**UNITED STATES********SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM10-Q**

**(Mark One)**

| **x**                                              |   | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
|----------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
| ** **                                         |
| **For the  quarterly period ended August 4, 2007** |
| ** **                                         |
| **OR**                                             |
| ** **                                         |
| **o**                                              |   | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from            to            **

**CommissionFile No. 1-3381**

**The Pep Boys - Manny, Moe & Jack**

(Exact name ofregistrant as specified in its charter)

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports); and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No  o

Indicate by checkmark whether the registrant isa large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

Large acceleratedfiler  o   Acceleratedfiler  x   Non-acceleratedfiler  o

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

As of August 31, 2007there were 51,627,284 shares of the registrant’s Common Stock outstanding.

 

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

 

2

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PART I - FINANCIALINFORMATION

Item 1. CondensedConsolidated Financial Statements (Unaudited)

THEPEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(dollaramounts in thousands, except share data)

UNAUDITED
| ** **                                                                    | ** ** | **August 4,  2007** | ** ** | **February 3,  2007** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                    | ** ** | ** **               |       |                       |       |
| Current Assets:                                                               |       |                     |       |                       |       |
| Cash and cash  equivalents                                                    |       | $                        | 26,575     |                       | $          | 21,884 |   |
| Accounts  receivable, net                                                     |       | 26,062                   |       | 29,582                     |       |
| Merchandise  inventories                                                      |       | 615,085                  |       | 607,042                    |       |
| Prepaid expenses                                                              |       | 31,275                   |       | 39,264                     |       |
| Other                                                                         |       | 55,065                   |       | 70,368                     |       |
| Total Current  Assets                                                         |       | 754,062                  |       | 768,140                    |       |
| Property and Equipment  - at cost:                                            |       |                     |       |                       |       |
| Land                                                                          |       | 251,705                  |       | 251,705                    |       |
| Buildings and  improvements                                                   |       | 932,300                  |       | 929,225                    |       |
| Furniture,  fixtures and equipment                                            |       | 697,561                  |       | 684,042                    |       |
| Construction in  progress                                                     |       | 4,669                    |       | 3,464                      |       |
|                                                                          |       | 1,886,235                |       | 1,868,436                  |       |
| Less accumulated  depreciation and amortization                               |       | 1,002,929                |       | 962,189                    |       |
| Property and  Equipment - net                                                 |       | 883,306                  |       | 906,247                    |       |
| Deferred income taxes                                                         |       | 24,144                   |       | 24,828                     |       |
| Other                                                                         |       | 39,128                   |       | 67,984                     |       |
| Total Assets                                                                  |       | $                        | 1,700,640  |                       | $          | 1,767,199 |   |
|                                                                          |       |                     |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                |       |                     |       |                       |       |
| Current Liabilities:                                                          |       |                     |       |                       |       |
| Accounts payable                                                              |       | $                        | 243,615    |                       | $          | 265,489 |   |
| Trade payable  program liability                                              |       | 13,016                   |       | 13,990                     |       |
| Accrued expenses                                                              |       | 265,506                  |       | 292,280                    |       |
| Deferred income  taxes                                                        |       | 31,020                   |       | 28,931                     |       |
| Current  maturities of long-term debt and obligations under capital leases    |       | 3,469                    |       | 3,490                      |       |
| Total Current  Liabilities                                                    |       | 556,626                  |       | 604,180                    |       |
|                                                                          |       |                     |       |                       |       |
| Long-term debt and  obligations under capital leases, less current maturities |       | 548,882                  |       | 535,031                    |       |
| Other long-term  liabilities                                                  |       | 66,259                   |       | 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                                                   |       | 294,255                  |       | 289,384                    |       |
| Retained  earnings                                                            |       | 462,615                  |       | 463,797                    |       |
| Accumulated  other comprehensive loss                                         |       | (7,884                   | )          | (9,380                     | )          |
| Less cost of  shares in treasury - 14,691,165 shares and 12,427,687 shares    |       | 229,406                  |       | 185,339                    |       |
| Less cost of  shares in benefits trust - 2,195,270 shares                     |       | 59,264                   |       | 59,264                     |       |
| Total  Stockholders’ Equity                                              |       | 528,873                  |       | 567,755                    |       |
| Total Liabilities and Stockholders’ Equity                               |       | $                        | 1,700,640  |                       | $          | 1,767,199 |   |

 

See notes to condensed consolidated financialstatements.

3

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THEPEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONSAND CHANGES IN RETAINED EARNINGS

(dollaramounts in thousands, except per share amounts)

UNAUDITED
| ** **                                                                                                        | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                        | ** ** | **August 4,  2007**           | ** ** | **July 29,  2006**              | ** ** | **August 4,  2007** | ** ** | **July 29,  2006** | ** ** |
| Merchandise  Sales                                                                                                |       | $                                  | 458,569    |                                 | $          | 481,997 |   | $ | 903,604 |   | $ | 939,312 |   |
| Service Revenue                                                                                                   |       | 100,320                            |       | 96,568                               |       | 201,298 |   | 195,854 |   |
| Total Revenues                                                                                                    |       | 558,889                            |       | 578,565                              |       | 1,104,902 |   | 1,135,166 |   |
| Costs of  Merchandise Sales                                                                                       |       | 319,800                            |       | 342,874                              |       | 635,110 |   | 672,422 |   |
| Costs of Service  Revenue                                                                                         |       | 88,951                             |       | 90,589                               |       | 177,862 |   | 178,764 |   |
| Total Costs of  Revenues                                                                                          |       | 408,751                            |       | 433,463                              |       | 812,972 |   | 851,186 |   |
| Gross Profit  from Merchandise Sales                                                                              |       | 138,769                            |       | 139,123                              |       | 268,494 |   | 266,890 |   |
| Gross Profit  from Service Revenue                                                                                |       | 11,369                             |       | 5,979                                |       | 23,436 |   | 17,090 |   |
| Total Gross  Profit                                                                                               |       | 150,138                            |       | 145,102                              |       | 291,930 |   | 283,980 |   |
| Selling, General  and Administrative Expenses                                                                     |       | 132,845                            |       | 139,544                              |       | 260,917 |   | 270,765 |   |
| Net (Loss) Gain  from Dispositions of Assets                                                                      |       | (15                                | )          | 6,431                                |       | 2,344 |   | 6,016 |   |
| **Operating  Profit**                                                                                             | ** ** | **17,278**                         | ** ** | **11,989**                           | ** ** | **33,357** | ** ** | **19,231** | ** ** |
| Non-operating  Income                                                                                             |       | 1,766                              |       | 2,018                                |       | 3,671 |   | 4,277 |   |
| Interest Expense                                                                                                  |       | 12,331                             |       | 11,968                               |       | 24,987 |   | 22,305 |   |
| Earnings From  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       | 6,713                              |       | 2,039                                |       | 12,041 |   | 1,203 |   |
| Income Tax  Expense                                                                                               |       | 2,517                              |       | 569                                  |       | 4,625 |   | 600 |   |
| Net Earnings  From Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | 4,196                              |       | 1,470                                |       | 7,416 |   | 603 |   |
| Loss From  Discontinued Operations, Net of Tax                                                                    |       | (17                                | )          | (30                                  | )          | (62 | ) | (133 | ) |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                  |       | —                             |       | (88                                  | )          | — |   | 179 |   |
| **Net  Earnings**                                                                                                 | ** ** | **4,179**                          | ** ** | **1,352**                            | ** ** | **7,354** | ** ** | **649** | ** ** |
|                                                                                                              |       |                               |       |                                 |       |   |   |   |   |
| Retained  Earnings, beginning of period                                                                           |       | 462,757                            |       | 477,438                              |       | 463,797 |   | 481,926 |   |
| Cumulative  effect adjustment for adoption of FIN 48                                                              |       | —                             |       | —                               |       | (155 | ) | — |   |
| Cash Dividends                                                                                                    |       | (3,539                             | )          | (3,811                               | )          | (7,120 | ) | (7,516 | ) |
| Effect of Stock  Options                                                                                          |       | (782                               | )          | (10                                  | )          | (1,261 | ) | (76 | ) |
| Dividend  Reinvestment Plan                                                                                       |       | —                             |       | (111                                 | )          | — |   | (125 | ) |
| Retained  Earnings, end of period                                                                                 |       | $                                  | 462,615    |                                 | $          | 474,858 |   | $ | 462,615 |   | $ | 474,858 |   |
|                                                                                                              |       |                               |       |                                 |       |   |   |   |   |
| Basic and  Diluted Earnings Per Share:                                                                            |       |                               |       |                                 |       |   |   |   |   |
|                                                                                                              |       |                               |       |                                 |       |   |   |   |   |
| Net Earnings  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | $                                  | 0.08       |                                 | $          | 0.03 |   | $ | 0.14 |   | $ | 0.01 |   |
| Discontinued  Operations, Net of Tax                                                                              |       | —                             |       | —                               |       | — |   | — |   |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                  |       | —                             |       | —                               |       | — |   | — |   |
| Earnings Per  Share                                                                                               |       | $                                  | 0.08       |                                 | $          | 0.03 |   | $ | 0.14 |   | $ | 0.01 |   |
|                                                                                                              |       |                               |       |                                 |       |   |   |   |   |
| Cash Dividends Per  Share                                                                                         |       | $                                  | 0.0675     |                                 | $          | 0.0675 |   | $ | 0.1350 |   | $ | 0.1350 |   |

 

See notes to condensed consolidated financialstatements.

4

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THEPEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(dollaramounts in thousands)

UNAUDITED
| **Twenty-six weeks ended**                                                  | ** ** | **August 4,  2007** | ** ** | **July 29,  2006**                        | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|
| ** **                                                                            | ** ** | ** **               | ** ** | **(as restated,  see Note 15)** | ** ** |
| Cash Flows from  Operating Activities:                                                |       |                     |       |                                           |       |
| Net Earnings                                                                          |       | $                        | 7,354      |                                           | $          | 649 |   |
| Adjustments to  reconcile net earnings to net cash provided by continuing operations: |       |                     |       |                                           |       |
| Net loss from  discontinued operations                                                |       | 62                       |       | 133                                            |       |
| Depreciation and  amortization                                                        |       | 41,689                   |       | 41,419                                         |       |
| Cumulative  effect of change in accounting principle, net of tax                      |       | —                   |       | (179                                           | )          |
| Accretion of  asset disposal obligation                                               |       | 149                      |       | 135                                            |       |
| Stock  compensation expense                                                           |       | 6,053                    |       | 1,718                                          |       |
| Deferred income  taxes                                                                |       | 6,283                    |       | (5,252                                         | )          |
| Gain from  dispositions of assets                                                     |       | (2,344                   | )          | (6,016                                         | )          |
| Change in fair  value of derivatives                                                  |       | 2,622                    |       | —                                         |       |
| Loss from asset  impairment                                                           |       | —                   |       | 550                                            |       |
| Excess tax  benefits from stock based awards                                          |       | (609                     | )          | (33                                            | )          |
| Increase in cash  surrender value of life insurance policies                          |       | (846                     | )          | (1,167                                         | )          |
| Changes in  Operating Assets and Liabilities:                                         |       |                     |       |                                           |       |
| Decrease in  accounts receivable, prepaid expenses and other                          |       | 28,556                   |       | 34,084                                         |       |
| (Increase)  decrease in merchandise inventories                                       |       | (8,043                   | )          | 3,611                                          |       |
| (Decrease)  increase in accounts payable                                              |       | (21,874                  | )          | 33,101                                         |       |
| Decrease in  accrued expenses                                                         |       | (16,380                  | )          | (18,136                                        | )          |
| Increase in  other long-term liabilities                                              |       | 1,856                    |       | 1,687                                          |       |
| Net cash provided by  continuing operations                                           |       | 44,528                   |       | 86,304                                         |       |
| Net cash used in  discontinued operations                                             |       | (124                     | )          | (245                                           | )          |
| Net Cash Provided by  Operating Activities                                            |       | 44,404                   |       | 86,059                                         |       |
|                                                                                  |       |                     |       |                                           |       |
| Cash Flows from  Investing Activities:                                                |       |                     |       |                                           |       |
| Cash paid for  property and equipment                                                 |       | (19,960                  | )          | (14,364                                        | )          |
| Proceeds from  dispositions of assets                                                 |       | 2,376                    |       | 687                                            |       |
| Proceeds from  surrender of life insurance policies                                   |       | 26,129                   |       | —                                         |       |
| Proceeds from  sales of assets held for disposal                                      |       | —                   |       | 6,981                                          |       |
| Net Cash Provided by  (Used in) Investing Activities                                  |       | 8,545                    |       | (6,696                                         | )          |
|                                                                                  |       |                     |       |                                           |       |
| Cash Flows from  Financing Activities:                                                |       |                     |       |                                           |       |
| Borrowings under  line of credit agreements                                           |       | 306,305                  |       | 223,535                                        |       |
| Payments under  line of credit agreements                                             |       | (290,718                 | )          | (283,801                                       | )          |
| Excess tax  benefits from stock based awards                                          |       | 609                      |       | 33                                             |       |
| Borrowings on  trade payable program liability                                        |       | 37,790                   |       | 31,557                                         |       |
| Payments on  trade payable program liability                                          |       | (38,764                  | )          | (35,490                                        | )          |
| Reduction of  long-term debt                                                          |       | (1,628                   | )          | (1,041                                         | )          |
| Payments on  capital lease obligations                                                |       | (129                     | )          | (131                                           | )          |
| Dividends paid                                                                        |       | (7,120                   | )          | (7,516                                         | )          |
| Repurchase of  common stock                                                           |       | (58,152                  | )          | —                                         |       |
| Proceeds from  exercise of stock options                                              |       | 3,154                    |       | 56                                             |       |
| Proceeds from  dividend reinvestment plan                                             |       | 395                      |       | 449                                            |       |
| Net Cash Used in  Financing Activities                                                |       | (48,258                  | )          | (72,349                                        | )          |
| Net Increase in Cash  and Cash Equivalents                                            |       | 4,691                    |       | 7,014                                          |       |
| Cash and Cash  Equivalents at Beginning of Period                                     |       | 21,884                   |       | 48,281                                         |       |
| Cash and Cash  Equivalents at End of Period                                           |       | $                        | 26,575     |                                           | $          | 55,295 |   |
|                                                                                  |       |                     |       |                                           |       |
| Supplemental Disclosure  of Cash Flow Information:                                    |       |                     |       |                                           |       |
| Non-cash operating  activities:                                                       |       |                     |       |                                           |       |
| Accrued payment  of stock option settlement                                           |       | $                        | —     |                                           | $          | 1,056 |   |
| Non-cash investing  activities:                                                       |       |                     |       |                                           |       |
| Accrued  purchases of property and equipment                                          |       | $                        | 2,346      |                                           | $          | 1,759 |   |
| Non-cash financing  activities:                                                       |       |                     |       |                                           |       |
| Equipment capital  leases                                                             |       | $                        | —     |                                           | $          | 84 |   |

 

See notes to condensed consolidated financialstatements.

