Document:

Exhibit
10.1

SETTLEMENT
AGREEMENT

This Settlement
Agreement (the “Settlement Agreement”) is entered into as of this 13th day of
April 2007 (the “Effective Date”), by and between Crdentia Corp., a Delaware
corporation (“Crdentia”) and Dawson James Securities, Inc. (“Dawson”) (Crdentia
and Dawson collectively referred to herein as the “Parties”).

WHEREAS,
Crdentia and Dawson entered into a selling agreement (the “Selling Agreement”)
on October 5, 2005, pursuant to which Dawson agreed to raise capital for Crdentia
by selling Crdentia’s offering of common stock; and

WHEREAS,
Dawson agreed to sell for Crdentia a certain quantity of units of stock as
reflected in the Selling Agreement, and the parties agreed that Dawson would be
paid a certain commission in exchange for its services as reflected in the
Selling Agreement; and

WHEREAS,
a dispute arose between the Parties involving the Selling Agreement; and

WHEREAS,
Dawson has filed suit in an action styled, Dawson James Securities,
Inc., a Florida corporation, vs. Crdentia Corp, a Delaware corporation,
Case No: 50-2006CA-001708-XXXX-MB AH, in the Circuit Court of the 15th Judicial Circuit, in and for Palm Beach
County, Florida, concerning the issues raised by the existence of the Selling
Agreement and the Parties’ respective performance thereunder, along with Dawson’s
equitable claims concerning the amounts Dawson claims it was due for its
services (the “Litigation”); and

WHEREAS,
The Parties are desirous of settling and disposing of all claims, which were
brought or could have been brought between the Parties in the Litigation; and
are desirous of releasing and eliminating any liability that they may have to
one another of any nature whatsoever including but not limited to such arising
out of or in anyway relating to the described Selling Agreement, as well as any
other warranty or representation therein contained or in any related agreements
or documents, and all claims arising by applicable statutes or otherwise at
common law.

NOW,
THEREFORE, in order to resolve the issues raised or that
could have been raised in the Litigation and to effectuate a full release of
the Parties as hereinafter further described from one another, for good and
valuable consideration, the sufficiency of which is hereby acknowledged, the Parties
agree as follows:

1.             Consideration.  Crdentia shall make the following payment in
accordance with the following provisions:

(a)           Within ten (10) business days from
the execution of this Settlement Agreement, Crdentia shall issue to Dawson,
FOUR HUNDRED THOUSAND (400,000)

 A-1
 

shares of Common Stock
(the “Shares”), par value $0.001 per share, of Crdentia (the “Stock
Consolidation”).

2.             Dawson shall immediately dismiss
all claims against Crdentia with prejudice upon executing this Settlement
Agreement or as soon as practicable thereafter with each party to bear their
own attorney’s fees and cost. Further, except in connection with enforcement of
this Settlement Agreement and/or the Registration Rights Agreement, Dawson and
Crdentia shall not pursue any new litigation or claims against each other
concerning the general subject matter of the Litigation.

3.             Registration
Rights.  Concurrently with the
execution of this Settlement Agreement, the Parties have entered into a
registration rights agreement attached hereto as Exhibit A (the “Registration
Rights Agreement”) with respect to the shares of Common Stock that comprises
the Stock Consideration.

4.             Mutual
Release of Claims.

(a)           Dawson hereby agrees for the benefit
of Crdentia, and each officer, director, shareholder, agent, representative,
affiliate, joint venturer, employee, member, partner, attorney, heir, assign,
executor, spouse, administrator, insurer, predecessor and successor, past and
present, of Crdentia (each such person being a “Released Crdentia Party” and
all such persons being “Released Crdentia Parties”), as follows. Except for the
obligations set forth in this Settlement Agreement as well as in the
Registration Rights Agreement, Dawson, for themselves and for their members,
partners, officers, directors, assigns, agents and successors, past and
present, hereby agree and confirm that, effective from and after the Effective
Date, they forever fully release and discharge each Released Crdentia Party of,
and hold each Released Crdentia Party harmless from, any and all rights,
claims, warranties, demands, debts, duties, obligations, liabilities fixed or
contingent, costs, attorneys’ fees, damages, expenses, snits, liens, losses and
causes of action (“Claims”) of any nature whatsoever, whether known or unknown,
suspected or unsuspected, existing or potential, arising or occurring any time
or period of time on or prior to the date of the execution of this Settlement
Agreement (including the future effects of such transactions, occurrences,
conditions, acts or omissions), including, without limitation, any Claims
arising under or in connection with the Selling Agreement dated October 5,
2005. Dawson acknowledges that it may hereafter discover facts different from
or in addition to those which they now know or believe to be true with respect
to all or any portion of the Claims, and Dawson agrees that in such event, this
release shall nonetheless be and remain effective in all respects,
notwithstanding such different or additional facts or the discovery thereof.

