | 5,294            |       |
| Interest Expense  (Income) (1)                                                                                           |       | 83,685            |       | 27,011                        |       | (3,781                              | )          | (69,029                                  | )          | 37,886           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (89,904           | )          | 73,826                        |       | 1,368                               |       | —                                   |       | (14,710          | )          |
| Income Tax  (Benefit) Expense                                                                                            |       | (4,249            | )          | (454                          | )          | 103                                 |       |                                     |       | (4,600           | )          |
| Equity in  Earnings of Subsidiaries(1)                                                                                   |       | 75,245            |       | —                        |       | —                              |       | (75,245                                  | )          | —           |       |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting   Principle(1)         |       | (10,410           | )          | 74,280                        |       | 1,265                               |       | (75,245                                  | )          | (10,110          | )          |
| Loss From  Discontinued Operations, Net of Tax                                                                           |       | (38               | )          | (300                          | )          | —                              |       | —                                   |       | (338             | )          |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | 183               |       | —                        |       | —                              |       | —                                   |       | 183              |       |
| Net (Loss) Earnings(1)                                                                                                   |       | $                 | (10,265    | )                             | $          | 73,980                              |       | $                                        | 1,265      |             | $          | (75,245 | ) | $ | (10,265 | ) |
|                                                                                                                          |            |                   |            |                               |            |                                     |            |                                          |            |                  |            |  |  |  |  |  |  |  |  |

 

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(1) As restated. See Note 16.

 

18

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CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS

(dollarsin thousands)

 
| **Thirty-nine weeks ended November  3, 2007**                                      | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantor** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------|------------|
| **Cash Flows from Operating Activities:**                                                              |       |              |       |                       |       |                            |       |                            |       |             |       |
| Net  (Loss) Earnings                                                                                   |       | $                 | (20,636    | )                          | $          | 22,538                          |       | $                               | 5,034      |             | $          | (27,572) |   | $ | (20,636 | ) |
| Adjustments  to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing  Operations |       | 14,250            |       | 57,952                     |       | 1,162                           |       | 25,426                          |       | 98,790           |       |
| Changes  in operating assets and liabilities                                                           |       | (53,244)          |       | 31,793                     |       | (6,701)                         |       | 296                             |       | (27,856)         |       |
| Net cash  (used in) provided by continuing operations                                                  |       | (59,630)          |       | 112,283                    |       | (505                            | )          | (1,850)                         |       | 50,298           |       |
| Net cash provided by discontinued operations                                                           |       | 25                |       | —                     |       | —                          |       | —                          |       | 25               |       |
| **Net Cash (Used in) Provided by Operating  Activities**                                               | ** ** | **(59,605)**      | ** ** | **112,283**                | ** ** | **(505**                        | **)**      | **(1,850)**                     | ** ** | **50,323**       | ** ** |
|                                                                                                   |       |              |       |                       |       |                            |       |                            |       |             |       |
| **Net Cash Provided by (Used in)  Investing Activities**                                               | ** ** | **18,007**        | ** ** | **(22,423)**               | ** ** | **—**                      | ** ** | **—**                      | ** ** | **(4,416)**      | ** ** |
|                                                                                                   |       |              |       |                       |       |                            |       |                            |       |             |       |
| **Net Cash Provided by (Used in)  Financing Activities**                                               | ** ** | **41,880**        | ** ** | **(86,994)**               | ** ** | **1,673**                       | ** ** | **1,850**                       | ** ** | **(41,591)**     | ** ** |
|                                                                                                   |       |              |       |                       |       |                            |       |                            |       |             |       |
| **Net Increase in Cash and Cash  Equivalents**                                                         | ** ** | **282**           | ** ** | **2,866**                  | ** ** | **1,168**                       | ** ** | **—**                      | ** ** | **4,316**        | ** ** |
| **Cash and Cash Equivalents at  Beginning of Period**                                                  | ** ** | **13,581**        | ** ** | **7,946**                  | ** ** | **357**                         | ** ** | **—**                      | ** ** | **21,884**       | ** ** |
| **Cash and Cash Equivalents at End of  Period**                                                        | ** ** | **$**             | **13,863** | ** **                 | **$**      | **10,812**                      | ** ** | **$**                           | **1,525**  | ** **       | **$**      | **—** | ** ** | **$** | **26,200** | ** ** |
|                                                                                                        |            |                   |            |                            |            |                                 |            |                                 |            |                  |            |  |  |  |  |  |  |  |  |  |

 
| **Thirty-nine weeks ended October  28, 2006**                                        | ** ** | **Pep Boys (1)** | ** ** | **Subsidiary  Guarantors(1)** | ** ** | **Subsidiary  Non-  Guarantor** | ** ** | **Consolidation/  Elimination(1)** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------------------|------------|------------------------------------|------------|------------------|------------|
| **Cash Flows from Operating Activities:**                                                                |       |                  |       |                          |       |                            |       |                               |       |             |       |
| Net (Loss) Earnings(1)                                                                                   |       | $                     | (10,265    | )                             | $          | 73,980                          |       | $                                  | 1,265      |             | $          | (75,245 | ) | $ | (10,265 | ) |
| Adjustments to Reconcile Net (Loss) Earnings to Net  Cash (Used in) Provided By Continuing Operations(1) |       | (57,423               | )          | 32,120                        |       | 597                             |       | 75,245                             |       | 50,539           |       |
| Changes in operating assets and liabilities                                                              |       | 50,091                |       | 1,762                         |       | (7,779                          | )          | —                             |       | 44,074           |       |
| Net cash (used in) provided by continuing operations  (1)                                                |       | (17,597               | )          | 107,862                       |       | (5,917                          | )          | —                             |       | 84,348           |       |
| Net cash  used in discontinued operations                                                                |       | (58                   | )          | (309                          | )          | —                          |       | —                             |       | (367             | )          |
| **Net Cash (Used in) Provided by  Operating Activities (1)**                                             | ** ** | **(17,655**           | **)**      | **107,553**                   | ** ** | **(5,917**                      | **)**      | —                             | ** ** | **83,981**       | ** ** |
|                                                                                                     |       |                  |       |                          |       |                            |       |                               |       |             |       |
| **Net Cash Used in Investing  Activities**                                                               | ** ** | **(2,083**            | **)**      | **(5,269**                    | **)**      | **(33,830**                     | **)**      | —                             | ** ** | **(41,182**      | **)**      |
|                                                                                                     |       |                  |       |                          |       |                            |       |                               |       |             |       |
| **Net Cash Provided by (Used in)  Financing Activities (1)**                                             | ** ** | **20,617**            | ** ** | **(101,443**                  | **)**      | **12,238**                      | ** ** | —                             | ** ** | **(68,588**      | **)**      |
|                                                                                                     |       |                  |       |                          |       |                            |       |                               |       |             |       |
| **Net Increase (Decrease) in Cash  and Cash  Equivalents**                                               | ** ** | **879**               | ** ** | **841**                       | ** ** | **(27,509**                     | **)**      | —                             | ** ** | **(25,789**      | **)**      |
| **Cash and Cash Equivalents at  Beginning of Period**                                                    | ** ** | **12,019**            | ** ** | **6,953**                     | ** ** | **29,309**                      | ** ** | —                             | ** ** | **48,281**       | ** ** |
| **Cash and Cash Equivalents at End of Period**                                                           | ** ** | **$**                 | **12,898** | ** **                    | **$**      | **7,794**                       | ** ** | **$**                              | **1,800**  | ** **       | **$**      | — | ** ** | **$** | **22,492** | ** ** |
|                                                                                                          |            |                       |            |                               |            |                                 |            |                                    |            |                  |            |  |  |  |  |  |  |  |  |  |

 

----

(1) As restated. See Note 16.