5

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Condensed Consolidated FinancialStatements

The condensed consolidated balance sheet as ofAugust 4, 2007, the condensed consolidated statements of operations and changesin retained earnings for the thirteen and twenty-six week periods ended August4, 2007 and July 29, 2006 and the condensed consolidated statements of cashflows for the twenty-six week periods ended August 4, 2007 and July 29, 2006are unaudited. In the opinion of management, all adjustments necessary topresent fairly the financial position, results of operations and cash flows atAugust 4, 2007 and for all periods presented have been made.

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted, as permitted by Rule 10-01 of the Securitiesand Exchange Commission’s Regulation S-X, “Interim Financial Statements”. It issuggested that these condensed consolidated financial statements be read inconjunction with the financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended February 3,2007. The results of operations for the thirteen and twenty-six week periodsended August 4, 2007 are not necessarily indicative of the operating resultsfor the full fiscal year.

NOTE 2. New Accounting Standards

Adopted:

In June 2006, the Financial Accounting StandardsBoard (FASB) issued Financial Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48), which clarifies the accounting foruncertainty in income taxes recognized in a company’s financial statements in accordancewith the FASB Statement 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.

The Company and its subsidiaries file income taxreturns in the U.S. federal, various states and Puerto Rico jurisdictions.  The Company is no longer subject to federalincome tax examination by tax authorities for years before fiscal 2004. Thefederal audit of tax fiscal years 2001, 2002 and 2003 was closed during thesecond quarter resulting in the recognition of a $4,227,000 additional incometax benefit. The impact of this recognition resulting from the federal auditremains subject to examination by the various states through fiscal 2008. TheCompany does not expect the total amount of unrecognized tax benefits willsignificantly change in the next twelve months.

State and local income tax returns are generallysubject to examination for a period of three to five years after filing of therespective return. The Company and its subsidiaries have various state incometax returns in the process of examination, appeals and litigation.

The Company adopted the provisions of FIN 48 onFebruary 4, 2007.  In connection with theadoption, the Company recorded a net decrease to retained earnings of $155,000and reclassified certain previously recognized deferred tax attributes as FIN48 liabilities.  The amount ofunrecognized tax benefits at February 4, 2007 was $7,126,000 of which $2,216,000would impact the Company’s tax rate, if recognized.

The Company recognizes potential interest andpenalties for unrecognized tax benefits in income tax expense and, accordingly,during the thirteen weeks and twenty-six weeks ended August 4, 2007, theCompany recognized approximately $25,282 and $50,564 in potential interestassociated with uncertain tax positions. At February 4, 2007, the Company has recorded approximately $734,000 forthe payment of interest and penalties, which is included in the $7,126,000unrecognized tax benefit noted above.

In February 2006, the FASB issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB Statements No.133 and 140” (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, by allowingfair value remeasurement of hybrid instruments that contain an embeddedderivative that otherwise would require bifurcation. SFAS No. 155 is effectivefor all financial instruments acquired or issued in fiscal years beginningafter September 15, 2006. The Company adopted this standard on February 4,2007, which did not affect our financial statements.

6

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In March 2006, the FASB issued SFAS No. 156, “Accountingfor Servicing of Financial Assets—an amendment of FASB Statement No. 140” (SFASNo. 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 afterSeptember 15, 2006. The Company adopted this standard on February 4, 2007,which did not affect our financial statements.

In June of 2006, the FASB ratified the consensusreached by the Emerging Issues Task Force (EITF) on Issue 06-3, “How TaxesCollected from Customers and Remitted to Governmental Authorities Should bePresented in the Income Statement (That Is, Gross versus Net Presentation).”The Company presents sales, net of sales taxes, in its consolidated statementof operations and the adoption of this EITF did not affect our financialstatements.

To be adopted:

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157defines the term fair value, establishes a framework for measuring it withingenerally accepted accounting principles and expands disclosures about itsmeasurements. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007. We are currentlyevaluating the impact of SFAS No. 157 on our consolidated financialstatements.

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value. SFASNo. 159 is effective for fiscal years beginning after November 15,2007. We are currently evaluating the impact of SFAS No. 159 on ourconsolidated financial statements.

In March 2007, the EITF reached a consensuson Issue Number 06-10, “Accounting for Deferred Compensation and PostretirementBenefit Aspects of Collateral Assignment Split-Dollar Life InsuranceArrangements,” (EITF 06-10). EITF 06-10 provides guidance to help companiesdetermine whether a liability for the postretirement benefit associated with acollateral assignment split-dollar life insurance arrangement should berecorded in accordance with either SFAS No. 106, “Employers’ Accountingfor Postretirement Benefits Other Than Pensions” (if, in substance, apostretirement benefit plan exists), or Accounting Principles Board Opinion No.12 (if the arrangement is, in substance, an individual deferred compensationcontract). EITF 06-10 also provides guidance on how a company should recognizeand measure the asset in a collateral assignment split-dollar life insurancecontract. EITF 06-10 is effective for fiscal years beginning afterDecember 15, 2007, although early adoption is permitted. We are currentlyevaluating the impact of EITF 06-10 on our consolidated financial statements.

In June 2007, the FASB ratified EITF IssueNumber 06-11, “Accounting for Income Tax Benefits of Dividends onShare-Based Payment Awards” (EITF 06-11). EITF 06-11 applies to share-basedpayment arrangements with dividend protection features that entitle employeesto receive (a) dividends on equity-classified nonvested shares,(b) dividend equivalents on equity-classified nonvested share units, or(c) payments equal to the dividends paid on the underlying shares while anequity-classified share option is outstanding, when those dividends or dividendequivalents are charged to retained earnings under SFAS No. 123(R), “Share-BasedPayment”, and result in an income tax deduction for the employer. A consensuswas reached that a realized income tax benefit from dividends or dividendequivalents that are charged to retained earnings and are paid to employees forequity-classified non-vested equity shares, non-vested equity share units, andoutstanding equity share options should be recognized as an increase inadditional paid-in capital. EITF 06-11 is effective prospectively for theincome tax benefits that result from dividends on equity-classified employeeshare-based payment awards that are declared in fiscal years beginning afterDecember 15, 2007, and interim periods within those fiscal years. We arecurrently evaluating the impact of EITF 06-11 on our consolidated financialstatements.

NOTE 3. Accounting for Stock-Based Compensation

The Company has stock-based compensation plans,under which it grants stock options and restricted stock units to key employeesand members of its Board of Directors. Generally, new stock option grants vestover a four-year period, with one-fifth vesting on each of the grant date andthe next four anniversaries thereof and have an expiration date of sevenyears.  Generally, new restricted stockunit grants vest over a four-year period, with one-fourth vesting on each ofthe first four anniversaries of the grant date. During the second quarter endedAugust 4, 2007, we granted 25,000 stock options with a weighted average fairvalue of $8.28 per option and 48,000 restricted stock units with a weightedaverage fair value of $20.93 per unit.

In accordance with SFAS No. 123(R), we recognizecompensation expense on a straight-line basis over the vesting period. Werecognized $1,663,000 and $570,000 of stock-based compensation expense duringthe thirteen weeks

7

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ended August 4, 2007 and July 29, 2006,respectively, and $6,053,000 and $1,718,000 of stock-based compensation expenseduring the twenty-six weeks ended August 4, 2007 and July 29, 2006,respectively.

NOTE 4. Merchandise Inventories

Merchandise inventories are valued at the lowerof cost or market. Cost is determined by using the last-in, first-out (LIFO)method. An actual valuation of inventory under the LIFO method can be made onlyat the end of each fiscal year based on inventory and costs at that time.Accordingly, interim LIFO calculations must be based on management’s estimatesof expected fiscal year-end inventory levels and costs. If the first-in,first-out (FIFO) method of costing inventory had been used by the Company,inventory would have been $599,197,000 and $593,265,000 as of August 4, 2007and February 3, 2007, respectively.

The Company establishes reserves for estimated inventoryshrink based on historical accuracy and effectiveness of its cycle countingprogram. 

The Company also records valuation adjustments(reserves) for potentially excess and obsolete inventories based on currentinventory levels, the historical analysis of product sales and current marketconditions. The nature of the Company’s inventory is such that the risk ofobsolescence is minimal and excess inventory has historically been returned tothe Company’s vendors for credit. The Company provides reserves when less thanfull credit is expected from a vendor or when market is lower than recordedcosts. The reserves are revised, if necessary, on a quarterly basis foradequacy. The Company’s reserves against inventory for these matters were$14,736,000 and $13,462,000 at August 4, 2007 and February 3, 2007,respectively.

NOTE 5. Other Current Assets

The Company’s other current assets as of August4, 2007 and February 3, 2007, respectively, were as follows:
| **(dollar amounts in thousands)** | ** ** | **August 4, 2007** | ** ** | **February 3, 2007** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
|                                             |       |                         |       |                           |       |
| Reinsurance  premiums and receivable             |       | $                            | 54,893     |                           | $          | 69,239 |   |
| Other                                            |       | 172                          |       | 1,129                          |       |
| Total                                            |       | $                            | 55,065     |                           | $          | 70,368 |   |

 

The Company has riskparticipation arrangements with respect to workers’ compensation, generalliability, automobile liability, other casualty coverages, and employee-relatedhealth care benefits, including the maintaining of stop loss coverage withthird party insurers to limit our total exposure.  The Company has a wholly owned captiveinsurance subsidiary through which it reinsures this retained exposure.  This subsidiary use both risk sharing poolsand third party insurance to manage this exposure.  The Company records both liabilities andreinsurance receivables using actuarial methods followed in the insuranceindustry and our historical claims experience.

NOTE 6. Discontinued Operations

In accordance with SFAS No. 144, ourdiscontinued operations continues to reflect the costs associated with thestores remaining from the 33 stores closed on July 31, 2003 as part of ourcorporate restructuring. The remaining reserve balance is not material.

During the second quarter of fiscal 2006, wesold a store that we have leased back and will continue to operate. Due to oursignificant continuing involvement with this store following the sale, wereclassified back into continuing operations, for all periods presented, this store’srevenues and costs that had been previously classified into discontinuedoperations during the third quarter of fiscal 2005, in accordance with SFASNo. 144 and EITF No. 03-13.

NOTE 7. Pension and Savings Plan

Pension expense includes the following:
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **August 4, 2007**       | ** ** | **July 29, 2006**          | ** ** | **August 4, 2007** | ** ** | **July 29, 2006** | ** ** |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Service cost                                     |       | $                                  | 51         |                                 | $          | 58 |   | $ | 102 |   | $ | 131 |   |
| Interest cost                                    |       | 836                                |       | 772                                  |       | 1,672 |   | 1,528 |   |
| Expected return  on plan assets                  |       | (587                               | )          | (532                                 | )          | (1,174 | ) | (1,113 | ) |
| Amortization of  transition obligation           |       | 41                                 |       | 41                                   |       | 82 |   | 82 |   |
| Amortization of  prior service cost              |       | 91                                 |       | 91                                   |       | 182 |   | 178 |   |
| Amortization of  net loss                        |       | 488                                |       | 602                                  |       | 976 |   | 1,130 |   |
| Net periodic benefit  cost                       |       | $                                  | 920        |                                 | $          | 1,032 |   | $ | 1,840 |   | $ | 1,936 |   |

 

8

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The Company has a qualified defined benefitpension plan with accrued benefits frozen at December 31, 1996. The Companymakes contributions to this plan in accordance with the requirements of ERISA.The Company does not anticipate making a contribution to this plan duringfiscal 2007.