(b)           Crdentia hereby agrees for the
benefit of Dawson, and each officer, director, shareholder, agent,
representative, affiliate, joint venturer, employee, partner, member, attorney,
heir, assign, executor, administrator, insurer, predecessor and successor, past
and present, of Dawson (each such person being a “Released Dawson Party” and
all such persons being “Released Dawson Parties”), as follows. Crdentia, for
themselves and for their members, partners, officers, directors, assigns,
agents and successors, past and present, hereby agree and confirm that,
effective from and after the

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Effective Date, they
hereby acknowledge full and complete satisfaction of, and covenants not to sue,
and forever fully release and discharge each Released Dawson Party of, and hold
each Released Dawson Party harmless from, any and all Claims of any nature
whatsoever, whether known or unknown, suspected or unsuspcctcd, existing or
potential, arising or occurring any time or period of time on or prior to the
date of the execution of this Settlement Agreement (including the future
effects of such transactions, occurrences, conditions, acts or omissions).
Crdentia acknowledges that it may hereafter discover facts different from or in
addition to those which they now know or believe to be true with respect to all
or any portion of the Claims, and Crdentia agrees that in such event, this
release shall nonetheless be and remain effective in all respects,
notwithstanding such different or additional facts or the discovery thereof.

(c)           The undersigned understand and agree
that the Claims released by the Parties pursuant to Sections 4(a) and (b) above
include not only those Claims presently known to Dawson and Crdentia but also
include all unknown or unanticipated Claims, rights, demands, actions,
obligations, liabilities, and causes of action of every kind and character that
would otherwise come within the scope of the Claims as described above. Dawson
and Crdentia understand that they may hereafter discover facts different from
what they now believe to be true, which if known, could have materially
affected this Release of Claims, but they nevertheless waive any Claims or
rights based on different or additional facts.

5.             Default and
Remedies.  In the event
Crdentia fails to comply with any term or provision of this Settlement
Agreement or the Registration Rights Agreement, then, in that event, in
addition to any other rights or remedies which Dawson may have, Dawson shall be
entitled, upon five (5) calendar days’ notice to Crdentia, to move for an immediate
final judgment against Crdentia for damages in the amount of $250,000.00. Any
such Motion to Enforce Settlement And For Damages
may be brought on the Court’s earliest motion calendar, and the motion shall be
deemed sufficient if merely signed by the attorney for Dawson and accompanied
by an Affidavit of Default. Crdentia waives any and all defenses to such motion
except strict compliance with this Settlement Agreement and the Registration
Rights Agreement. Crdentia further waives an evidentiary hearing on Dawson’s
motion unless Crdentia files an Affidavit Opposing Default prior to the
scheduled hearing on the motion in which Crdentia attests, under oath, that it
has strictly complied with this Settlement Agreement and the Registration Rights
Agreement. Upon the filing of a Registration Statement with the U.S. Securities
and Exchange Commision by Crdentia, which includes the Shares, and provided
that the Shares are not removed from the Registration Statement for any reason,
this Default and Remedies Clause shall terminate.

Dawson shall he
entitled to recover all of its attorneys’ fees and costs incurred in any
proceeding whatsoever related to the obtaining, enforcement, registration,
collection, post-judgment or appeal of a final judgment related to this
Settlement Agreement and/or the Registration Rights Agreement.

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6.             No Action or
Charges.  Each of the Parties
acknowledges and agrees that it has no pending lawsuit, administrative charge
or complaint against the other or any of the other releasees specified above,
in any court or with any governmental agency. Each of the Parties also agrees
that, to the extent permitted by law, such Party will not allow any lawsuit,
administrative charge or complaint to be pursued on its behalf. Each of the
Parties further agrees that it will not participate, cooperate or assist in any
litigation against any of the releasees set forth above in any manner, except
the extent required by law. If either of the Parties is lawfully subpoenaed by
a court in a manner relating to the matters released above, it agrees to
provide the other Party with written notice of such a subpoena within five (5)
days of receipt.