 

19

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NOTE13. Commitments and Contingencies

 

Duringthe fourth quarter of 2006 and first quarter of 2007, the Company was servedwith four separate lawsuits brought by former associates employed inCalifornia, each of which lawsuits purports to be a class action on behalf ofall current and former California store associates.  One or more of thelawsuits claim 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 allegethat the Company violated certain record keeping requirements arising out ofthe foregoing alleged violations.  The lawsuits (i) claim thesealleged practices 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.  During the third quarter of 2007, the Companyreached a settlement in principle regarding the accrued vacation time claims(which is subject to court approval). The Company continues to vigorously defend the remaining claims.

 

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 $6,250,000 in the thirdquarter of fiscal 2007, are adequate and that the ultimate resolution of thesematters will not have a material adverse effect on the Company’s financialposition.  However, there exists areasonable possibility of loss in excess of the amounts accrued, the amount ofwhich cannot currently be estimated.  While the Company does not believe that theamount of such excess loss could be material to the Company’s financialposition, any such loss could have a material adverse effect on the Company’sresults of operations in the period(s) during which the underlying mattersare resolved.

 

Wehave exercised an option to purchase, on or before August 1, 2008, 29properties that we currently rent under a master operating lease.  We believe that the market value of theseproperties exceeds their $116,318,000 purchase price, which will allow us tofund such purchase through sale leasebacks or other financing transactions.

 

NOTE14. Other Comprehensive Loss and Stockholders’ Equity

 

Thefollowing are the components of comprehensive loss:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **November 3,  2007**         | ** ** | **October 28,  2006**            | ** ** | **November 3,  2007** | ** ** | **October 28,  2006** | ** ** |
| Net loss                                         |       | $                                  | (27,990    | )                                     | $          | (10,914 | ) | $ | (20,636 | ) | $ | (10,265 | ) |
| Other comprehensive  income (loss), net of tax:  |       |                               |       |                                  |       |   |   |   |   |
| Defined benefit plan adjustment                  |       | 318                                |       | —                                |       | 1,097 |   | — |   |
| Derivative financial instrument adjustment       |       | (3,733                             | )          | (768                                  | )          | (3,016 | ) | (644 | ) |
| Comprehensive loss                               |       | $                                  | (31,405    | )                                     | $          | (11,682 | ) | $ | (22,555 | ) | $ | (10,909 | ) |

 

Thecomponents of accumulated other comprehensive loss are:

 
| **(dollar amounts in thousands)**        | ** ** | **November 3,  2007** | ** ** | **February 3,  2007** | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Derivative  financial instrument adjustment, net of tax |       | $                          | (3,016     | )                          | $          | — |   |
| Defined  benefit plan adjustment, net of tax            |       | (8,283                     | )          | (9,380                     | )          |
| Accumulated  other comprehensive loss                   |       | $                          | (11,299    | )                          | $          | (9,380 | ) |

 

OnSeptember 7, 2006, the Company renewed its share repurchase program andreset the authority back to $100,000,000 for repurchases to be made from timeto time in the open market or in privately negotiated transactions through September 30,2007. During the first quarter of fiscal 2007, the Companyrepurchased 2,702,460 shares of Common Stock for $50,841,000. Theseshares were placed into the Company’s treasury. The Company also disbursed$7,311,000 for 494,800 shares of Common Stock repurchased during the fourthquarter of 2006.

 

NOTE 15. Interest Rate Swap Agreements

 

OnJune 3, 2003, the Company entered into an interest rate swap which wasdesignated as a cash flow hedge of the Company’s real estate operating leasepayments. During the fourth quarter 2006, the Company removed the designationas a cash flow hedge and records the change in fair value of the swap throughthe operating statement through its termination date on July 1, 2008.During the thirty-nine weeks ended November 3, 2007, a $2,771,000 expensewas recorded in cost of merchandise sales for the change in fair value of thisswap.

 

OnNovember 2, 2006, the Company entered into an interest rate swap for anotional amount of $200,000,000. The Company has designated the swap a cashflow hedge on the first $200,000,000 of the Company’s $320,000,000 seniorsecured notes. The interest rate swap converts the variable LIBOR portion ofthe interest payments to a fixed rate of 5.036% and terminates in 

 

20

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October 2013.The Company, from inception through April 8, 2007, reflected the change infair value in Interest Expense. The Company documented that the swap met therequirements of SFAS No. 133 for hedge accounting on April 9, 2007,and prospectively recorded the effective portion of the change in fair value ofthe swap through Accumulated Other Comprehensive Loss. During the period from February 4,2007 through April 8, 2007, a $974,000 expense was recorded in interestexpense for the change in fair value of this swap.

 

As of November 3,2007 and February 3, 2007, the combined fair values of the interest rateswaps were a liability of $2,941,000, net, and an asset of $5,522,000,respectively.  $4,718,000 ($3,016,000,net of tax) of the $8,463,000 decline in fair value during the thirty-nineweeks ended November 3, 2007 was included in Accumulated OtherComprehensive Loss on the condensed consolidated balance sheet.

 

NOTE 16. Restatement ofPreviously Issued Financial Statements

 

Subsequent to theissuance of the Company’s condensed consolidated financial statements for thequarterly period ended October 28, 2006, the Company determined thatcertain amounts presented in the condensed consolidating information for thethirteen and thirty-nine weeks ended October 28, 2006 presented in thesupplemental guarantor information note (Note 12) contained errors.  The errors resulted from (i) the failureto correctly record consolidating intercompany journal entries between Pep Boysand the Subsidiary Guarantors and (ii) the failure to consolidate PBYCorporation’s wholly-owned subsidiary, The Pep Boys Manny Moe & Jackof California, in the Subsidiary Guarantors column.  The Company has corrected the errors andrestated the condensed consolidating statements of operations for the thirteenand thirty-nine weeks ended October 28, 2006 and the condensedconsolidating statement of cash flows for the thirty-nine weeks ended October 28,2006 included in Note 12.  The correctionof these errors did not affect the Company’s previously reported interim orannual consolidated balance sheets, consolidated statements of operations,consolidated statements of stockholders’ equity or consolidated statements ofcash flows.