The Company has an unfunded, non-qualifiedExecutive Supplemental Retirement Plan (SERP) defined benefit plan that wasclosed to new participants on January 31, 2004. As of August 4, 2007, theCompany contributed $300,000 of an anticipated $3,300,000 contribution duringfiscal 2007 to this plan.

The Company has a non-qualified SERP definedcontribution plan for key employees who were designated by the Board ofDirectors after January 31, 2004. The Company’s contribution expense for thedefined contribution portion of the plan was approximately $209,000 and$244,000 for the thirteen weeks ended August 4, 2007 and July 29, 2006,respectively, and approximately $421,000 and $488,000 for the twenty-six weeksended August 4, 2007 and July 29, 2006, respectively.

The Company has two 401(k) savings plans,which cover all full-time employees who are at least 21 years of age with oneor more years of service. The Company contributes the lesser of 50% of thefirst 6% of a participant’s contributions or 3% of the participant’scompensation. The Company’s savings plans’ contribution expense wasapproximately $652,000 and $921,000 for the thirteen weeks ended August 4, 2007and July 29, 2006, respectively and approximately $1,628,000 and$1,751,000 for the twenty-six weeks ended August 4, 2007 and July 29,2006, respectively.

 NOTE 8. Debt and Financing Arrangements

On February 15, 2007, the Company amendedits $320,000,000 Senior Secured Term Loan, due in 2013, to reduce the interestrate from London Interbank Offered Rate (LIBOR) plus 2.75% to LIBOR plus 2.00%.

NOTE 9. Warranty Reserve

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

Components of the reserve for warranty costs forthe twenty-six week period ended August 4, 2007 and July 29, 2006 are asfollows:
| **(dollar amounts in thousands)** | ** ** | **Twenty-six Weeks  Ended August 4,  2007** | ** ** | **Twenty-six Weeks  Ended July 29,  2006** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                                 | ** ** | ** **                                                | ** ** |
| Beginning  balance                               |       | $                                                          | 645        |                                                      | $          | 1,477 |   |
|                                             |       |                                                       |       |                                                      |       |
| Additions  related to current period sales       |       | 5,359                                                      |       | 8,076                                                     |       |
|                                             |       |                                                       |       |                                                      |       |
| Warranty costs  incurred in current period       |       | (5,525                                                     | )          | (8,158                                                    | )          |
| Ending balance                                   |       | $                                                          | 479        |                                                      | $          | 1,395 |   |

 

9

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NOTE 10. Earnings Per Share

 (in thousands, except per share amounts)
| ** ** | ** ** | ** **                                                                                                                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** ** | ** ** | ** **                                                                                                                     | ** ** | **August 4,  2007**           | ** ** | **July 29,  2006**              | ** ** | **August 4,  2007** | ** ** | **July 29,  2006** | ** ** |
| * *   | * *   | * *                                                                                                                       | * *   | * *                           | * *   | * *                             | * *   | * * | * * | * * | * * |
| (a)        |       | Net Earnings  From Continuing Operations Before Cumulative Effect of Change in Accounting  Principle                           |       | $                                  | 4,196      |                                 | $          | 1,470 |   | $ | 7,416 |   | $ | 603 |   |
|       |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|       |       | Discontinued  Operations, Net of Tax                                                                                           |       | (17                                | )          | (30                                  | )          | (62 | ) | (133 | ) |
|       |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|       |       | Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                               |       | —                             |       | (88                                  | )          | — |   | 179 |   |
|       |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|       |       | Net Earnings                                                                                                                   |       | $                                  | 4,179      |                                 | $          | 1,352 |   | $ | 7,354 |   | $ | 649 |   |
|       |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|  (b)  |       | Basic average  number of common shares outstanding during period                                                               |       | 51,652                             |       | 54,254                               |       | 52,387 |   | 54,239 |   |
|       |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|       |       | Common shares  assumed issued upon exercise of dilutive stock options, net of assumed repurchase,  at the average market price |       | 612                                |       | 936                                  |       | 562 |   | 967 |   |
|       |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|  (c)  |       | Diluted average  number of common shares assumed outstanding during period                                                     |       | 52,264                             |       | 55,190                               |       | 52,949 |   | 55,206 |   |
|       |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|       | ** ** | **Basic  Earnings per Share:**                                                                                                 | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|       |       | Net Earnings From Continuing Operations Before Cumulative  Effect of Change in Accounting Principle                            |       | $                                  | 0.08       |                                 | $          | 0.03 |   | $ | 0.14 |   | $ | 0.01 |   |
|       |       | Discontinued Operations, Net of Tax                                                                                            |       | —                             |       | —                               |       | — |   | — |   |
|       |       | Cumulative Effect of Change in Accounting Principle,  Net of Tax                                                               |       | —                             |       | —                               |       | — |   | — |   |
|       |       | Basic Earnings  per Share                                                                                                      |       | $                                  | 0.08       |                                 | $          | 0.03 |   | $ | 0.14 |   | $ | 0.01 |   |
|       | ** ** | **Diluted  Earnings per Share:**                                                                                               | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|       |       |                                                                                                                           |       |                               |       |                                 |       |   |   |   |   |
|       |       | Net Earnings From Continuing Operations Before Cumulative  Effect of Change in Accounting Principle                            |       | $                                  | 0.08       |                                 | $          | 0.03 |   | $ | 0.14 |   | $ | 0.01 |   |
|       |       | Discontinued Operations, Net of Tax                                                                                            |       | —                             |       | —                               |       | — |   | — |   |
|       |       | Cumulative Effect of Change in Accounting Principle,  Net of Tax                                                               |       | —                             |       | —                               |       | — |   | — |   |
|       |       | Diluted Earnings per  Share                                                                                                    |       | $                                  | 0.08       |                                 | $          | 0.03 |   | $ | 0.14 |   | $ | 0.01 |   |

 

At August 4, 2007 and July 29, 2006,respectively, there were 3,620,000 and 3,241,000 outstanding options andrestricted stock units. Certain stock options were excluded from thecalculation of diluted earnings per share because their exercise prices weregreater than the average market price of the common shares for the periods thenended and therefore would be anti-dilutive. The total numbers of such sharesexcluded from the diluted earnings per share calculation are 980,000 and 2,976,000for the thirteen weeks ended August 4, 2007 and July 29, 2006, respectively.The total numbers of such shares excluded from the diluted earnings per sharecalculation are 1,059,000 and 2,898,000 for the twenty-six weeks ended August4, 2007 and July 29, 2006, respectively.

10

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NOTE 11. Supplemental Guarantor Information

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

 

The following condensedconsolidating information presents, in separate columns, the condensedconsolidating balance sheets as of August 4, 2007 and February 3, 2007 and therelated condensed consolidating statements of operations for the thirteen andtwenty-six weeks ended August 4, 2007 and July 29, 2006 and condensedconsolidating statements of cash flows for the twenty-six weeks ended August 4,2007 and July 29, 2006 for (i) the Company (“Pep Boys”) on a parent only basis,with its investment in subsidiaries recorded under the equity method, (ii) the SubsidiaryGuarantors on a combined basis including the consolidation of PBY Corporation,wholly owned subsidiary, Pep Boys Manny Moe & Jack of California, (iii) thesubsidiary of the Company that does not guarantee the Notes, and (iv) theCompany on a consolidated basis.
| **As of August 4, 2007**                                  | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Current Assets:                                                               |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Cash and cash equivalents                                                     |       | $                 | 14,402     |                       | $          | 8,562                                |       | $                                     | 3,611      |             | $          | — |   | $ | 26,575 |   |
| Accounts receivable, net                                                      |       | 12,941            |       | 13,134                     |       | (13                                  | )          | —                                |       | 26,062           |       |
| Merchandise inventories                                                       |       | 232,975           |       | 382,110                    |       | —                               |       | —                                |       | 615,085          |       |
| Prepaid expenses                                                              |       | 26,119            |       | 11,583                     |       | 13,522                               |       | (19,949                               | )          | 31,275           |       |
| Other                                                                         |       | 22,493            |       | 9                          |       | 54,670                               |       | (22,107                               | )          | 55,065           |       |
| Total Current Assets                                                          |       | 308,930           |       | 415,398                    |       | 71,790                               |       | (42,056                               | )          | 754,062          |       |
| Property and Equipment—at cost:                                          |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Land                                                                          |       | 78,508            |       | 166,766                    |       | 12,893                               |       | (6,462                                | )          | 251,705          |       |
| Buildings and improvements                                                    |       | 310,235           |       | 611,740                    |       | 20,937                               |       | (10,612                               | )          | 932,300          |       |
| Furniture, fixtures and equipment                                             |       | 292,449           |       | 405,112                    |       | —                               |       | —                                |       | 697,561          |       |
| Construction in progress                                                      |       | 3,452             |       | 1,217                      |       | —                               |       | —                                |       | 4,669            |       |
|                                                                          |       | 684,644           |       | 1,184,835                  |       | 33,830                               |       | (17,074                               | )          | 1,886,235        |       |
| Less accumulated depreciation and amortization                                |       | 396,908           |       | 602,141                    |       | 581                                  |       | 3,299                                 |       | 1,002,929        |       |
| Total Property and Equipment—Net                                         |       | 287,736           |       | 582,694                    |       | 33,249                               |       | (20,373                               | )          | 883,306          |       |
| Investment in subsidiaries                                                    |       | 1,626,188         |       | —                     |       | —                               |       | (1,626,188                            | )          | —           |       |
| Intercompany receivable                                                       |       | —            |       | 764,512                    |       | 78,943                               |       | (843,455                              | )          | —           |       |
| Deferred income taxes                                                         |       | 20,478            |       | 3,666                      |       | —                               |       | —                                |       | 24,144           |       |
| Other                                                                         |       | 38,745            |       | 383                        |       | —                               |       | —                                |       | 39,128           |       |
| Total Assets                                                                  |       | $                 | 2,282,077  |                       | $          | 1,766,653                            |       | $                                     | 183,982    |             | $          | (2,532,072 | ) | $ | 1,700,640 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                           | ** ** | ** **                            | ** ** | ** **       | ** ** |
| Current Liabilities:                                                          |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Accounts payable                                                              |       | $                 | 243,606    |                       | $          | 9                                    |       | $                                     | —     |             | $          | — |   | $ | 243,615 |   |
| Trade payable program liability                                               |       | 13,016            |       | —                     |       | —                               |       | —                                |       | 13,016           |       |
| Accrued expenses                                                              |       | 57,328            |       | 77,940                     |       | 166,375                              |       | (36,137                               | )          | 265,506          |       |
| Current deferred taxes                                                        |       | 7,130             |       | 29,810                     |       | —                               |       | (5,920                                | )          | 31,020           |       |
| Current maturities of long-term debt and obligations  under capital leases    |       | 3,469             |       | —                     |       | —                               |       | —                                |       | 3,469            |       |
| Total Current Liabilities                                                     |       | 324,549           |       | 107,759                    |       | 166,375                              |       | (42,057                               | )          | 556,626          |       |
| Long-term debt and obligations under capital leases, less  current maturities |       | 528,285           |       | 20,597                     |       | —                               |       | —                                |       | 548,882          |       |
| Other long-term liabilities                                                   |       | 56,915            |       | 29,716                     |       | —                               |       | (20,372                               | )          | 66,259           |       |
| Intercompany liabilities                                                      |       | 843,455           |       | —                     |       | —                               |       | (843,455                              | )          | —           |       |
| Stockholders’ Equity:                                                    |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Common stock                                                                  |       | 68,557            |       | 2                          |       | 100                                  |       | (102                                  | )          | 68,557           |       |
| Additional paid-in capital                                                    |       | 294,255           |       | 386,856                    |       | 3,900                                |       | (390,756                              | )          | 294,255          |       |
| Retained earnings                                                             |       | 462,615           |       | 1,221,723                  |       | 13,607                               |       | (1,235,330                            | )          | 462,615          |       |
| Accumulated other comprehensive loss                                          |       | (7,884            | )          | —                     |       | —                               |       | —                                |       | (7,884           | )          |
| Less:                                                                         |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Cost of  shares in treasury                                                   |       | 229,406           |       | —                     |       | —                               |       | —                                |       | 229,406          |       |
| Cost of  shares in benefits trust                                             |       | 59,264            |       | —                     |       | —                               |       | —                                |       | 59,264           |       |
| Total Stockholders’ Equity                                               |       | 528,873           |       | 1,608,581                  |       | 17,607                               |       | (1,626,188                            | )          | 528,873          |       |
| Total Liabilities and Stockholders’ Equity                               |       | $                 | 2,282,077  |                       | $          | 1,766,653                            |       | $                                     | 183,982    |             | $          | (2,532,072 | ) | $ | 1,700,640 |   |

 

11

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| **As of February 3, 2007**                                | ** ** | **Pep Boys(1)** | ** ** | **Subsidiary  Guarantors(1)** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination(1)** | ** ** | **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)                                                 |       | 1,589,279            |       | —                        |       | —                           |       | (1,589,279                               | )          | —           |       |
| Intercompany receivable(1)                                                    |       | —               |       | 684,520                       |       | 81,160                           |       | (765,680                                 | )          | —           |       |
| Deferred income taxes                                                         |       | 24,828               |       | —                        |       | —                           |       | —                                   |       | 24,828           |       |
| Other                                                                         |       | 63,843               |       | 4,141                         |       | —                           |       | —                                   |       | 67,984           |       |
| Total Assets(1)                                                               |       | $                    | 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(1)                                                           |       | 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(1)                                                  |       | 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(1)                                                |       | 53,330               |       | 27,378                        |       | —                           |       | (20,475                                  | )          | 60,233           |       |
| Intercompany liabilities(1)                                                   |       | 765,680              |       | —                        |       | —                           |       | (765,680                                 | )          | —           |       |
| Stockholders’ Equity:                                                    |       |                 |       |                          |       |                             |       |                                     |       |             |       |
| Common stock(1)                                                               |       | 68,557               |       | 2                             |       | 100                              |       | (102                                     | )          | 68,557           |       |
| Additional paid-in capital(1)                                                 |       | 289,384              |       | 386,857                       |       | 3,900                            |       | (390,757                                 | )          | 289,384          |       |
| Retained earnings(1)                                                          |       | 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(1)                                            |       | 567,755              |       | 1,574,410                     |       | 14,869                           |       | (1,589,279                               | )          | 567,755          |       |
| Total Liabilities and Stockholders’ Equity(1)                            |       | $                    | 2,243,619  |                          | $          | 1,714,509                        |       | $                                        | 210,190    |             | $          | (2,401,119 | ) | $ | 1,767,199 |   |

 

----

(1)   As restated. See Note 15.