7.             No
Assignment or Transfer of Claims. 
Each of the Parties represents and warrants that it has not hereto for assigned,
transferred or purported to assign or transfer to any other person or entity
any rights, Claims or causes of actions herein released and discharged and no
other person or entity has any interest in the matters here and released and
discharged. Furthermore, each of the Parties shall indemnify and hold the other
and all persons or entities released herein harmless from and against any and
all rights, Claims or causes of actions which have been assigned or transferred
contrary to the foregoing representations, or in violation of all foregoing
warranties, and shall hold such persons or entities harmless from any and all
loss, expense and/or liability arising directly or indirectly out of the breach
of any of the foregoing representations or warranties.

8.             No Admission
of Liability.  This Settlement
Agreement is a compromise in settlement of disputed Claims being released
herein, and therefore this Settlement Agreement does not constitute an
admission of liability on behalf of either of the Parties or any of the
releasees, are an admission, direct or by implication that either of the
Parties or any of the releasees has violated any law, rule, regulation, policy
or contractual right or other obligation owed to any Party. Each of the Parties
specifically denies all allegations of improper or unlawful conduct. Each of
the Parties intends merely to avoid litigation.

9.             No External
or Prior Representations. 
Each of the Parties represents and warrants that such Parties are not
relying, and has not relied, on any representations or statements, verbal or
written, made by any other party or any other releasees hereto with regard to
the facts involved in this controversy in regard to any such Parties’ rights or
asserted rights arising out of alleged Claims or the execution and terms of
this Agreement, except as provided herein. Each of the Parties has consulted
with an attorney regarding the terms of this Settlement Agreement and has
entered into this Settlement Agreement freely, willingly and without coercion
or duress.

10.           Investment
Representations.

(a)           This Settlement Agreement is made in
reliance upon Dawson’s representation to Crdentia, which by their acceptance
hereof Dawson hereby confirms, that the Stock Consideration to be received by
Dawson will be acquired for investment for its own account, not as a nominee or
agent, and not with a view to the sale or distribution of any part thereof, and
that Dawson has no present intention of selling,

 A-4
 

granting participation
in, or otherwise distributing the same. Dawson also represents and warrants
that it has sufficient business and financial experience to enable it to
protect its own interests in connection with the issuance of the Stock
Consideration hereunder.

(b)           Dawson is an “accredited investor” as
defined in Rule 501 under the Securities Act of 1933, as amended (the “Act”).
Dawson believes that it has received all the information it considers necessary
or appropriate for deciding whether to accept the Stock Consideration. Dawson
further represents that it has had an opportunity to ask questions and receive
answers from Crdentia regarding the business, properties, prospects and
financial condition of Crdentia.

(c)           Dawson understands that the Stock
Consideration it is accepting hereunder is characterized as “restricted
securities” under the federal securities laws inasmuch as it is being acquired
from Crdentia in a transaction not involving a public offering and that under
such laws and applicable regulations such securities may be resold without
registration under the Act only in certain limited circumstances. In this
connection, Dawson represents that it is familiar with SEC Rule 144, as
presently in effect, and understand the resale limitations imposed thereby and
by the Act. Dawson understands that the Stock Consideration has not been
registered under the Act and has not been registered or qualified in any state
in which it is offered, and thus Dawson will not be able to resell or otherwise
transfer the Stock Consideration unless it is registered under the Act, or qualified
under applicable state securities laws, or an exemption from such registration
or qualification is available.

(d)           It is understood that the
certificate(s) evidencing the Stock consideration shall bear the following
legend:

“THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.”

11.           Binding.  This Settlement Agreement shall be binding
upon the Parties and their respective heirs, administrators, representatives,
executors, successors and assigns, and shall inure to the benefit of the
Parties and their respective heirs, administrators, representatives, executors,
successors and assigns.

12.           Severability.  If any of the provisions in this Settlement
Agreement are determined to be invalid by a court, arbitrator, or government
agency of competent jurisdiction, it is agreed that such determination shall
not affect the enforceability of the other provisions herein.