 

The following tablereflects the effects of the restatement on the condensed consolidatingfinancial statements for the thirteen and thirty-nine weeks ended October 28,2006:

 
| ** **                                                                                                  | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| **(dollars in thousands)**                                                                        | ** ** | **Previously  Reported**       | ** ** | **Restated**                              | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed Consolidating Statement of  Operations**                                                        |       |                           |       |                                      |       |   |   |   |   |
| **Thirteen weeks ended October 28, 2006**                                                              |       |                           |       |                                      |       |   |   |   |   |
| Non-Operating  (Expense) Income                                                                             |       | $                              | 11,638     |                                      | $          | 29,796 |   | $ | (6,490 | ) | $ | (24,648 | ) |
| Interest Expense  (Income)                                                                                  |       | (6,772                         | )          | 11,386                                    |       | (6,490 | ) | (24,648 | ) |
| Equity in  Earnings of Subsidiaries                                                                         |       | 26,138                         |       | —                                    |       | (46,923 | ) | (20,785 | ) |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle |       | 46,970                         |       | 20,832                                    |       | (46,923 | ) | (20,785 | ) |
| Net (Loss)  Earnings                                                                                        |       | 46,787                         |       | 20,649                                    |       | (46,923 | ) | (20,785 | ) |
| **Thirty-nine weeks ended October 28, 2006**                                                           |       |                           |       |                                      |       |   |   |   |   |
| Non-Operating  (Expense) Income                                                                             |       | 69,033                         |       | 87,191                                    |       | (50,871 | ) | (69,029 | ) |
| Interest Expense  (Income)                                                                                  |       | 8,853                          |       | 27,011                                    |       | (50,871 | ) | (69,029 | ) |
| Equity in  Earnings of Subsidiaries                                                                         |       | 96,404                         |       | —                                    |       | (171,649 | ) | (75,245 | ) |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle |       | 170,684                        |       | 74,280                                    |       | (171,649 | ) | (75,245 | ) |
| Net (Loss)  Earnings                                                                                        |       | 170,384                        |       | 73,980                                    |       | (171,649 | ) | (75,245 | ) |
|                                                                                                             |            |                                |            |                                           |            |  |  |  |  |  |  |  |  |

 
| ** **                                                                                            | ** ** | **Pep Boys**             | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| **(dollars in thousands)**                                                                  | ** ** | **Previously  Reported** | ** ** | **Restated**                   | ** ** | **Previously  Reported**                  | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed Consolidating Statement of Cash  Flows**                                                  |       |                     |       |                           |       |                                      |       |   |   |   |   |   |   |
| **Thirty-nine  weeks ended October 28, 2006**                                                    |       |                     |       |                           |       |                                      |       |   |   |   |   |   |   |
| Net (Loss)  Earnings                                                                                  |       | $                        | —     |                           | $          | —                                    |       | $ | 170,384 |   | $ | 73,980 |   | $ | (171,649 | ) | $ | (75,245 | ) |
| Adjustments to Reconcile Net (Loss)  Earnings to Net Cash (Used in) Provided By Continuing Operations |       | (56,311                  | )          | (57,423                        | )          | (65,396                                   | )          | 32,120 |   | 171,649 |   | 75,245 |   |
| Net cash (used in) provided by continuing  operations                                                 |       | (16,485                  | )          | (17,597                        | )          | 106,750                                   |       | 107,862 |   | — |   | — |   |
| Net Cash (Used in) Provided by Operating  Activities                                                  |       | (16,543                  | )          | (17,655                        | )          | 106,441                                   |       | 107,553 |   | — |   | — |   |
| Net Cash Provided by (Used in) Financing                                                              |       | 19,505                   |       | 20,617                         |       | (100,331                                  | )          | (101,443 | ) | — |   | — |   |
|                                                                                                       |            |                          |            |                                |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

21

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Additionally, the Companyincorrectly presented borrowings and payments under its line of creditagreement and vendor financing trade payable program on a net basis rather thana gross basis in the financing activities section of the condensed consolidatedstatement of cash flows for the thirty-nine weeks ended October 28,2006.   Such presentation in theaccompanying condensed consolidated statement of cash flows for the thirty-nineweeks ended November 3, 2007 has been restated to separately stateborrowings and payments.  The correctionsdid not affect the Company’s previously reported net cash provided by (used in)operating, investing or financing activities on the condensed consolidatedstatements of cash flows for the periods presented in this Quarterly Report on Form 10-Q.

 

Note 17. Store Impairment and Pending Store Closures

 

In the third quarter offiscal 2007, the Company adopted a five-year strategic plan. One of the initialsteps in this plan was to identify certain low-return stores for closure. The Companyidentified 31 stores for closure, which are initially being operated as clearancecenters, with the expectation that all such stores will be closed to the publicby the end of the fourth quarter of fiscal 2007.

 

Managementevaluated this plan to determine the impact on the accompanying condensedconsolidated financial statements as of November 3, 2007. The storeclosure portion of the Company’s five-year strategic plan is being accountedfor in accordance with the provisions of SFAS No. 144 “Accounting forImpairment or Disposal of Long-Lived Assets” and SFAS No. 146 “Accountingfor Costs Associated with Exit or Disposals Activities”. A charge of$10,963,000 for the impairment of the properties, buildings and equipmentassociated with these store locations was recorded during the third quarter toreflect a reduction to quoted market values, net of disposal costs, for ourowned properties and the write down to fair value for leasehold improvementsand equipment using estimated cash flows. Because the Company continued tooperate these stores during the fourth quarter, there was no reclassificationof the related assets to assets held for sale, nor have the stores’ operationsbeen reclassified to discontinued operations for the thirteen and thirty-nineweeks ended November 3, 2007. The impairment charge was classified as occupancycosts of $7,967,000 and $2,996,000 in cost of merchandise sales and cost of servicerevenue, respectively, in the condensed consolidated statements of operations.

 

The Company expects to incurapproximately $6,000,000 of costs primarily related to lease exist costs andseverance that will be recognized in accordance with SFAS No. 146 in thefourth quarter of 2007.

 

NOTE 18. Subsequent Event

 

On November 27,2007, the Company sold 34 properties for an aggregate purchase price of$166,200,000 and agreed to lease back these properties to be operated as PepBoys stores for a term of 15 years, with four 5-year renewal options. Theproceeds from the sale were used to repay a portion of the Company’s SeniorSecured Term Loan.

 

22

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Item 2. Management’s Discussion and Analysis of Financial Condition andResults 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/A for the fiscal year ended February 3, 2007.

 

OVERVIEW

 

ThePep Boys - Manny, Moe & Jack is a leader in the automotive aftermarketwith over 560 stores located throughout 35 states and Puerto Rico. All of ourstores feature the nationally-recognized Pep Boys brand name, establishedthrough more than 80 years of providing high-quality automotive merchandise andservices, and are company-owned, ensuring chain-wide consistency for ourcustomers. We are the only national chain offering automotive service,accessories, tires and parts under one roof, positioning us to achieve our goalof becoming the category dominant one-stop shop for automotive maintenanceproducts and services.