12

----

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(dollars in thousands)

(unaudited)

 
| **Thirteen weeks ended August 4, 2007**                                                         | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation  / Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| Merchandise Sales                                                                                                        |       | $                 | 158,097    |                       | $          | 300,472                          |       | $                                     | —     |             | $          | — |   | $ | 458,569 |   |
| Service Revenue                                                                                                          |       | 34,776            |       | 65,544                     |       | —                           |       | —                                |       | 100,320          |       |
| Other Revenue                                                                                                            |       | —            |       | —                     |       | 6,212                            |       | (6,212                                | )          | —           |       |
| Total Revenues                                                                                                           |       | 192,873           |       | 366,016                    |       | 6,212                            |       | (6,212                                | )          | 558,889          |       |
| Costs of Merchandise  Sales                                                                                              |       | 110,598           |       | 209,202                    |       | —                           |       | —                                |       | 319,800          |       |
| Costs of Service  Revenue                                                                                                |       | 29,974            |       | 58,977                     |       | —                           |       | —                                |       | 88,951           |       |
| Costs of Other Revenue                                                                                                   |       | —            |       | —                     |       | 4,272                            |       | (4,272                                | )          | —           |       |
| Total Costs of Revenues                                                                                                  |       | 140,572           |       | 268,179                    |       | 4,272                            |       | (4,272                                | )          | 408,751          |       |
| Gross Profit from  Merchandise Sales                                                                                     |       | 47,499            |       | 91,270                     |       | —                           |       | —                                |       | 138,769          |       |
| Gross Profit from  Service Revenue                                                                                       |       | 4,802             |       | 6,567                      |       | —                           |       | —                                |       | 11,369           |       |
| Gross Profit from Other  Revenue                                                                                         |       | —            |       | —                     |       | 1,940                            |       | (1,940                                | )          | —           |       |
| Total Gross Profit                                                                                                       |       | 52,301            |       | 97,837                     |       | 1,940                            |       | (1,940                                | )          | 150,138          |       |
| Selling, General and  Administrative Expenses                                                                            |       | 43,198            |       | 91,528                     |       | 72                               |       | (1,953                                | )          | 132,845          |       |
| Net Loss from  Dispositions of Assets                                                                                    |       | (13               | )          | (2                         | )          | —                           |       | —                                |       | (15              | )          |
| Operating Profit                                                                                                         |       | 9,090             |       | 6,307                      |       | 1,868                            |       | 13                                    |       | 17,278           |       |
| Non-Operating (Expense)  Income                                                                                          |       | (4,036            | )          | 31,863                     |       | 3,325                            |       | (29,386                               | )          | 1,766            |       |
| Interest Expense                                                                                                         |       | 29,609            |       | 10,770                     |       | 1,325                            |       | (29,373                               | )          | 12,331           |       |
| (Loss) Earnings from  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       | (24,555           | )          | 27,400                     |       | 3,868                            |       | —                                |       | 6,713            |       |
| Income Tax (Benefit)  Expense                                                                                            |       | (690              | )          | 1,758                      |       | 1,449                            |       | —                                |       | 2,517            |       |
| Equity in Earnings of  Subsidiaries                                                                                      |       | 27,998            |       | —                     |       | —                           |       | (27,998                               | )          | —           |       |
| Net Earnings from  Continuing Operations Before Cumulative Effect of Change in Accounting  Principle                     |       | 4,133             |       | 25,642                     |       | 2,419                            |       | (27,998                               | )          | 4,196            |       |
| Gain (Loss) From  Discontinued Operations, Net of Tax                                                                    |       | 46                |       | (63                        | )          | —                           |       | —                                |       | (17              | )          |
| Cumulative Effect of  Change in Accounting Principle, Net of Tax                                                         |       | —            |       | —                     |       | —                           |       | —                                |       | —           |       |
| Net Earnings                                                                                                             |       | $                 | 4,179      |                       | $          | 25,579                           |       | $                                     | 2,419      |             | $          | (27,998 | ) | $ | 4,179 |   |

 
| **Thirteen weeks ended July 29, 2006**                                                          | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors(1)** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation  / Elimination(1)** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|------------------|------------|
| Merchandise  Sales                                                                                                       |       | $                 | 168,324    |                          | $          | 313,673                          |       | $                                        | —     |             | $          | — |   | $ | 481,997 |   |
| Service Revenue                                                                                                          |       | 33,405            |       | 63,163                        |       | —                           |       | —                                   |       | 96,568           |       |
| Other Revenue                                                                                                            |       | —            |       | —                        |       | 7,003                            |       | (7,003                                   | )          | —           |       |
| Total Revenues                                                                                                           |       | 201,729           |       | 376,836                       |       | 7,003                            |       | (7,003                                   | )          | 578,565          |       |
| Costs of  Merchandise Sales                                                                                              |       | 118,307           |       | 224,567                       |       | —                           |       | —                                   |       | 342,874          |       |
| Costs of Service  Revenue                                                                                                |       | 32,168            |       | 58,421                        |       | —                           |       | —                                   |       | 90,589           |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                        |       | 7,356                            |       | (7,356                                   | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 150,475           |       | 282,988                       |       | 7,356                            |       | (7,356                                   | )          | 433,463          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 50,017            |       | 89,106                        |       | —                           |       | —                                   |       | 139,123          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 1,237             |       | 4,742                         |       | —                           |       | —                                   |       | 5,979            |       |
| Gross Loss from  Other Revenue                                                                                           |       | —            |       | —                        |       | (353                             | )          | 353                                      |       | —           |       |
| Total Gross  Profit                                                                                                      |       | 51,254            |       | 93,848                        |       | (353                             | )          | 353                                      |       | 145,102          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 49,385            |       | 89,725                        |       | 81                               |       | 353                                      |       | 139,544          |       |
| Net (Loss) Gain  from Dispositions of Assets                                                                             |       | (16               | )          | 6,447                         |       | —                           |       | —                                   |       | 6,431            |       |
| Operating Profit  (Loss)                                                                                                 |       | 1,853             |       | 10,570                        |       | (434                             | )          | —                                   |       | 11,989           |       |
| Non-Operating  (Expense) Income                                                                                          |       | (4,787            | )          | 29,479                        |       | 427                              |       | (23,101                                  | )          | 2,018            |       |
| Interest Expense  (Income)                                                                                               |       | 28,557            |       | 7,781                         |       | (1,269                           | )          | (23,101                                  | )          | 11,968           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (31,491           | )          | 32,268                        |       | 1,262                            |       | —                                   |       | 2,039            |       |
| Income Tax  (Benefit) Expense                                                                                            |       | (506              | )          | 1,008                         |       | 67                               |       | —                                   |       | 569              |       |
| Equity in  Earnings of Subsidiaries(1)                                                                                   |       | 32,436            |       | —                        |       | —                           |       | (32,436                                  | )          | —           |       |
| Net Earnings  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle(1)                  |       | 1,451             |       | 31,260                        |       | 1,195                            |       | (32,436                                  | )          | 1,470            |       |
| Loss From  Discontinued Operations, Net of Tax                                                                           |       | (11               | )          | (19                           | )          | —                           |       | —                                   |       | (30              | )          |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | (88               | )          | —                        |       | —                           |       | —                                   |       | (88              | )          |
| Net Earnings(1)                                                                                                          |       | $                 | 1,352      |                          | $          | 31,241                           |       | $                                        | 1,195      |             | $          | (32,436 | ) | $ | 1,352 |   |

 

(1)  As restated. SeeNote 15.

13

----

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(dollars in thousands)

(unaudited)

 
| **Twenty-six weeks ended August 4, 2007**                                                       | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------|------------|
|                                                                                                                     |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Merchandise  Sales                                                                                                       |       | $                 | 312,381    |                       | $          | 591,223                              |       | $                                     | —     |             | $          | — |   | $ | 903,604 |   |
| Service Revenue                                                                                                          |       | 70,388            |       | 130,910                    |       | —                               |       | —                                |       | 201,298          |       |
| Other Revenue                                                                                                            |       | —            |       | —                     |       | 12,472                               |       | (12,472                               | )          | —           |       |
| Total Revenues                                                                                                           |       | 382,769           |       | 722,133                    |       | 12,472                               |       | (12,472                               | )          | 1,104,902        |       |
| Costs of  Merchandise Sales                                                                                              |       | 220,079           |       | 415,031                    |       | —                               |       | —                                |       | 635,110          |       |
| Costs of Service  Revenue                                                                                                |       | 60,189            |       | 117,673                    |       | —                               |       | —                                |       | 177,862          |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                     |       | 9,838                                |       | (9,838                                | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 280,268           |       | 532,704                    |       | 9,838                                |       | (9,838                                | )          | 812,972          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 92,302            |       | 176,192                    |       | —                               |       | —                                |       | 268,494          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 10,199            |       | 13,237                     |       | —                               |       | —                                |       | 23,436           |       |
| Gross Profit  from Other Revenue                                                                                         |       | —            |       | —                     |       | 2,634                                |       | (2,634                                | )          | —           |       |
| Total Gross  Profit                                                                                                      |       | 102,501           |       | 189,429                    |       | 2,634                                |       | (2,634                                | )          | 291,930          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 85,495            |       | 178,149                    |       | 158                                  |       | (2,885                                | )          | 260,917          |       |
| Net Gain (Loss)  from Dispositions of Assets                                                                             |       | 2,354             |       | (10                        | )          | —                               |       | —                                |       | 2,344            |       |
| Operating Profit                                                                                                         |       | 19,360            |       | 11,270                     |       | 2,476                                |       | 251                                   |       | 33,357           |       |
| Non-Operating  (Expense) Income                                                                                          |       | (7,937            | )          | 65,582                     |       | 3,965                                |       | (57,939                               | )          | 3,671            |       |
| Interest Expense  (Income)                                                                                               |       | 61,522            |       | 21,153                     |       | —                               |       | (57,688                               | )          | 24,987           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (50,099           | )          | 55,699                     |       | 6,441                                |       | —                                |       | 12,041           |       |
| Income Tax  (Benefit) Expense                                                                                            |       | (19,309           | )          | 21,464                     |       | 2,470                                |       |                                  |       | 4,625            |       |
| Equity in  Earnings of Subsidiaries                                                                                      |       | 38,143            |       | —                     |       | —                               |       | (38,143                               | )          | —           |       |
| Net Earnings  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle                     |       | 7,353             |       | 34,235                     |       | 3,971                                |       | (38,143                               | )          | 7,416            |       |
| Gain (Loss) From  Discontinued Operations, Net of Tax                                                                    |       | 1                 |       | (63                        | )          | —                               |       | —                                |       | (62              | )          |
| Net Earnings                                                                                                             |       | $                 | 7,354      |                       | $          | 34,172                               |       | $                                     | 3,971      |             | $          | (38,143 | ) | $ | 7,354 |   |