13.           Counterparts.  The Parties hereto may execute faxed copies of
this Settlement Agreement, and exchange such executed copies via facsimile.
Either party

 A-5
 

may demand that the other
party execute original copies at a future date, and such demand may be sought
to be enforced by specific performance. Notwithstanding the foregoing, it shall
be no defense to the enforcement of this Settlement Agreement that the “original”
Settlement Agreement is not produced, and all Parties waivt: “best evidence”
objections with regard to this Settlement Agreement. In addition, two or more
duplicate originals of this Settlement Agreement may be signed by the Parties
hereto, each of which shall be an original, but all of which together shall
constitute one and the same instrument.

14.           Survival.  The representations, warranties and covenants
of the Parties hereto shall survive the execution of this Settlement Agreement
and the payment of the Settlement Consideration.

15.           Entire Agreement;
Modification.  This Settlement
Agreement constitutes the entire understanding among the Parties and supersedes
all prior or contemporaneous written or oral statements, agreements,
understandings and/or negotiations regarding the subject matter herein. This
Settlement Agreement may not be modified or amended in any way without the
express written consent of the Parties.

16.           Fees and Expenses.  Except as set forth in this Settlement
Agreement and the Registration Rights Agreement, each Party shall bear its own
fees and expenses in connection with this Settlement Agreement.

17.           Governing Law.  This Settlement Agreement is to be construed
in accordance with and governed by the internal laws of the State of Florida
without giving effect to any choice of law rule that would cause the
application of the laws of any jurisdiction other than the internal laws of the
State of Florida to the rights and duties of the parties. In addition, each of
the parties hereto (a) irrevocably and unconditionally consents to submit
itself to the jurisdiction of the State of Florida in the event any dispute
arises out of this Settlement Agreement or the transactions contemplated by
this Settlement Agreement, (b) agrees that it will not attempt to deny or
defeat such personal jurisdiction by motion or other request for leave from any
such court, (c) agrees that it will not bring any action relating to this
Settlement Agreement or the transactions contemplated by this Settlement
Agreement in any court other than the Circuit Courts of the State of Florida,
and each of the parties irrevocably waives the right to trial by jury, (d)
waives, to the fullest extent permitted by law, the defense of an inconvenient
forum to the maintenance of such action in the Circuit Courts of the State of
Florida, and (e) each of the parties irrevocably consents to service of process
by first class certified mail, return receipt requested, postage prepaid, to
the address at which such party is to receive notice.

18.           Notices.  All notices, requests, Claims, demands and
other communications under this Settlement Agreement shall be in writing and
shall be deemed given (i) upon personal delively, (ii) one (1) Business Day
after being sent via a nationally recognized overnight courier service if
overnight courier service is requested or (ii) upon receipt of electronic or
other confirmation of transmission if sent via facsimile, or (iii) immediately
if sent via email in each case at the addresses, fax numbers

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or email addresses (or at
such other address, fax number or email address for a party as shall be
specified by like notice) set forth below:

If to Crdentia, to:

 

Crdentia Corp.

5001 LBJ Freeway, Suite
850

Dallas, Texas 75244

	
  Attention:

  	
  Chief Executive Officer

  
	
  Facsimile:

  	
  972-392-2722

  
	
  Email:

  	
  jkaiser@crdentia.com

  

 

with copies to:

 

Morrison & Foerster
LLP

12531 High Bluff Drive,
Suite 100

San Diego, California 92
130

	
  Attention:

  	
  Steven G. Rowles, Esq.

  
	
  Facsimile:

  	
  858-523-28 10

  
	
  Email:

  	
  srowles@mofo.com

  

 

If to the Dawson, to:

 

 

with copies to:

 

Blank Rome LLP

1200 N. Federal Highway,
Suite 417

Boca Raton, Florida 33432

Attn:  Bruce C. Rosetto, Esq.

Facsimile:  (561) 417-8101

Email:  rosetto@blankrome.com

 

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IN
WITNESS WHEREOF, the Parties hereto have duly executed this
Settlement Agreement as of the date first written above.

	
  

  	
  Crdentia Corp.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ C. Fred Toney

  	
   

  
	
   

  	
  Name:

  	
  C. Fred Toney

  
	
   

  	
  Title:

  	
  Chairman

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Dawson James Securities, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Robert D. Keyser Jr.

  	
   

  
	
   

  	
  Name:

  	
  Robert D. Keyser Jr.

  
	
   

  	
  Title:

  	
  CEO

  

 

 A-8Exhibit 10.6

EMPLOYMENT
AGREEMENT

This EMPLOYMENT AGREEMENT
is made by and between THE PEP BOYS—MANNY, MOE & JACK, a Pennsylvania
corporation (the “Company”), and Jeffrey C. Rachor (the “Executive”), on the
date of the last signature below (the “Effective Date”).