 

Forthe thirteen weeks ended November 3, 2007, our comparable sales (salesgenerated by locations in operation during the same period) decreased by 2.9%compared to an increase of 0.8% for the thirteen weeks ended October 28,2006. This decrease in comparable sales consisted of a 4.1% decrease incomparable merchandise sales which was partially offset by a 2.6% increase incomparable service revenue. Comparable merchandise sales declined primarily dueto reduced customer count, fewer promotional offerings and the elimination ofcommercial delivery in fifty-five locations while comparable service revenueswere driven by a greater allocation of the Company’s advertising spend to serviceofferings, improved staffing, fewer package discounts and improved overallpricing conditions.

 

Inthe third quarter of fiscal 2007, we adopted a five-year strategic plan, thecornerstones of which are to refocus on core automotive merchandise, optimizeour square footage productivity and add incremental service bay density througha “hub and spoke” growth model.  As partof our plan to refocus on core automotive merchandise, we will reallocate alarger portion of our inventory investment to core automotive merchandise,including additional tire inventory, a broader parts assortment and more carcustomization accessories.  Accordingly,we recorded a charge of $32,803,000 for inventory impairment due to our decisionto discontinue the sale of certain merchandise. In order to support theinvestment needed for our revitalization, the Company completed a review of itsunderperforming stores and determined to close 31 stores. As a result of thisdecision, the Company recorded an asset impairment charge of $10,963,000 in thethird quarter and expects to record an additional charge of approximately$6,000,000 in the fourth quarter of fiscal 2007 for the costs associated withclosing such locations.

 

Ournet loss for the third quarter of fiscal 2007 was $27,990,000 or $17,076,000greater than the $10,914,000 net loss for the third quarter of fiscal 2006,resulting primarily from the $32,803,000 inventory impairment, a $10,963,000asset impairment, $3,100,000 in executive severance costs and $6,250,000 inlegal settlements and reserves, offset by a $3,900,000 benefit on acompany-owned life insurance policy and favorable expense control. During thethird quarter of fiscal 2006, the Company recorded a $4,995,000 litigationsettlement and a $4,200,000 charge for early debt retirement.

 

Thefollowing discussion explains the material changes in our results of operationsfor the thirteen (third quarter) and thirty-nine weeks ended November 3,2007 and the significant developments affecting our financial condition since February 3,2007. We strongly recommend that you read the audited consolidated financialstatements and footnotes and Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in our Annual Report on Form 10-K/Afor the fiscal year ended February 3, 2007.

 

LIQUIDITYAND CAPITAL RESOURCES – November 3, 2007

 

Ourcash requirements arise principally from the purchase of inventory and capitalexpenditures related to existing stores, offices and warehouses and informationsystems. The capital expenditures for the thirty-nine weeks ended November 3,2007 were primarily for store maintenance and improvements. During thethirty-nine weeks ended November 3, 2007, we incurred payments ofapproximately $33,506,000 for property and equipment investments versus$25,092,000 during the comparable period in fiscal 2006. We estimate thatcapital expenditures related to existing stores, warehouses and offices andinformation systems during fiscal 2007 will be approximately $50,000,000.

 

23

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Duringthe thirty-nine weeks ended November 3, 2007, we received $26,714,000 fromthe surrender of certain company-owned life insurance policies. The proceedsfrom the surrender of these non-core assets were used to repay borrowings underthe Company’s revolving credit facility. In fiscal 2006, the Company received$6,981,000 from the sale of one of its stores. The Company anticipatescollecting approximately $11,479,000 from other company-owned life insurancepolicies during the fourth quarter of fiscal 2007.

 

Weanticipate that our net cash provided by operating activities and borrowingsunder our existing revolving credit facility will satisfy our principal cashrequirements for capital expenditures and inventory purchases in fiscal 2007.We have no material debt maturities due within the next twelve months.

 

Wehave exercised an option to purchase, on or before August 1, 2008, 29properties that we currently rent under a master operating lease.  We believe that the market value of theseproperties exceeds their $116,318,000 purchase price, which will allow us tofund such purchase through sale leasebacks or other financing transactions.

 

WorkingCapital increased from $163,960,000 at February 3, 2007 to $238,750,000 atNovember 3, 2007. At November 3, 2007, we had stockholders’ equity of$496,301,000 and long-term debt, net of current maturities, of $549,751,000.Our long-term debt was approximately 53% of our total capitalization at November 3,2007 and 49% at February 3, 2007. As of November 3, 2007, we hadfurther undrawn availability under our revolving credit facility totaling$156,000,000.

 

OnJune 29, 2007, the Company entered into a new $65,000,000 vendor financingprogram with JPMorgan Chase Bank, National Association that will replace ourprevious $20,000,000 vendor financing program once the final scheduled paymentsfactored under this program are made in December 2007. Under theseprograms, the Company’s factor makes accelerated and discounted payments to ourvendors and the Company, in turn, makes its regularly scheduled full vendorpayments to the factor. As of November 3, 2007, the Company had anoutstanding balance of $21,596,000 under these programs, classified as tradepayable program liability in the condensed consolidated balance sheet.

 

OnNovember 27, 2007, we sold 34 properties for an aggregate purchase priceof $166,200,000 and agreed to lease back these properties to be operated as PepBoys stores for a term of 15 years, with four 5-year renewal options. Theproceeds from the sale were used to repay a portion of our Senior Secured TermLoan. As these transactions occurred subsequent to third quarter of fiscal2007, they had no impact on the accompanying condensed consolidated financialstatements for the thirteen and thirty-nine weeks ended November 3, 2007.

 

CONTRACTUALOBLIGATIONS

 

Thefollowing charts represent our total contractual obligations and commercialcommitments as of November 3, 2007:

 
| **Contractual Obligations (2)(3)  (dollar amounts in thousands)** | ** ** | **Total** | ** ** | **Due in less  than 1 year** | ** ** | **Due in  1–3 years** | ** ** | **Due in  3–5 years** | ** ** | **Due after  5 years** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------|------------|--------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| Long-term  debt (1)                                                                        |       | $         | 552,720    |                                             | $          | 3,224                                |       | $                                    | 41,285     |                             | $          | 6,400 |   | $ | 501,811 |   |
| Operating  leases                                                                          |       | 500,151   |       | 58,771                                           |       | 98,711                               |       | 89,021                               |       | 253,648                          |       |
| Asset  purchase obligation under operating lease (4)                                       |       | 116,318   |       | 116,318                                          |       | —                               |       | —                               |       | —                           |       |
| Expected scheduled interest payments on all  long—term debt                           |       | 280,965   |       | 41,409                                           |       | 82,095                               |       | 75,723                               |       | 81,738                           |       |
| Capital  leases                                                                            |       | 476       |       | 221                                              |       | 255                                  |       | —                               |       | —                           |       |
| Total cash  obligations                                                                    |       | $         | 1,450,630  |                                             | $          | 219,943                              |       | $                                    | 222,346    |                             | $          | 171,144 |   | $ | 837,197 |   |

 

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(1)Long-termdebt includes current maturities.