 
| **Twenty-six weeks ended July 29, 2006**                                                        | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors(1)** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination(1)** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|------------------|------------|
|                                                                                                                     |       |              |       |                          |       |                                 |       |                                     |       |             |       |
| Merchandise  Sales                                                                                                       |       | $                 | 328,028    |                          | $          | 611,284                              |       | $                                        | —     |             | $          | — |   | $ | 939,312 |   |
| Service Revenue                                                                                                          |       | 68,272            |       | 127,582                       |       | —                               |       | —                                   |       | 195,854          |       |
| Other Revenue                                                                                                            |       | —            |       | —                        |       | 14,140                               |       | (14,140                                  | )          | —           |       |
| Total Revenues                                                                                                           |       | 396,300           |       | 738,866                       |       | 14,140                               |       | (14,140                                  | )          | 1,135,166        |       |
| Costs of  Merchandise Sales                                                                                              |       | 232,767           |       | 439,655                       |       | —                               |       | —                                   |       | 672,422          |       |
| Costs of Service  Revenue                                                                                                |       | 62,736            |       | 116,028                       |       | —                               |       | —                                   |       | 178,764          |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                        |       | 15,964                               |       | (15,964                                  | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 295,503           |       | 555,683                       |       | 15,964                               |       | (15,964                                  | )          | 851,186          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 95,261            |       | 171,629                       |       | —                               |       | —                                   |       | 266,890          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 5,536             |       | 11,554                        |       | —                               |       | —                                   |       | 17,090           |       |
| Gross Loss from  Other Revenue                                                                                           |       | —            |       | —                        |       | (1,824                               | )          | 1,824                                    |       | —           |       |
| Total Gross  Profit (Loss)                                                                                               |       | 100,797           |       | 183,183                       |       | (1,824                               | )          | 1,824                                    |       | 283,980          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 92,401            |       | 176,378                       |       | 162                                  |       | 1,824                                    |       | 270,765          |       |
| Net (Loss) Gain  from Dispositions of Assets                                                                             |       | (16               | )          | 6,032                         |       | —                               |       | —                                   |       | 6,016            |       |
| Operating Profit  (Loss)                                                                                                 |       | 8,380             |       | 12,837                        |       | (1,986                               | )          | —                                   |       | 19,231           |       |
| Non-Operating  (Expense) Income                                                                                          |       | (9,462            | )          | 57,395                        |       | 725                                  |       | (44,381                                  | )          | 4,277            |       |
| Interest Expense  (Income)                                                                                               |       | 53,518            |       | 15,625                        |       | (2,457                               | )          | (44,381                                  | )          | 22,305           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (54,600           | )          | 54,607                        |       | 1,196                                |       | —                                   |       | 1,203            |       |
| Income Tax  (Benefit) Expense                                                                                            |       | (626              | )          | 1,159                         |       | 67                                   |       |                                     |       | 600              |       |
| Equity in  Earnings of Subsidiaries(1)                                                                                   |       | 54,460            |       | —                        |       | —                               |       | (54,460                                  | )          | —           |       |
| Net Earnings  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle(1)                  |       | 486               |       | 53,448                        |       | 1,129                                |       | (54,460                                  | )          | 603              |       |
| Loss From  Discontinued Operations, Net of Tax                                                                           |       | (16               | )          | (117                          | )          | —                               |       | —                                   |       | (133             | )          |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | 179               |       | —                        |       | —                               |       | —                                   |       | 179              |       |
| Net Earnings(1)                                                                                                          |       | $                 | 649        |                          | $          | 53,331                               |       | $                                        | 1,129      |             | $          | (54,460 | ) | $ | 649 |   |

 

(1)  As restated. SeeNote 15.

 

 

14

----

 

CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS

(dollarsin thousands)

(unaudited)
| **Twenty-six weeks ended August 4, 2007**                              | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------|------------|
| **Cash Flows from Operating  Activities:**                                                      |       |              |       |                       |       |                             |       |                           |       |             |       |
| Net  Earnings                                                                                   |       | $                 | 7,354      |                       | $          | 34,172                           |       | $                              | 3,971      |             | $          | (38,143) |   | $ | 7,354 |   |
| Adjustments  to Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing  Operations |       | (8,862)           |       | 24,555                     |       | 1,188                            |       | 36,178                         |       | 53,059           |       |
| Changes  in operating assets and liabilities                                                    |       | (40,621)          |       | 26,893                     |       | (2,889)                          |       | 732                            |       | (15,885)         |       |
| Net cash  (used in) provided by continuing operations                                           |       | (42,129)          |       | 85,620                     |       | 2,270                            |       | (1,233)                        |       | 44,528           |       |
| Net cash used in discontinued operations                                                        |       | (124)             |       | —                     |       | —                           |       | —                         |       | (124)            |       |
| **Net Cash (Used in) Provided by  Operating Activities**                                        | ** ** | **(42,253)**      | ** ** | **85,620**                 | ** ** | **2,270**                        | ** ** | **(1,233)**                    | ** ** | **44,404**       | ** ** |
|                                                                                            |       |              |       |                       |       |                             |       |                           |       |             |       |
| **Net Cash Used in Investing  Activities**                                                      | ** ** | **22,858**        | ** ** | **(14,313)**               | ** ** | —                           | ** ** | —                         | ** ** | **8,545**        | ** ** |
|                                                                                            |       |              |       |                       |       |                             |       |                           |       |             |       |
| **Net Cash Provided by (Used in)  Financing Activities**                                        | ** ** | **20,216**        | ** ** | **(70,691)**               | ** ** | **984**                          | ** ** | **1,233**                      | ** ** | **(48,258)**     | ** ** |
|                                                                                            |       |              |       |                       |       |                             |       |                           |       |             |       |
| **Net Increase in Cash**                                                                        | ** ** | **821**           | ** ** | **616**                    | ** ** | **3,254**                        | ** ** | —                         | ** ** | **4,691**        | ** ** |
| **Cash and Cash Equivalents at  Beginning of Period**                                           | ** ** | **13,581**        | ** ** | **7,946**                  | ** ** | **357**                          | ** ** | —                         | ** ** | **21,884**       | ** ** |
| **Cash and Cash Equivalents at End of Period**                                                  | ** ** | **$**             | **14,402** | ** **                 | **$**      | **8,562**                        | ** ** | **$**                          | **3,611**  | ** **       | **$**      | — | ** ** | **$** | **26,575** | ** ** |

 

 
| **Twenty-six weeks ended July 29, 2006**                                 | ** ** | **Pep Boys(1)** | ** ** | **Subsidiary  Guarantors(1)** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation  Elimination(1)** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------|------------|
| **Cash Flows from Operating  Activities:**                                                        |       |                 |       |                          |       |                             |       |                              |       |             |       |
| Net Earnings(1)                                                                                   |       | $                    | 649        |                          | $          | 53,331                           |       | $                                 | 1,129      |             | $          | (54,460 | ) | $ | 649 |   |
| Adjustments to Reconcile Net Earnings to Net Cash  (Used in) Provided By Continuing Operations(1) |       | (44,544              | )          | 21,269                        |       | 123                              |       | 54,460                            |       | 31,308           |       |
| Changes in operating assets and liabilities                                                       |       | 34,190               |       | 22,710                        |       | (2,553                           | )          | —                            |       | 54,347           |       |
| Net cash (used in) provided by continuing operations(1)                                           |       | (9,705               | )          | 97,310                        |       | (1,301                           | )          | —                            |       | 86,304           |       |
| Net cash  used in discontinued operations(1)                                                      |       | (63                  | )          | (182                          | )          | -                                |       | —                            |       | (245             | )          |
| **Net Cash (Used in) Provided by  Operating Activities(1)**                                       | ** ** | **(9,768**           | **)**      | **97,128**                    | ** ** | **(1,301**                       | **)**      | —                            | ** ** | **86,059**       | ** ** |
|                                                                                              |       |                 |       |                          |       |                             |       |                              |       |             |       |
| **Net Cash Used in Investing Activities**                                                         | ** ** | **(6,755**           | **)**      | **59**                        | ** ** | —                           | ** ** | —                            | ** ** | **(6,696**       | **)**      |
|                                                                                              |       |                 |       |                          |       |                             |       |                              |       |             |       |
| **Net Cash Provided by (Used in)  Financing Activities(1)**                                       | ** ** | **18,624**           | ** ** | **(94,375**                   | **)**      | **3,402**                        | ** ** | —                            | ** ** | **(72,349**      | **)**      |
|                                                                                              |       |                 |       |                          |       |                             |       |                              |       |             |       |
| **Net Increase in Cash**                                                                          | ** ** | **2,101**            | ** ** | **2,812**                     | ** ** | **2,101**                        | ** ** | —                            | ** ** | **7,014**        | ** ** |
| **Cash and Cash Equivalents at  Beginning of Period**                                             | ** ** | **12,019**           | ** ** | **6,953**                     | ** ** | **29,309**                       | ** ** | —                            | ** ** | **48,281**       | ** ** |
| **Cash and Cash Equivalents at End of Period**                                                    | ** ** | **$**                | **14,120** | ** **                    | **$**      | **9,765**                        | ** ** | **$**                             | **31,410** | ** **       | **$**      | — | ** ** | **$** | **55,295** | ** ** |

 

(1) As restated. See Note 15.

 

 

15

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NOTE 12. Contingencies

During the fourth quarterof 2006 and first quarter of 2007, the Company was served with four separatelawsuits brought by former associates employed in California, each of whichlawsuits purports to be a class action on behalf of all current and formerCalifornia store associates.  One or more of the lawsuits claim that theplaintiff was not paid for (i) overtime, (ii) accrued vacation time, (iii) alltime worked (i.e. “off the clock” work) and/or (iv) late or missed meal periodsor rest breaks.   The plaintiffs also allege that the Companyviolated certain record keeping requirements arising out of the foregoingalleged violations.  The lawsuits (i) claim these alleged practices areunfair business practices, (ii) request back pay, restitution, penalties,interest and attorney fees and (iii) request that the Company be enjoined fromcommitting further unfair business practices. The Company believes that it hasmeritorious defenses to all of these claims and intends to defend these claimsvigorously. The resolution of these claims cannot be predicted and there is noreasonable estimate of the amount or range potential loss.  Accordingly,the Company has not recorded any provision for loss associated with these claims. However, an adverse determination of these claims could have a material effecton the Company’s results of operations and cash flows in the period(s) duringwhich they are determined.

The Company is also partyto various actions and claims arising in the normal course of business. TheCompany believes that amounts accrued for awards or assessments in connectionwith such matters are adequate and that the ultimate resolution of thesematters will not have a material adverse effect on the Company’s financialposition, results of operations or cash flows.

16

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NOTE13. Other Comprehensive Income

Thefollowing are the components of comprehensive income:
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **August 4,  2007**           | ** ** | **July 29,  2006**              | ** ** | **August 4,  2007** | ** ** | **July 29,  2006** | ** ** |
| Net earnings                                     |       | $                                  | 4,179      |                                 | $          | 1,352 |   | $ | 7,354 |   | $ | 649 |   |
| Other  comprehensive income (loss), net of tax:  |       |                               |       |                                 |       |   |   |   |   |
| Defined benefit plan adjustment                  |       | 389                                |       | —                               |       | 779 |   | — |   |
| Derivative financial instrument adjustment       |       | 1,633                              |       | (212                                 | )          | 717 |   | 124 |   |
| Comprehensive income                             |       | $                                  | 6,201      |                                 | $          | 1,140 |   | $ | 8,850 |   | $ | 773 |   |

 

Thecomponents of accumulated other comprehensive loss are:
| **(dollar amounts in thousands)**        | ** ** | **August 4,  2007** | ** ** | **February 3,  2007** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| Derivative  financial instrument adjustment, net of tax |       | $                        | 717        |                       | $          | — |   |
| Defined benefit  plan adjustment, net of tax            |       | (8,601                   | )          | (9,380                     | )          |
| Accumulated other  comprehensive loss                   |       | $                        | (7,884     | )                          | $          | (9,380 | ) |

 

NOTE 14. Interest RateSwap 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 twenty-six weeks ended August 4, 2007, a $1,648,000 expense wasrecorded 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 a notionalamount of $200,000,000. The Company has designated the swap a cash flow hedgeon the first $200,000,000 of the Company’s $320,000,000 senior secured notes.The interest rate swap converts the variable LIBOR portion of the interestpayments to a fixed rate of 5.036% and terminates in October 2013. The Company,from inception through April 8, 2007, reflected the change in fair value inInterest Expense. The Company documented that the swap met the requirements ofSFAS No. 133 for hedge accounting on April 9, 2007, and prospectively recordedthe effective portion of the change in fair value of the swap throughAccumulated Other Comprehensive Loss. During the period from February 4, 2007through April 8, 2007, a $974,000 expense was recorded in interest expense forthe change in fair value of this swap.

Asof August 4, 2007 and February 3, 2007, the fair values of the interest rateswaps were $3,691,000 and $5,522,000, respectively.  $791,000 ($717,000, net of tax) of the$1,831,000 decline in fair value was included in Accumulated OtherComprehensive Loss on the condensed consolidated balance sheet.

NOTE 15. Restatement ofPreviously Issued Financial Statements

Subsequent to theissuance of the Company’s consolidated financial statements for the fiscal yearended February 3, 2007, the Company determined that certain informationpresented in the condensed consolidating balance sheets as of February 3, 2007and January 28, 2006 and the related condensed consolidating statements ofoperations and cash flows for each of three years in the period ended February3, 2007, presented in the supplemental guarantor information note containederrors.  The errors resulted from (i) thefailure to correctly record consolidating intercompany journal entries betweenthe Company (Pep Boys) and Subsidiary Guarantors (ii) the failure to correctlyrecord certain reclassification entries to intercompany receivables and liabilitiesand (iii) the failure to consolidate PBY Corporation’s wholly owned subsidiary,Pep Boys Manny Moe & Jack of California in the Subsidiary Guarantorscolumn.  The Company corrected the errorsand restated the condensed consolidating balance sheet of February 3, 2007, thecondensed consolidating statements of operation for the thirteen and twenty-sixweeks ended July 29, 2006 and the condensed consolidating statement of cashflows for the twenty-six weeks ended July 29, 2006 included in Note 11.  The corrections did not affect the Company’spreviously reported Consolidated Balance Sheets, Statements of Operations orStatements of Cash Flows.