(2)Thecontractual obligations table excludes our defined benefit pension obligation.Future plan contributions are dependent upon actual plan asset returns andinterest rates. For the thirteen weeks ended November 3, 2007, the Companycontributed $368,000 of an anticipated $1,000,000 aggregate contribution duringfiscal 2007, to its non-qualified defined benefit pension plan.

(3)Thecontractual obligations table excludes the Company’s FIN 48 liabilities of$3,037,000 because the Company cannot make a reliable estimate of the timing ofthe related cash payments.

(4)Wehave exercised an option to purchase, on or before August 1, 2008, 29properties that we currently rent under a master operating lease.  We believe that the market value of theseproperties exceeds their $116,318,000 purchase price, which will allow us tofund such purchase through sale leasebacks or other financing transactions.

 

24

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| **Commercial Commitments**                  | ** ** | ** ** | ** ** | **Due in less** | ** ** | **Due in**         | ** ** | **Due in**         | ** ** | **Due after** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **Total**  | ** ** | **than 1 year** | ** ** | **1–3 years** | ** ** | **3–5 years** | ** ** | **5 years**   | ** ** |
| Import  letters of credit                        |       | $          | 1,280      |                      | $          | 1,280                   |       | $                       | —     |               | $          | — |   | $ | — |   |
| Standby  letters of credit                       |       | 68,065     |       | 53,065                    |       | 15,000                  |       | —                  |       | —             |       |
| Surety bonds                                     |       | 10,439     |       | 9,681                     |       | 758                     |       | —                  |       | —             |       |
| Purchase  obligations (1)(2)                     |       | 13,495     |       | 11,595                    |       | 1,663                   |       | 237                     |       | —             |       |
| Total  commercial commitments                    |       | $          | 93,279     |                      | $          | 75,621                  |       | $                       | 17,421     |               | $          | 237 |   | $ | — |   |

 

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(1)Ouropen purchase orders are based on current inventory or operational needs andare fulfilled by our vendors within short periods of time. We currently do nothave minimum purchase commitments under our vendor supply agreements andgenerally our open purchase orders (orders that have not been shipped) are notbinding agreements. Those purchase obligations that are in transit from ourvendors at November 3, 2007 are considered to be a contractual obligation.

(2)Inthe first quarter of fiscal 2005, we entered into a contractual commitment topurchase approximately $4,800,000 of products over a six-year period. Thecommitment for years two through five is approximately $950,000 per year, whilethe final year’s commitment is approximately half that amount. Following yeartwo, we are obligated to pay the vendor a per unit fee if there is a shortfallbetween our cumulative purchases during the two year period and the minimumpurchase requirement. For years three through six, we are obligated to pay thevendor a per unit fee for any annual shortfall. The maximum annual obligationunder any shortfall is approximately $950,000. At November 3, 2007, weexpect to meet the cumulative minimum purchase requirements under thiscontract.

 

STORE IMPAIRMENT AND PENDING STORE CLOSURES

 

In the third quarter offiscal 2007, the Company adopted a five-year strategic plan. One of the initialsteps in this plan was to identify certain low-return stores for closure.  The Company identified 31 stores for closure,which are initially being operated as clearance centers, with the expectationthat all such stores will be closed to the public by the end of the fourthquarter of fiscal 2007.

 

Managementevaluated this plan to determine the impact on the accompanying condensedconsolidated financial statements as of November 3, 2007. The storeclosure portion of the Company’s five-year strategic plan is being accountedfor in accordance with the provisions of SFAS No. 144 “Accounting forImpairment or Disposal of Long-Lived Assets” and SFAS No. 146 “Accountingfor Costs Associated with Exit or Disposals Activities”. A charge of$10,963,000 for the impairment of the properties, buildings and equipmentassociated with these store locations was recorded during the third quarter toreflect a reduction to quoted market values, net of disposal costs, for ourowned properties and the write down to fair value for leasehold improvementsand equipment using estimated cash flows. Because the Company continued tooperate these stores during the fourth quarter, there was no reclassificationof the related assets to assets held for sale, nor have the stores’ operationsbeen reclassified to discontinued operations for the thirteen and thirty-nineweeks ended November 3, 2007. The impairment charge was classified as occupancycosts of $7,967,000 and $2,996,000 in cost of merchandise sales and cost of servicerevenue, respectively, in the condensed consolidated statements of operations.

 

The Company expects to incurapproximately $6,000,000 of costs primarily related to lease exist costs andseverance that will be recognized in accordance with SFAS No. 146 in thefourth quarter of 2007.

 

DISCONTINUEDOPERATIONS

 

Inaccordance with SFAS No. 144, discontinued operations continue to reflectthe remaining costs associated with the 33 stores closed on July 31, 2003 aspart of our corporate restructuring. The remaining reserve balance is notmaterial.

 

RESULTSOF OPERATIONS

 

ThirteenWeeks Ended November 3, 2007 vs. Thirteen Weeks Ended October 28,2006

 

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

 

25

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| ** **                                                                                                     | ** ** | **Percentage of Total Revenues**    | ** ** | **Percentage Change**                         | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirteen weeks ended**                                                                             | ** ** | **November 3, 2007  (Fiscal 2007)** | ** ** | **October 28, 2006  (Fiscal 2006)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| ** **                                                                                                     | ** ** | ** **                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Merchandise  Sales                                                                                             |       | 81.4                                               | %          | 82.4                                               | %          | (4.0 | )% |
| Service Revenue  (1)                                                                                           |       | 18.6                                               |       | 17.6                                               |       | 2.6 |   |
| Total Revenues                                                                                                 |       | 100.0                                              |       | 100.0                                              |       | (2.8 | ) |
| Costs of  Merchandise Sales (2)                                                                                |       | 80.4                                               | (3)        | 71.2                                               | (3)        | (8.5 | ) |
| Costs of Service  Revenue (2)                                                                                  |       | 89.7                                               | (3)        | 92.8                                               | (3)        | 0.8 |   |
| Total Costs of  Revenues                                                                                       |       | 82.1                                               |       | 75.0                                               |       | (6.4 | ) |
| Gross Profit  from Merchandise Sales                                                                           |       | 19.6                                               | (3)        | 28.8                                               | (3)        | (34.7 | ) |
| Gross Profit  from Service Revenue                                                                             |       | 10.3                                               | (3)        | 7.2                                                | (3)        | 46.7 |   |
| Total Gross  Profit                                                                                            |       | 17.9                                               |       | 25.0                                               |       | (30.6 | ) |
| Selling, General  and Administrative Expenses                                                                  |       | 25.1                                               |       | 25.3                                               |       | 3.4 |   |
| Net (Loss) Gain  from Dispositions of Assets                                                                   |       | (0.1                                               | )          | —                                             |       | NM |   |
| Operating Loss                                                                                                 |       | (7.4                                               | )          | (0.2                                               | )          | (2,824.3 | ) |
| Non-operating  Income                                                                                          |       | 0.2                                                |       | 0.2                                                |       | 1.5 |   |
| Interest Expense                                                                                               |       | 2.1                                                |       | 2.8                                                |       | 26.2 |   |
| Loss from  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting  Principle |       | (9.3                                               | )          | (2.9                                               | )          | (213.7 | ) |
| Income Tax  Benefit                                                                                            |       | 43.7                                               | (4)        | 32.7                                               | (4)        | 319.9 |   |
| Net Loss from  Continuing Operations Before Cumulative Effect of Change in Accounting  Principle               |       | (5.2                                               | )          | (1.9                                               | )          | (162.1 | ) |
| Discontinued  Operations, Net of Tax                                                                           |       | —                                             |       | —                                             |       | NM |   |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                               |       | —                                             |       | —                                             |       | NM |   |
| Net Loss                                                                                                       |       | (5.2                                               | )          | (2.0                                               | )          | (156.5 | ) |

 

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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 third quarter decreased 2.8%, with a 2.9% comparable revenuesdecrease, resulting primarily from a decline in retail and commercialmerchandise sales. Comparable merchandise sales decreased 4.1%, whilecomparable service revenue increased 2.6%. The decline in merchandise sales wasdue primarily to reduced customer count, fewer promotional offerings and theremoval of commercial delivery from fifty-five stores. Service revenues were drivenby a greater allocation of the Company’s advertising spend to serviceofferings, improved staffing, fewer package discounts and improved overallpricing conditions.

 

Grossprofit as a percentage of merchandise sales decreased from 28.8% in fiscal 2006to 19.6% or $85,327,000 in fiscal 2007. This decline in rate results from therecording a charge of $32,803,000 for inventory impairment for thediscontinuance of certain merchandise, a $7,967,000 impairment charge resultingfrom the pending closure of 31 low-return stores, and decreased leverage onother fixed occupancy costs, partially offset by a reduction in warehouse anddistribution costs.

 

Grossprofit from service revenue increased, as a percentage of service revenue, to10.3% in fiscal 2007 from 7.2% in fiscal 2006. Gross profit from servicerevenue increased 46.7% or $3,274,000 from the comparative period in the prioryear. This increase was due primarily to increased leverage on comparable fixedoccupancy expenses in both quarters with lower employee related benefitsexpenses, offsetting higher payroll and the impairment charge resulting fromthe pending store closure of close 31 low-return stores. The employee relatedbenefits expenses were lower due to lower healthcare costs, improved workers compensationexperience and the recording of a company-owned life insurance policy benefit.

 

26

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Selling,general and administrative expenses, as a percentage of total revenues, were25.1% and 25.3% in fiscal 2007 and fiscal 2006, respectively. Selling, generaland administrative expenses decreased 22.6% or $4,713,000 from the comparativeperiod in the prior year resulting primarily from favorable retail payroll andemployee related benefits expense partially offset by the payment of executiveseverance and the accrual of legal settlements and reserves.  The employee related benefits expenses werelower due to the inclusion of lower healthcare costs, improved workerscompensation experience and the recording of a company-owned life insurancepolicy benefit. During the third quarter of fiscal 2007, the Company recorded a$3,146,000 executive severance and $6,245,000 legal settlements and reserves.During the third quarter of fiscal 2006, the Company recorded a $4,550,000litigation settlement.

 

Interestexpense in fiscal 2007 was lower than fiscal 2006 principally from the$4,200,000 charge recorded in fiscal 2006 for the remaining interest associatedwith the early satisfaction and discharge of the 4.25% Convertible Senior Notesand value of the surviving conversion right, which expired on June 1,2007.

 

Incometax benefit for the third quarter of fiscal 2007 reflects a higher tax rate asa result of a change in the expected annual operating results for fiscal 2007.

 

Netloss of  $27,990,000 for the thirdquarter, was greater than the $10,914,000 net loss from the prior yearprimarily from the impairment of inventory and the pending closure of 31low-return stores partially offset by lower selling, general and administrativeexpenses and interest expense.

 

Thirty-nineWeeks Ended November 3, 2007 vs. Thirty-nine Weeks Ended October 28,2006

 

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

 
| ** **                                                                                                    | ** ** | **Percentage of Total Revenues**    | ** ** | **Percentage Change**                         | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirty-nine weeks ended**                                                                         | ** ** | **November 3, 2007  (Fiscal 2007)** | ** ** | **October 28, 2006  (Fiscal 2006)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| Merchandise  Sales                                                                                            |       | 81.7                                               | %          | 82.6                                               | %          | (3.9 | )% |
| Service Revenue  (1)                                                                                          |       | 18.3                                               |       | 17.4                                               |       | 2.7 |   |
| Total Revenues                                                                                                |       | 100.0                                              |       | 100.0                                              |       | (2.7 | ) |
| Costs of  Merchandise Sales (2)                                                                               |       | 73.6                                               | (3)        | 71.5                                               | (3)        | 1.0 |   |
| Costs of Service  Revenue (2)                                                                                 |       | 88.8                                               | (3)        | 91.8                                               | (3)        | 0.6 |   |
| Total Costs of  Revenues                                                                                      |       | 76.4                                               |       | 75.0                                               |       | 0.9 |   |
| Gross Profit  from Merchandise Sales                                                                          |       | 26.4                                               | (3)        | 28.5                                               | (3)        | (11.0 | ) |
| Gross Profit  from Service Revenue                                                                            |       | 11.2                                               | (3)        | 8.2                                                | (3)        | 39.9 |   |
| Total Gross  Profit                                                                                           |       | 23.6                                               |       | 25.0                                               |       | (8.1 | ) |
| Selling, General  and Administrative Expenses                                                                 |       | 24.1                                               |       | 24.3                                               |       | 3.6 |   |
| Net Gain from  Dispositions of Assets                                                                         |       | 0.1                                                |       | 0.4                                                |       | (70.6 | ) |
| Operating (Loss)  Profit                                                                                      |       | (0.4                                               | )          | 1.1                                                |       | (134.1 | ) |
| Non-operating  Income                                                                                         |       | 0.3                                                |       | 0.3                                                |       | (11.2 | ) |
| Interest Expense                                                                                              |       | 2.2                                                |       | 2.2                                                |       | 3.7 |   |
| Loss from  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       | (2.3                                               | )          | (0.9                                               |  )    | (157.5 | ) |
| Income Tax  Benefit                                                                                           |       | 45.4                                               | (4)        | 49.9                                               | (4)        | 274.2 |   |
| Net Loss from  Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | (1.3                                               | )          | (0.6                                               |  )    | (104.4) |   |
| Discontinued  Operations, Net of Tax                                                                          |       | —                                             |       | —                                             |       | NM |   |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                              |       | —                                             |       | —                                             |       | NM |   |
| Net Loss                                                                                                      |       | (1.3                                               | )          | (0.6                                               |  )    | (101.0 | ) |

 

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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.