The following tablereflects the effects of the restatement on the condensed consolidatingfinancial statements as of February 3, 2007 and for the thirteen and twenty-sixweeks ended July 29, 2006:
| ** **                                                        | ** ** | **Pep Boys**        | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| **(dollars in thousands)**                              | ** ** | **Previously  Reported** | ** ** | **Restated**                   | ** ** | **Previously  Reported**                  | ** ** | **Restated** | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed  Consolidating Balance Sheet as of February 3, 2007** |       |                     |       |                           |       |                                      |       |   |   |   |   |   |   |
| Investment in  subsidiaries                                       |       | $                        | 1,567,674  |                           | $          | 1,589,279                                 |       | $ | 1,384,492 |   | $ | — |   | $ | (2,952,166 | ) | $ | (1,589,279 | ) |
| Intercompany  receivables                                         |       | —                   |       | —                         |       | 726,297                                   |       | 684,520 |   | (807,457 | ) | (765,680 | ) |
| Total Assets                                                      |       | 2,222,014                |       | 2,243,619                      |       | 3,140,778                                 |       | 1,714,509 |   | (3,805,783 | ) | (2,401,119 | ) |
| Accrued expenses                                                  |       | 22,512                   |       | 43,815                         |       | 136,073                                   |       | 72,692 |   | (61,626 | ) | (19,548 | ) |
| Total Current  Liabilities                                        |       | 311,816                  |       | 333,119                        |       | 164,806                                   |       | 101,425 |   | (67,763 | ) | (25,685 | ) |
| Intercompany  liabilities                                         |       | 807,457                  |       | 765,680                        |       | —                                    |       | — |   | (807,457 | ) | (765,680 | ) |
| Other long-term  liabilities                                      |       | 32,855                   |       | 53,330                         |       | —                                    |       | — |   | — |   | (20,475 | ) |
| Common stock                                                      |       | —                   |       | —                         |       | 1,502                                     |       | 2 |   | (1,602 | ) | (102 | ) |
| Additional  paid-in capital                                       |       | —                   |       | —                         |       | 436,857                                   |       | 386,857 |   | (440,757 | ) | (390,757 | ) |
| Retained  earnings                                                |       | 442,193                  |       | 463,797                        |       | 2,498,939                                 |       | 1,187,551 |   | (2,488,204 | ) | (1,198,420 | ) |
| Total  Stockholders’ Equity                                  |       | 546,151                  |       | 567,755                        |       | 2,937,298                                 |       | 1,574,410 |   | (2,930,563 | ) | (1,589,279 | ) |
| Total Liabilities and  Stockholders’ Equity                  |       | 2,222,014                |       | 2,243,619                      |       | 3,140,778                                 |       | 1,714,509 |   | (3,805,783 | ) | (2,401,119 | ) |
|                                                                   |            |                          |            |                                |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

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| ** **                                                                                          | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| **(dollars in thousands)**                                                                | ** ** | **Previously  Reported**       | ** ** | **Restated**                              | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed Consolidating  Statement of Operations**                                                |       |                           |       |                                      |       |   |   |   |   |
| **Thirteen weeks ended July 29,  2006**                                                             |       |                           |       |                                      |       |   |   |   |   |
| Equity in Earnings of Subsidiaries                                                                  |       | $                              | 37,240     |                                      | $          | — |   | $ | (69,676 | ) | $ | (32,436 | ) |
| Net Earnings from Continuing Operations Before Cumulative  Effect of Change in Accounting Principle |       | 68,500                         |       | 31,260                                    |       | (69,676 | ) | (32,436 | ) |
| Net Earnings                                                                                        |       | 68,481                         |       | 31,241                                    |       | (69,676 | ) | (32,436 | ) |
| **Twenty-six weeks ended July 29,  2006**                                                           |       |                           |       |                                      |       |   |   |   |   |
| Equity in Earnings of Subsidiaries                                                                  |       | 70,266                         |       | —                                    |       | (124,726 | ) | (54,460 | ) |
| Net Earnings from Continuing Operations Before Cumulative  Effect of Change in Accounting Principle |       | 123,714                        |       | 53,448                                    |       | (124,726 | ) | (54,460 | ) |
| Net Earnings                                                                                        |       | 123,597                        |       | 53,331                                    |       | (124,726 | ) | (54,460 | ) |
|                                                                                                     |            |                                |            |                                           |            |  |  |  |  |  |  |  |  |

 

 
| ** **                                                                                      | ** ** | **Subsidiary Guarantors** | ** ** | **Consolidation / Elimination** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| **(dollars in thousands)**                                                            | ** ** | **Previously  Reported**       | ** ** | **Restated**                              | ** ** | **Previously  Reported** | ** ** | **Restated** | ** ** |
| **Condensed  Consolidating Statement of Cash Flows**                                            |       |                           |       |                                      |       |   |   |   |   |
| **Twenty-six  weeks ended July 29, 2006**                                                       |       |                           |       |                                      |       |   |   |   |   |
| Net Earnings                                                                                    |       | $                              | 123,597    |                                      | $          | 53,331 |   | $ | (124,726) |   | $ | (54,460) |   |
| Adjustments to  Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing  Operations |       | (48,997)                       |       | 21,269                                    |       | 124,726 |   | 54,460 |   |
|                                                                                                 |            |                                |            |                                           |            |  |  |  |  |  |  |  |  |

 

 

Additionally, the Companyincorrectly presented borrowings and payments under its line of creditagreements and vendor financing trade payable program on a net basis instead ofa gross basis in the financing activities section of the Condensed ConsolidatedStatements of Cash Flows for each of the three years in the period endedFebruary 3, 2007. Such presentation in the accompanying CondensedConsolidated Statement of Cash Flows for the twenty-six weeks ended July 29,2006, has been restated to separately present its borrowings and payments. Thecorrections did not affect the Company’s previously reported net cash used infinancing activities on the Condensed Consolidated Statements of Cash Flows forany period presented.

Also, see Item 5“Other Information” for further discussion of the affect of the restatement onpreviously issued financial statements.

18

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Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis below should be readin conjunction with (i) the condensed consolidated interim financial statementsand the notes to such financial statements included elsewhere in this Form 10-Qand (ii) the consolidated financial statements and the notes to such financialstatements included in Item 8, “Financial Statements and Supplementary Data” ofour Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

OVERVIEW

The Pep Boys - Manny, Moe & Jack is aleader in the automotive aftermarket with 592 stores located throughout 36states and Puerto Rico. All of our stores feature the nationally-recognized PepBoys brand name, established through more than 80 years of providinghigh-quality automotive merchandise and services, and are company-owned,ensuring chain-wide consistency for our customers. We are the only nationalchain offering automotive service, accessories, tires and parts under one roof,positioning us to achieve our goal of becoming the category dominant one-stopshop for automotive maintenance products and services.

For the thirteen weeks ended August 4, 2007, ourcomparable sales (sales generated by locations in operation during the sameperiod) decreased by 3.6% compared to an increase of 0.4% for the thirteenweeks ended July 29, 2006. This decrease in comparable sales consisted of a5.1% decrease in comparable merchandise sales which was partially offset by a3.8% increase in comparable service revenue. Comparable merchandise salesdeclined primarily due to the elimination of commercial delivery in fifty-fivelocations and fewer promotional offerings, while comparable service revenueswere driven by an increased focus of the Company’s advertising to serviceofferings and opportunistic pricing initiatives.

Our net earnings for the second quarter of 2007were $4,179,000 or $2,827,000 higher than the $1,352,000 net earnings for thesecond quarter of 2006. This increase in profitability was primarily due toimproved service revenue margins and expense control initiatives, which werepartially offset by fewer asset sales.

The following discussion explains the materialchanges in our results of operations for the thirteen (second quarter) andtwenty-six weeks ended August 4, 2007 and the significant developmentsaffecting our financial condition since February 3, 2007. We strongly recommendthat you read the audited consolidated financial statements and footnotes andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the fiscal year endedFebruary 3, 2007.

LIQUIDITY AND CAPITAL RESOURCES – August 4, 2007

Our cash requirements arise principally from thepurchase of inventory and capital expenditures related to existing stores,offices and warehouses and information systems. The capital expenditures forthe twenty-six weeks ended August 4, 2007 were primarily for store maintenanceand improvements. During the twenty-six weeks ended August 4, 2007, we investedapproximately $18,345,000 in property and equipment versus $16,123,000 investedin the second quarter of fiscal 2006. We estimate that capital expendituresrelated to existing stores, warehouses and offices and information systemsduring fiscal 2007 will be approximately $45,000,000 to $55,000,000.

During the second quarter of 2007, we received$26,129,000 from the surrender of certain company-owned life insurancepolicies. The proceeds from the surrender of these non-core assets were used torepay borrowings under the Company’s revolving credit facility. In fiscal 2006,the Company received $6,981,000 from the sale of one of its stores.

We anticipate that our net cash provided byoperating activities and our existing revolving credit facility will exceed ourprincipal cash requirements for capital expenditures and inventory purchases infiscal 2007. We have no material debt maturities due within the next twelvemonths.

During the second quarter of fiscal 2007, wecompleted a valuation of our owned store and distribution centerproperties.  We plan to begin to monetizea portion of these assets during the second half of fiscal 2007 throughsale/leaseback transactions, with the initial use of proceeds expected to bethe repayment of debt.

Working Capital increased from $163,960,000 atFebruary 3, 2007 to $197,436,000 at August 4, 2007. At August 4, 2007, we hadstockholders’ equity of $528,873,000 and long-term debt, net of currentmaturities, of $548,882,000. Our long-term debt was approximately 51% of ourtotal capitalization at August 4, 2007 and 49% at February 3, 

19

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2007. As of August 4, 2007, we had furtherundrawn availability under our revolving credit facility totaling $174,000,000.

On June 29, 2007, the Company entered into a new$65,000,000 vendor financing program with JPMorgan Chase Bank, NationalAssociation that will replace our previous $20,000,000 vendor financing programonce the final scheduled payments factored under this program are made inDecember 2007. Under these programs, the Company’s factor makes accelerated anddiscounted payments to our vendors and the Company, in turn, makes itsregularly scheduled full vendor payments to the factor. As of August 4, 2007,the Company had an outstanding balance of $13,016,000 under these programs,classified as trade payable program liability in the consolidated balancesheet.

CONTRACTUAL OBLIGATIONS

The following charts represent our totalcontractual obligations and commercial commitments as of August 4, 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)                                                                        |       | $         | 551,795    |                                             | $          | 3,224                                |       | $                                    | 39,555     |                             | $          | 6,400 |   | $ | 502,616 |   |
| Operating leases                                                                           |       | 457,172   |       | 61,297                                           |       | 94,408                               |       | 89,912                               |       | 211,555                          |       |
| Asset purchase  obligation under operating lease                                           |       | 116,505   |       | 116,505                                          |       | —                               |       | —                               |       | —                           |       |
| Expected  scheduled interest payments on all long–term debt                           |       | 277,749   |       | 40,935                                           |       | 81,161                               |       | 74,749                               |       | 80,904                           |       |
| Capital leases                                                                             |       | 556       |       | 245                                              |       | 311                                  |       | —                               |       | —                           |       |
| Total cash obligations                                                                     |       | $         | 1,403,777  |                                             | $          | 222,206                              |       | $                                    | 215,435    |                             | $          | 171,061 |   | $ | 795,075 |   |

 

----

(1) Long-term debtincludes current maturities.

(2) The contractualobligations table excludes our defined benefit pension obligation. Future plancontributions are dependent upon actual plan asset returns and interest rates.For the thirteen weeks ended August 4, 2007, the Company contributed $300,000of an anticipated $3,300,000 aggregate contribution during fiscal 2007, to itsnon-qualified defined benefit pension plan.

(3) The contractualobligations table excludes the Company’s FIN 48 liabilities of $3,037,000because the Company cannot make a reliable estimate of the timing of therelated cash payments.
| **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                        |       | $          | 315        |                      | $          | 115                     |       | $                       | 200        |               | $          | — |   | $ | — |   |
| Standby letters  of credit                       |       | 63,065     |       | 51,335                    |       | 11,730                  |       | —                  |       | —             |       |
| Surety bonds                                     |       | 10,552     |       | 2,363                     |       | 8,189                   |       | —                  |       | —             |       |
| Purchase obligations  (1)(2)                     |       | 7,308      |       | 7,308                     |       | —                  |       | —                  |       | —             |       |
| Total commercial  commitments                    |       | $          | 81,240     |                      | $          | 61,121                  |       | $                       | 20,119     |               | $          | — |   | $ | — |   |

 

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(1) Our openpurchase orders are based on current inventory or operational needs and arefulfilled by our vendors within short periods of time. We currently do not haveminimum purchase commitments under our vendor supply agreements and generallyour open purchase orders (orders that have not been shipped) are not bindingagreements. Those purchase obligations that are in transit from our vendors atAugust 4, 2007 are considered to be a contractual obligation.

(2) In the first quarterof fiscal 2005, we entered into a contractual commitment to purchaseapproximately $4,800,000 of products over a six-year period. The commitment foryears two through five is approximately $950,000 per year, while the final year’scommitment is approximately half that amount. Following year two, we areobligated to pay the vendor a per unit fee if there is a shortfall between ourcumulative purchases during the two year period and the minimum purchaserequirement. For years three through six, we are obligated to pay the vendor aper unit fee for any annual shortfall. The maximum annual obligation under anyshortfall is approximately $950,000. At August 4, 2007, we expect to meet thecumulative minimum purchase requirements under this contract. Accordingly, noamounts attributable to this contractual commitment are included in the table.

DISCONTINUED OPERATIONS

In accordance with SFAS No. 144, ourdiscontinued operations continues to reflect the costs associated with thestores remaining from the 33 stores closed on July 31, 2003 as part of ourcorporate restructuring. The remaining reserve balance is immaterial.

20

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During the second quarter of fiscal 2006, wesold a store that we leased back and continue to operate. Due to oursignificant continuing involvement with this store following the sale, wereclassified back into continuing operations, for all periods presented, thisstore’s revenues and costs that had been previously classified intodiscontinued operations during the third quarter of fiscal 2005, in accordancewith SFAS No. 144 and EITF No. 03-13.

 RESULTS OF OPERATIONS

Thirteen Weeks EndedAugust 4, 2007 vs. Thirteen Weeks Ended July 29, 2006

The following table presents for the periodsindicated certain items in the consolidated statements of operations as apercentage of total revenues (except as otherwise provided) and the percentagechange in dollar amounts of such items compared to the indicated prior period.
| ** **                                                                                                        | ** ** | **Percentage of Total Revenues**  | ** ** | **Percentage Change**                      | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **Thirteen weeks ended**                                                                                | ** ** | **August 4, 2007  (Fiscal 2007)** | ** ** | **July 29, 2006  (Fiscal 2006)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| ** **                                                                                                        | ** ** | ** **                                       | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Merchandise  Sales                                                                                                |       | 82.1                                             | %          | 83.3                                            | %          | (4.9 | )% |
| Service Revenue  (1)                                                                                              |       | 17.9                                             |       | 16.7                                            |       | 3.9 |   |
| Total Revenues                                                                                                    |       | 100.0                                            |       | 100.0                                           |       | (3.4 | ) |
| Costs of  Merchandise Sales (2)                                                                                   |       | 69.7                                             | (3)        | 71.1                                            | (3)        | 6.7 |   |
| Costs of Service  Revenue (2)                                                                                     |       | 88.7                                             | (3)        | 93.8                                            | (3)        | 1.8 |   |
| Total Costs of  Revenues                                                                                          |       | 73.1                                             |       | 74.9                                            |       | 5.7 |   |
| Gross Profit  from Merchandise Sales                                                                              |       | 30.3                                             | (3)        | 28.9                                            | (3)        | (0.3 | ) |
| Gross Profit  from Service Revenue                                                                                |       | 11.3                                             | (3)        | 6.2                                             | (3)        | 90.1 |   |
| Total Gross  Profit                                                                                               |       | 26.9                                             |       | 25.1                                            |       | 3.5 |   |
| Selling, General  and Administrative Expenses                                                                     |       | 23.8                                             |       | 24.1                                            |       | 4.8 |   |
| Net (Loss) Gain  from Dispositions of Assets                                                                      |       | —                                           |       | 1.1                                             |       | (100.2 | ) |
| Operating Profit                                                                                                  |       | 3.1                                              |       | 2.1                                             |       | 44.1 |   |
| Non-operating  Income                                                                                             |       | 0.3                                              |       | 0.3                                             |       | (12.5 | ) |
| Interest Expense                                                                                                  |       | 2.2                                              |       | 2.1                                             |       | (3.0 | ) |
| Earnings from  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       | 1.2                                              |       | 0.4                                             |       | 229.2 |   |
| Income Tax  Expense                                                                                               |       | 37.5                                             | (4)        | 27.9                                            | (4)        | (342.4 | ) |
| Net Earnings  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | 0.8                                              |       | 0.3                                             |       | 185.4 |   |
| Discontinued  Operations, Net of Tax                                                                              |       | —                                           |       | —                                          |       | NM |   |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                  |       | —                                           |       | —                                          |       | NM |   |
| Net Earnings                                                                                                      |       | 0.7                                              |       | 0.2                                             |       | 209.1 |   |

 

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(1) Service revenueconsists of the labor charge for installing merchandise or maintaining orrepairing vehicles, excluding the sale of any installed parts or materials.

(2) Costs of merchandisesales include the cost of products sold, buying, warehousing and storeoccupancy costs. Costs of service revenue include service center payroll andrelated employee benefits and service center occupancy costs. Occupancy costsinclude utilities, rents, real estate and property taxes, repairs and maintenanceand depreciation and amortization expenses.

(3) As a percentage ofrelated sales or revenue, as applicable.

(4) As a percentage ofEarnings from Continuing Operations Before Income Taxes and Cumulative Effectof Change in Accounting Principle.

NM: Not Meaningful

Total revenues for the second quarter decreased3.4%, with a 3.6% comparable revenues decrease, resulting primarily from adecline in retail and commercial merchandise sales. Comparable merchandisesales decreased 5.1%, while comparable service revenue increased 3.8%. Thedecline in merchandise sales was due primarily to the removal of commercialdelivery from fifty-five stores and fewer promotional offerings. Servicerevenues were driven by an increased focus of the Company’s advertising to serviceofferings and opportunistic retail price increases.

21

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While gross profit from merchandise sales was$354,000 lower in fiscal 2007 than in fiscal 2006, gross profit as a percentageof merchandise sales increased to 30.3% in fiscal 2007 from 28.9% in fiscal2006. This product margin improvement resulted primarily from improvedmerchandise acquisition costs, sales of a more favorable (higher gross margin)mix of merchandise and opportunistic pricing initiatives.

Gross profit from service revenue increased, asa percentage of service revenue to 11.3% in fiscal 2007 from 6.2% in fiscal2006. This was a 90.1% or $5,390,000 increase from the prior year. Thisincrease, as a percentage of service revenue, was due primarily to increasedleverage of fixed expenses, lower employee benefit expenses and favorableworkers compensation experience.

Selling, general and administrative expenses, asa percentage of total revenues, were 23.8% and 24.1% in fiscal 2007 and fiscal2006, respectively. This 4.8% or $6,699,000 decrease from the prior yearresulted primarily from lower payroll and improving workers compensationexperience. Fiscal year 2007 reflects $800,000 in outsourcing-related severancecharges while fiscal year 2006 reflects a $2,100,000 favorable litigation settlement,a $1,100,000 severance charge for the Company’s former CEO and $1,400,000 instrategic review costs.

Net (loss) gain from dispositions of assetsdecreased from the prior year, as no stores were sold in the second quarter offiscal 2007. A $6,329,000 gain resulting from a store sale was recorded in thesecond quarter of fiscal 2006.

Income tax expense for the second quarter of2007 reflects a $4,227,000 tax benefit resulting from the favorable settlementof a previously uncertain tax position, which was partially offset by higherannual tax rate as a result of a taxable gain on the surrender of certaincompany-owned life insurance policies.

Net earnings of $4,179,000 for the second quarter, improved $2,827,000 from the prioryear primarily due to improved service revenue margins and lower selling,general and administrative expenses, which were partially offset by fewer assetsales.

Twenty-six Weeks Ended August 4, 2007 vs.Twenty-six Weeks Ended July 29, 2006

The following table presents for the periodsindicated certain items in the consolidated statements of operations as apercentage of total revenues (except as otherwise provided) and the percentagechange in dollar amounts of such items compared to the indicated prior period.
| ** **                                                                                                        | ** ** | **Percentage of Total Revenues**  | ** ** | **Percentage Change**                      | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **Twenty-six weeks ended**                                                                              | ** ** | **August 4, 2007  (Fiscal 2007)** | ** ** | **July 29, 2006  (Fiscal 2006)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| Merchandise  Sales                                                                                                |       | 81.8                                             | %          | 82.7                                            | %          | (3.8 | )% |
| Service Revenue  (1)                                                                                              |       | 18.2                                             |       | 17.3                                            |       | 2.8 |   |
| Total Revenues                                                                                                    |       | 100.0                                            |       | 100.0                                           |       | (2.7 | ) |
| Costs of  Merchandise Sales (2)                                                                                   |       | 70.3                                             | (3)        | 71.6                                            | (3)        | 5.5 |   |
| Costs of Service  Revenue (2)                                                                                     |       | 88.4                                             | (3)        | 91.3                                            | (3)        | 0.5 |   |
| Total Costs of  Revenues                                                                                          |       | 73.6                                             |       | 75.0                                            |       | 4.5 |   |
| Gross Profit  from Merchandise Sales                                                                              |       | 29.7                                             | (3)        | 28.4                                            | (3)        | 0.6 |   |
| Gross Profit  from Service Revenue                                                                                |       | 11.6                                             | (3)        | 8.7                                             | (3)        | 37.1 |   |
| Total Gross  Profit                                                                                               |       | 26.4                                             |       | 25.0                                            |       | 2.8 |   |
| Selling, General  and Administrative Expenses                                                                     |       | 23.6                                             |       | 23.9                                            |       | 3.6 |   |
| Net Gain from  Dispositions of Assets                                                                             |       | 0.2                                              |       | 0.5                                             |       | (61.0 | ) |
| Operating Profit                                                                                                  |       | 3.0                                              |       | 1.7                                             |       | 73.5 |   |
| Non-operating  Income                                                                                             |       | 0.3                                              |       | 0.4                                             |       | (14.2 | ) |
| Interest Expense                                                                                                  |       | 2.3                                              |       | 2.0                                             |       | (12.0 | ) |
| Earnings from  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       | 1.1                                              |       | 0.1                                             |       | 900.9 |   |
| Income Tax  Expense                                                                                               |       | 38.4                                             | (4)        | 49.9                                            | (4)        | (670.8 | ) |
| Net Earnings  from Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | 0.7                                              |       | 0.1                                             |       | 1,129.9 |   |
| Discontinued  Operations, Net of Tax                                                                              |       | —                                           |       | —                                          |       | NM |   |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                  |       | —                                           |       | —                                          |       | NM |   |
| Net Earnings                                                                                                      |       | 0.7                                              |       | 0.1                                             |       | 1,033.1 |   |

 

22

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(1) Service revenueconsists of the labor charge for installing merchandise or maintaining orrepairing vehicles, excluding the sale of any installed parts or materials.

(2) Costs of merchandisesales include the cost of products sold, buying, warehousing and store occupancycosts. Costs of service revenue include service center payroll and relatedemployee benefits and service center occupancy costs. Occupancy costs includeutilities, rents, real estate and property taxes, repairs and maintenance anddepreciation and amortization expenses.

 (3) As apercentage of related sales or revenue, as applicable.

(4) As a percentage ofEarnings from Continuing Operations Before Income Taxes and Cumulative Effectof Change in Accounting Principle.

NM: Not Meaningful

Total revenues for the first twenty-six weeks offiscal 2007 decreased 2.7%, with a 3.0% comparable revenues decrease, resultingprimarily from a decline in retail and commercial merchandise sales. Comparablemerchandise sales decreased 4.1%, while comparable service revenue increased2.6%. The decline in merchandise sales was primarily due to the removal ofcommercial delivery from fifty-five stores and fewer promotional offerings.

Gross profit as a percentage of merchandisesales increased to 29.7% in fiscal 2007 from 28.4% in fiscal 2006. This was a0.6% or $1,604,000 increase from the prior year. This increase resultedprimarily from improved merchandise acquisition costs, favorable (higher grossmargin)  mix of merchandise, opportunisticretail price increases and a $1,300,000 gain on the settlement of an inventoryinsurance claim resulting from Hurricane Katrina.

Gross profit from service revenue increased, asa percentage of service revenue to 11.6% in fiscal 2007 from 8.7% in fiscal2006. This was a 37.1% or $6,346,000 increase from the prior year. Thisincrease, as a percentage of service revenue, was due primarily to increasedleverage of fixed expenses.

Selling, general and administrative expenses, asa percentage of total revenues, were 23.6% and 23.9% in fiscal 2007 and fiscal2006, respectively. This 3.6% or $9,848,000 decrease from the prior yearresulted primarily from lower store payroll and employee benefits costs,favorable workers compensation experience and reduced media expense. Fiscalyear 2007 reflects a $3,900,000 CEO transition charge and $800,000 inoutsourcing-related severance charges, while fiscal year 2006 reflects a$2,300,000 favorable insurance settlement, a $2,100,000 favorable litigationsettlement, a $1,100,000 severance charge for the Company’s former CEO and$2,775,000 in strategic review costs.

Net gain from dispositions of assets decreased$3,672,000 from the prior year. While no stores were sold in fiscal 2007, theCompany did record a $2,400,000 gain due to the settlement of an insuranceclaim relating to stores impaired during Hurricane Katrina in 2005. Fiscal 2006reflects a $6,329,000 gain from the sale of a store recorded in the secondquarter of fiscal 2006.

Interest expense increased $2,682,000 due to anincrease in the Company’s weighted average interest rate and higher debtlevels.