 

27

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(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 thirty-nine weeks of fiscal 2007 decreased 2.7%, with a2.9% comparable revenues decrease, resulting primarily from a decline in retailand commercial merchandise sales. Comparable merchandise sales decreased 4.1%,while comparable service revenue increased 2.6%. The decline in merchandisesales was primarily due to reduced customer count, fewer promotional offeringsand the removal of commercial delivery from fifty-five stores. Service revenueswere driven by a greater allocation of the Company’s advertising spend toservice offerings, improved staffing, fewer package discounts and improvedoverall pricing conditions.

 

Grossprofit as a percentage of merchandise sales decreased to 26.4% in fiscal 2007from 28.5% in fiscal 2006. Gross profit from merchandise sales decreased 11.0%or $43,755,000 from the comparative period in the prior year. This decreaseresulted primarily from the Company recording a $32,803,000 inventoryimpairment for the discontinuance of certain merchandise, a $7,967,000impairment charge resulting from the pending closure of 31 low-return stores,and decreased leverage on other fixed occupancy costs, partially offset by areduction in warehouse and distribution costs and a gain on the settlement ofan inventory insurance claim resulting from Hurricane Katrina.

 

Grossprofit from service revenue increased, as a percentage of service revenue to11.2% in fiscal 2007 from 8.2% in fiscal 2006. Gross profit from servicerevenue increased 39.9% or $9,620,000 from the comparative period in the prioryear. This increase was due primarily to increased leverage on comparable fixedoccupancy expenses in both quarters with lower employee related benefitsexpenses partially offset by higher payroll expense and an impairment chargeresulting from the pending closure of 31 low-return stores. The employeerelated benefits expenses were lower due to lower healthcare costs, improvedworkers compensation experience and the receipt of a company-owned lifeinsurance policy benefit.

 

Selling,general and administrative expenses, as a percentage of total revenues, were24.1% and 24.3% in fiscal 2007 and fiscal 2006, respectively. Selling, generaland administrative expenses decreased 3.6% or $14,561,000 from the comparativeperiod in the prior year which resulted primarily from favorable retail payrolland employee related benefits expenses and reduced media expense.  The employee related benefits expenses werelower due to lower healthcare costs, improved workers compensation experienceand the receipt of a company-owned life insurance policy benefit. During fiscal2006, the Company recorded a charge for a $4,550,000 litigation settlement, a$1,100,000 severance charge for the Company’s former CEO and $2,775,000 instrategic review costs, a $2,300,000 favorable insurance settlement, and a$2,100,000 favorable litigation settlement.

 

Netgain from dispositions of assets decreased $4,400,000 from the prior year.While no stores were sold in fiscal 2007, the Company did record a $2,400,000gain in fiscal 2007 due to the settlement of an insurance claim relating tostores impaired during Hurricane Katrina offset by $571,000 in fixed asset losses.Fiscal 2006 reflects a $6,329,000 gain from the sale of a store recorded in thesecond quarter of fiscal 2006.

 

Interestexpense decreased $1,398,000 due to the $4,200,000 charge recorded in fiscal2006 for the remaining interest associated with the early satisfaction anddischarge of the 4.25% Convertible Senior Notes and value of the survivingconversion right, which expired on June 1, 2007, and was partially offsetby higher weighted average interest rate and debt levels during fiscal 2007than during fiscal 2006.

 

Netloss of  $20,636,000 for fiscal 2007, wasgreater than the $10,265,000 net loss from the prior year primarily from theimpairment of inventory and the pending closure of 31 low-return storespartially offset by improved gross profit service revenue, lower selling,general and administrative expenses and interest expense.

 

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 

 

28

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salesfloor and commercial sales business (Retail Sales). Our Service Center Business(labor and installed merchandise and tires) competes in the “DIFM” area of theindustry.

 

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

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(Dollar amounts in thousands)** | ** ** | **November 3,  2007**         | ** ** | **October 28,  2006**            | ** ** | **November 3,  2007** | ** ** | **October 28,  2006** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Retail Sales (1)                                 |       | $                                  | 297,681    |                                  | $          | 323,522 |   | $ | 934,849 |   | $ | 1,005,033 |   |
| Service Center  Revenue (2)                      |       | 237,695                            |       | 227,327                               |       | 705,429 |   | 680,982 |   |
| Total Revenues                                   |       | $                                  | 535,376    |                                  | $          | 550,849 |   | $ | 1,640,278 |   | $ | 1,686,015 |   |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Gross Profit  from Retail Sales (3)              |       | $                                  | 41,645     |                                  | $          | 93,554 |   | $ | 224,529 |   | $ | 283,322 |   |
| Gross Profit  from Service Center Revenue (3)    |       | 53,963                             |       | 44,139                                |       | 163,009 |   | 138,351 |   |
| Total Gross  Profit                              |       | $                                  | 95,608     |                                  | $          | 137,693 |   | $ | 387,538 |   | $ | 421,673 |   |

 

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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

 

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

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactof SFAS No. 159 on our consolidated financial statements.

 

InMarch 2007, the EITF reached a consensus on Issue Number 06-10, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of CollateralAssignment Split-Dollar Life Insurance Arrangements,” (EITF 06-10). EITF 06-10provides guidance to help companies determine whether a liability for thepostretirement benefit associated with a collateral assignment split-dollarlife insurance arrangement should be recorded in accordance with either SFAS No. 106,“Employers’ Accounting for Postretirement Benefits Other Than Pensions” (if, insubstance, a postretirement benefit plan exists), or Accounting PrinciplesBoard Opinion No. 12 (if the arrangement is, in substance, an individualdeferred compensation contract). EITF 06-10 also provides guidance on how acompany should recognize and measure the asset in a collateral assignmentsplit-dollar life insurance contract. EITF 06-10 is effective for fiscal yearsbeginning after December 15, 2007, although early adoption is permitted.We are currently evaluating the impact of EITF 06-10 on our consolidatedfinancial statements.

 

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 arrangements with dividend protectionfeatures that entitle employees to receive (a) dividends onequity-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 benefits thatresult from dividends on equity-classified employee share-based payment awardsthat are declared in fiscal years beginning after December 15, 2007, and interimperiods within those fiscal years. We are currently evaluating the impact ofEITF 06-11 on our consolidated financial statements.