Net earnings improved by $6,705,000 from theprior fiscal year, primarily due to improved service revenue margins and lowerselling, general and administrative expenses, which were partially offset byfewer asset sales and higher interest expense.

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INDUSTRY COMPARISON

We operate in the U.S. automotive aftermarket,which has two general competitive arenas: Do-It-For-Me (“DIFM”) (service labor,installed merchandise and tires) market and the Do-It-Yourself (“DIY”) (retailmerchandise) market. Generally, the specialized automotive retailers focus oneither the “DIY” or “DIFM” areas of the business. We believe that our operationin both the “DIY” and “DIFM” areas of the business positively differentiates usfrom most of our competitors. Although we manage our store performance at astore level in aggregation, we believe that the following presentation shows arepresentative comparison against competitors within the two sales arenas. Wecompete in the “DIY” area of the business through our retail sales floor andcommercial sales business (Retail Sales). Our Service Center Business (laborand installed merchandise and tires) competes in the “DIFM” area of theindustry.

The following table presents the revenues andgross profit for each area of the business.
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **August 4,**                 | ** ** | **July 29,**                    | ** ** | **August 4,** | ** ** | **July 29,** | ** ** |
| **(Dollar amounts in thousands)** | ** ** | **2007**                           | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2007** | ** ** |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Retail Sales (1)                                 |       | $                                  | 322,464    |                                 | $          | 353,554 |   | $ | 637,167 |   | $ | 681,511 |   |
| Service Center  Revenue (2)                      |       | 236,425                            |       | 225,011                              |       | 467,735 |   | 453,655 |   |
| Total Revenues                                   |       | $                                  | 558,889    |                                 | $          | 578,565 |   | $ | 1,104,902 |   | $ | 1,135,166 |   |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Gross Profit  from Retail Sales (3)              |       | $                                  | 93,141     |                                 | $          | 100,179 |   | $ | 182,885 |   | $ | 189,768 |   |
| Gross Profit from  Service Center Revenue (3)    |       | 56,997                             |       | 44,923                               |       | 109,045 |   | 94,212 |   |
| Total Gross  Profit                              |       | $                                  | 150,138    |                                 | $          | 145,102 |   | $ | 291,930 |   | $ | 283,980 |   |

 

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(1) Excludes revenuesfrom installed products.

(2) Includes revenuesfrom installed products.

(3) Gross Profit fromRetail Sales includes the cost of products sold, buying, warehousing and storeoccupancy costs. Gross Profit from Service Center Revenue includes the cost ofinstalled products sold, buying, warehousing, service center payroll andrelated employee benefits and service center occupancy costs. Occupancy costsinclude utilities, rents, real estate and property taxes, repairs andmaintenance and depreciation and amortization expenses.

NEW ACCOUNTING STANDARDSTO BE ADOPTED

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157defines the term fair value, establishes a framework for measuring it withingenerally accepted accounting principles and expands disclosures about itsmeasurements. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007. We are currentlyevaluating the impact of SFAS No. 157 on our consolidated financialstatements.

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value. SFASNo. 159 is effective for fiscal years beginning after November 15,2007. We are currently evaluating the impact of SFAS No. 159 on our consolidatedfinancial statements.

In March 2007, the EITF reached a consensuson Issue Number 06-10, “Accounting for Deferred Compensation and PostretirementBenefit Aspects of Collateral Assignment Split-Dollar Life InsuranceArrangements,” (EITF 06-10). EITF 06-10 provides guidance to help companiesdetermine whether a liability for the postretirement benefit associated with acollateral assignment split-dollar life insurance arrangement should be recordedin accordance with either SFAS No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions” (if, in substance, apostretirement benefit plan exists), or Accounting Principles Board Opinion No.12 (if the arrangement is, in substance, an individual deferred compensationcontract). EITF 06-10 also provides guidance on how a company should recognizeand measure the asset in a collateral assignment split-dollar life insurancecontract. EITF 06-10 is effective for fiscal years beginning afterDecember 15, 2007, although early adoption is permitted. We are currentlyevaluating the impact of EITF 06-10 on our consolidated financial statements.

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In June 2007, the FASB ratified EITF IssueNumber 06-11, “Accounting for Income Tax Benefits of Dividends onShare-Based Payment Awards” (EITF 06-11). EITF 06-11 applies to share-basedpayment arrangements with dividend protection features that entitle employeesto receive (a) dividends on equity-classified nonvested shares,(b) dividend equivalents on equity-classified nonvested share units, or(c) payments equal to the dividends paid on the underlying shares while anequity-classified share option is outstanding, when those dividends or dividendequivalents are charged to retained earnings under SFAS No. 123(R), “Share-BasedPayment”, and result in an income tax deduction for the employer. A consensuswas reached that a realized income tax benefit from dividends or dividendequivalents that are charged to retained earnings and are paid to employees forequity-classified non-vested equity shares, non-vested equity share units, andoutstanding equity share options should be recognized as an increase inadditional paid-in capital. EITF 06-11 is effective prospectively for theincome tax benefits that result from dividends on equity-classified employeeshare-based payment awards that are declared in fiscal years beginning afterDecember 15, 2007, and interim periods within those fiscal years. We arecurrently evaluating the impact of EITF 06-11 on our consolidated financialstatements.

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations discusses our condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thecondensed consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period. Additionally, the Companyestimates its interim product gross margins in accordance with AccountingPrinciples Bulletin No. 28, “Interim Financial Reporting”.

On an on-going basis, we evaluate our estimatesand judgments, including those related to customer incentives, product returnsand warranty obligations, bad debts, inventories, income taxes, financingoperations, restructuring costs, retirement benefits, risk participationagreements and contingencies and litigation. We base our estimates andjudgments on historical experience and on various other factors that are believedto be reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. Actual results may differ fromthese estimates under different assumptions or conditions. For a detaileddiscussion of significant accounting policies that may involve a higher degreeof judgment or complexity, refer to “Critical Accounting Policies and Estimates”as reported in our Form10-K for the fiscal year ended February 3, 2007, which disclosures are herebyincorporated by reference.

FORWARD-LOOKINGSTATEMENTS

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

Item 3. Quantitative andQualitative Disclosures About Market Risk

The Company’s primary market risk exposure withregard to financial instruments is to changes in interest rates. Pursuant tothe terms of its revolving credit agreement, changes in LIBOR could affect therates at which the Company could borrow funds thereunder. At August 4, 2007,the Company had borrowings of $33,155,000 under this facility. Additionally,the Company has a $318,400,000 Senior Secured Term Loan facility that bearsinterest at LIBOR plus 2.0%, and approximately $116,505,000 of real estateoperating leases which vary based on changes in LIBOR.

25

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On June 3, 2003, we entered into an interestrate swap which was designated as a cash flow hedge of the Company’s realestate operating lease payments. During the fourth quarter 2006, we removed thedesignation as a cash flow hedge and will record the change in fair valuethrough the operating statement until its termination date on July 1,2008. During the twenty-six weeks ended August 4, 2007, a $648,000 expense wasrecorded in cost of merchandise sales for the change in fair value of thisswap.

On November 2, 2006, the Company entered into aninterest rate swap for a notional amount of $200,000,000. The Company hasdesignated the swap a cash flow hedge on the first $200,000,000 of the Company’s$320,000,000 senior secured notes. The interest rate swap converts the variableLIBOR portion of the interest payments to a fixed rate of 5.036% and terminatesin October 2013. The Company, from inception through April 8, 2007, reflectedthe change in fair value in Interest Expense. The Company documented that theswap met the requirements of SFAS No. 133 for hedge accounting on April 9,2007, and prospectively recorded the effective portion of the change in fairvalue through Accumulated Other Comprehensive Loss. During the period fromFebruary 4, 2007 through April 8, 2007, a $974,000 expense was recorded ininterest expense for the change in fair value of this swap.

As of August 4, 2007 and February 3, 2007, thefair values of the interest rate swaps were $3,691,000 and $5,522,000,respectively.  $791,000 ($717,000, net oftax) of the $1,831,000 decline in fair value was included in Accumulated OtherComprehensive Loss on the consolidated balance sheet.

Item 4. Controls and Procedures.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our disclosure controls and procedures (asdefined in Rule 13a-15 of the Securities Exchange Act of 1934 (the"Exchange Act")) are designed to ensure that information required tobe disclosed is accumulated and communicated to our management, including ourprincipal executive and principal financial officers, as appropriate to allowtimely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s chiefexecutive officer and chief financial officer, evaluated the effectiveness ofthe Company’s disclosure controls and procedures as of the end of the periodcovered by this report. Based on that evaluation, the chief executive officerand chief financial officer concluded that our disclosure controls andprocedures as of the end of the period covered by this report were notfunctioning effectively to provide reasonable assurance that the informationrequired to be disclosed by the Company in reports filed under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms solely due to the fact thatthere was a material weakness in one of our internal controls over financialreporting (which are a subset of disclosure controls and procedures) asdescribed below.

CHANGES IN INTERNAL CONTROL OVER FINANCIALREPORTING

During the fiscal quarter covered by thisreport, a change in the Company’s internal control over financial reportingoccurred that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting in that theCompany determined it had a material weakness in its financial reportingcontrol related to preparation and review of the Company’s supplementalguarantor information footnote and consolidated statement of cash flowspresentation resulting from the errors described in Notes 11 and 15.    

Other than described above, there was no changein the Company’s internal control over financial reporting occurred during thefiscal quarter covered by this report that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting. 

Item 5. Other Information

As indicated in Notes 11 and 15, in preparingthis Form 10-Q for the fiscal period ended August 4, 2007, errors wereidentified relating to our supplemental guarantor information note and thepresentation of the certain line items line in the financing section of theconsolidated statement of cash flows. Accordingly, this Form 10-Q includesrestated financial information for prior periods. These same errors also existin the previously issued Form 10-K for the fiscal year ended February 3, 2007and Form 10-Q for the quarterly period ended May 5, 2007.

The Company will file as soon as reasonablypracticable a Form 10-K/A (“Form 10-K/A”) for the fiscal year ended February 3,2007 for the purpose of correcting its Supplemental Guarantor Information Noteas it relates to the condensed consolidating financial statements of Pep Boys(parent corporation) and its Subsidiary Guarantors.  The Form 10-K/A will also include correctionsfor the other errors.  The Company willfile contemporaneously with the Form 10-K/A, a Form 10-Q/A for the fiscalquarter ended May 5, 2007 to correct such errors.

Such errors have no impact, for any previouslycompleted period, on the Company’s (i) consolidated balance sheets, (ii)consolidated statements of operations, (ii) net cash flows from operatingactivities, investing activities or financing activities included in theconsolidated statements of cash flows or (iii) the balance sheets, statementsof operations or statements of cash flows for the Non-Subsidiary Guarantors orthe Consolidated entities, which are included in “NOTE 8-SUPPLEMENTAL GUARANTORINFORMATION” to the Form 10-K for the year ended February 3, 2007.

26

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PART II - OTHERINFORMATION

Item 1.  LegalProceedings

During the fourth quarter of 2006 and the firstquarter of 2007, the Company was served with four separate lawsuits brought byformer associates employed in California, each of which lawsuits purports to bea class action on behalf of all current and former California storeassociates.  One or more of the lawsuitsclaim that the plaintiff was not paid for (i) overtime, (ii) accrued vacationtime, (iii) all time worked (i.e. “off the clock” work) and/or (iv) late ormissed meal periods or rest breaks.   Theplaintiffs also allege that the Company violated certain record keepingrequirements arising 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 that the Company beenjoined from committing further unfair business practices. The Company believesthat it has meritorious defenses to all of these claims and intends to defendthese claims vigorously.   However, anadverse 

27

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determination of these claims could have amaterial effect on the Company’s results of operations in the period(s) duringwhich they are determined.

The Company is also party to various actions andclaims arising in the normal course of business. The Company believes thatamounts accrued for awards or assessments in connection with such matters areadequate and that the ultimate resolution of these matters will not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

Item 1A.  RiskFactors

There have been no changes to the risksdescribed in the Company’s previously filed Annual Report on Form 10-K forthe fiscal year ended February 3, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  DefaultsUpon Senior Securities

None.

Item 4.  Submissionof Matters to a Vote of Security Holders

None.

Item 5.  OtherInformation

None.

Item 6.  Exhibits
|        | 10.1*  | THE PEP BOYS –  MANNY, MOE & JACK PENSION PLAN AMENDMENT 2007-1                                                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                             |
|   | (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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* - Management contract or compensatory plan orarrangement.

28

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SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        | THE PEP BOYS - MANNY, MOE & JACK                |   |
|--------|-----------------------------------------------------|--------|
|   | (Registrant)                                        |
|   |                                                |   |
| Date:  |    September  18, 2007               |   | by: | /s/ Harry F. Yanowitz |   |
|   |                                                |   |
|   | Harry F. Yanowitz                                   |
|   | Senior Vice President and   Chief Financial Officer |
|        |                                                     |        |  |  |  |  |

 

29

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INDEX TO EXHIBITS
| 10.1*  |   | THE PEP BOYS – MANNY, MOE & JACK PENSION PLAN  AMENDMENT 2007-1                                                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                             |
| (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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* - Management contract or compensatory plan orarrangement.

30

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