 

29

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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,store closures, retirement benefits, risk participation agreements andcontingencies and litigation. We base our estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. For a detailed discussionof significant accounting policies that may involve a higher degree of judgmentor complexity, refer to “Critical Accounting Policies and Estimates” asreported in our Form 10-K/A for the fiscal year ended February 3,2007, which disclosures are hereby 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 future financialperformance, automotive aftermarket trends, levels of competition, businessdevelopment activities, future capital expenditures, financing sources andavailability and the effects of regulation and litigation. Although we believethat the expectations reflected in such forward-looking statements are based onreasonable assumptions, we can give no assurance that our expectations will beachieved. Our actual results may differ materially from the results discussedin the forward-looking statements due to factors beyond our control, includingthe strength of the national and regional economies, retail and commercialconsumers’ ability to spend, the health of the various sectors of theautomotive aftermarket, the weather in geographical regions with a highconcentration of our stores, competitive pricing, the location and number ofcompetitors’ stores, product and labor costs and the additional factorsdescribed in our filings with the Securities and Exchange Commission (SEC). Weassume no obligation to update or supplement forward-looking statements thatbecome untrue because of subsequent events.

 

Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk

 

TheCompany’s primary market risk exposure with regard to financial instruments isto changes in interest rates. Pursuant to the terms of its revolving creditagreement, changes in LIBOR could affect the rates at which the Company couldborrow funds thereunder. At November 3, 2007, the Company had borrowingsof $34,885,000 under this facility. Additionally, the Company has a$317,600,000 Senior Secured Term Loan facility that bears interest at LIBORplus 2.0%, and approximately $116,318,000 of real estate operating leases whichvary based on changes in LIBOR.

 

OnJune 3, 2003, the Company entered into an interest rate swap, which wasdesignated as a cash flow hedge of the Company’s real estate operating leasepayments. During the fourth quarter 2006, the Company removed the designationas a cash flow hedge and records the change in fair value of the swap throughthe operating statement through its termination date on July 1, 2008.During the thirty-nine weeks ended November 3, 2007, a $2,771,000 expensewas recorded in cost of merchandise sales for the change in fair value of thisswap.

 

OnNovember 2, 2006, the Company entered into an interest rate swap for anotional amount of $200,000,000. The Company has designated the swap a cashflow hedge on the first $200,000,000 of the Company’s $320,000,000 seniorsecured notes. The interest rate swap converts the variable LIBOR portion ofthe interest payments to a fixed rate of 5.036% and terminates in October 2013.The Company, from inception through April 8, 2007, reflected the change infair value in Interest Expense. The Company documented that the swap met therequirements of SFAS No. 133 for hedge accounting on April 9, 2007,and prospectively recorded the effective portion of the change in fair value ofthe swap through Accumulated Other Comprehensive Loss. During the period from February 4,2007 through April 8, 2007, a $974,000 expense was recorded in interestexpense for the change in fair value of this swap.

 

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As of November 3,2007 and February 3, 2007, the combined fair values of the interest rateswaps were a liability of $2,941,000, net, and an asset of $5,522,000,respectively.  $4,718,000 ($3,016,000,net of tax) of the $8,463,000 decline in fair value was included in AccumulatedOther Comprehensive Loss on the condensed consolidated balance sheet.

 

Item 4. Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Our disclosure controls and procedures as defined in Rule 13a-15of the Securities Exchange Act of 1934 are designed to ensure that informationrequired to be disclosed is accumulated and communicated to our management,including our principal executive and principal financial officers, asappropriate to allow timely decisions regarding required disclosure. TheCompany’s management, with the participation of the Company’s chief executiveofficer and chief financial officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. Based on that evaluation, the chief executive officer and chieffinancial officer concluded that our disclosure controls and procedures as ofthe end of the period covered by this report were not functioning effectivelyto provide reasonable assurance that the information required to be disclosedby the Company in reports filed under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, solely due to the fact that there was amaterial weakness in our internal control over financial reporting (which is asubset of disclosure controls and procedures) as described below.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

During the second quarter offiscal 2007, the Company determined it had a material weakness in its internalcontrol over financial reporting related to preparation and review of theCompany’s supplemental guarantor information note and condensed consolidatedstatements of cash flows presentation which resulted in the errors described inNote 16.

 

With respect to the thirdquarter of fiscal 2007, the Company discovered that the impairment chargerelated to the store closure portion of its five-year strategic plan, see Note17, should be recorded in the third quarter instead of the fourth quarter asinitially concluded.  This resulted inthe delayed filing with the SEC of this Quarterly Report on Form 10-Q.

 

The Company has determinedthat the above-described errors collectively result in a material weakness inthe financial close and reporting process as of the end of the fiscal quartercovered by this report.

 

The Company is implementing changes to improve theeffectiveness of the financial close and reporting process within its internalcontrol over financial reporting to remedy the material weakness. The changesinclude (i) hiring staff and providing additional accounting researchresources, (ii) improving process documentation and (iii) improvingthe review process by more senior accounting personnel. On an ongoing basis,the Company will continue to review its internal controls and disclosurecontrols and may identify additional measures, which will enhance its internalcontrol over financial reporting.

 

In furtherance of the Company’s new process forcounting its inventory (which was previously disclosed as a change in internalcontrol over financial reporting in the fourth quarter of fiscal 2006), duringthe third quarter of 2007, the Company began recording inventory shrinkageadjustments based upon cycle counts of its physical inventory completed duringthe quarter. Prior to this change, the Company recorded quarterly inventoryshrinkage adjustments based upon historical trend data.

 

Other than the changes described above, no otherchange in the Company’s internal control over financial reporting occurredduring the fiscal quarter covered by this report that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

Item 5. Other Information

 

None.

 

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PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

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 lawsuits claim that theplaintiff was not paid for (i) overtime, (ii) accrued vacation time, (iii) alltime worked (i.e. “off the clock” work) and/or (iv) late or missed mealperiods or rest breaks.   The plaintiffsalso allege that the Company violated certain record keeping requirementsarising out of the foregoing 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.During the third quarter of 2007, the Company reached a settlement in principleregarding the accrued vacation time claims (which is subject to court approval).  The Company continues to vigorously defendthe remaining claims.

 

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 $6,250,000 in the thirdquarter of fiscal 2007, are adequate and that the ultimate resolution of thesematters will not have a material adverse effect on the Company’s financialposition.  However, there exists areasonable possibility of loss in excess of the amounts accrued, the amount ofwhich cannot currently be estimated. While the Company does not believe that the amount of such excess loss couldbe material to the Company’s financial position, any such loss could have amaterial adverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

Item 1A.  Risk Factors

 

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

 

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

 

None.

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

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

 

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SIGNATURES

 

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

 

 
|        | THE PEP BOYS - MANNY, MOE & JACK                                                                      |   |
|--------|----------------------------------------------------------------------------------------------------------------|--------|
|   | (Registrant)                                                                                                   |
|   |                                                                                                           |   |
| Date:  |    December 18,  2007                                                                      |   | by: | /s/ Harry F. Yanowitz |   |
|   |                                                                                                           |   |
|   | Harry F. Yanowitz                                                                                              |
|   | Senior Vice President and   Chief Financial Officer  (duly authorized officer and principal 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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