W I T N E S S E T H :

WHEREAS, the Company desires to retain the employment
services of the Executive and the Executive desires to accept such employment
by entering into this Employment Agreement on the terms and conditions as set
forth herein (the “Agreement”);

NOW, THEREFORE, in
consideration of the representations, warranties and mutual covenants set forth
herein, the Company and the Executive agree as follows:

1.     Position and Duties.

(a)   The
Executive shall serve as the President & Chief Executive Officer (“CEO”)
of the Company and shall perform such duties and services incident to such
positions and such other reasonably related duties as may be assigned to him
from time to time by the Board of Directors of the Company (“Board”). On the
Effective Date, the Board shall appoint the Executive to be a member of the
Board and, thereafter, use its best efforts to have the Executive elected to
the Board annually during the Executive’s employment with the Company. During
Executive’s employment with the Company, the Executive shall report directly to
and take direction from the Board or its Chairman.

(b)   Excluding
periods of vacation, sick leave and disability to which the Executive is
entitled, the Executive agrees to devote his full time, attention and energy to
the business of the Company and to use his reasonable best efforts to perform
faithfully and efficiently such responsibilities. Executive shall not, without
the prior written consent of the Company, actively engage in any other business
or business activity during the Employment Period (as defined below). The
Executive may, however, (i) serve on civic or charitable boards or
committees, (ii) participate in appropriate professional organizations, (iii) deliver
lectures, fulfill speaking engagements or teach at educational institutions, (iv) manage
personal investments, and (v) serve on corporate boards with the
permission of the Board, so long as such activities do not significantly
interfere with the performance of the Executive’s responsibilities hereunder.

2.     Employment Period; Commencement of Employment.   The
term of this Agreement shall commence on the Effective Date and end on the
third anniversary of the Effective Date, as defined below (the “Initial
Employment Period”). Thereafter, the term of this Agreement shall automatically
renew for an indeterminate number of one-year periods unless, at least three
months prior to the expiration of the Initial Employment Period or any
succeeding one-year term, either party gives written notice to the other of its
election not to extend such term of the Agreement (the Initial Employment
Period and any succeeding one-year renewal is hereinafter referred to as the “Employment
Period”). The Executive shall commence employment services as soon as
reasonably practicable following the Effective Date, but no later than March 26,
2007 (the “Start Date”).

3.     Compensation.

(a)   Signing Bonus.   In consideration for the Executive
entering into this Agreement and agreeing to serve as the President &
CEO, the Company shall pay to the Executive a signing bonus equal to $1,200,000
(the “Signing Bonus”) within ten business days following the Start Date. The
Signing Bonus shall be conditioned on the Executive’s continued employment with
the Company for one year following the Start Date. To the extent that the
Executive’s employment with the Company is terminated by either the Executive
or the Company, for any or no reason, prior to the end of that one-year period,
the Signing Bonus shall be forfeited and the Executive agrees to repay the
Signing Bonus to the Company within five business days following such
termination. The Executive agrees that the Company shall have the right to set
off such repayment obligation against any amount then owed by the Company to
the Executive, 

including, without
limitation, the cancellation of stock options, restricted stock units and/or
other equity instrument in the Company having a fair market value equal to the
repayment obligation.

(b)   Inducement Grant.   On the Effective Date, the Company
shall grant to the Executive (i) a stock option to purchase 1,000,000
shares of the Company’s common stock (the “Inducement Option”) and (ii) 500,000
restricted stock units (the “Inducement RSUs” and together with the Inducement
Option, the “Inducement Grant”). The Inducement Option shall have an exercise
price per share equal to the fair market value of one share of the Company’s
common stock on the Effective Date ( i.e., the
average of the high and low of the price per share on the NY Stock Exchange on
the date of grant). The Inducement Grants shall be subject to the following
vesting schedule: 25% fully vested on the Start Date and 25% to vest on each of
the first, second and third anniversaries of the Effective Date. The Inducement
Grants shall have such other terms and conditions as set forth in separate
agreements to be entered into by the Company and the Executive and as
consistent with the terms of the Company’s 1999 Stock Incentive Plan.

(c)   Base Salary.   During the Employment Period, as
consideration for services rendered, the Company shall pay to the Executive a
base salary at an annual rate at least equal to $1,200,000 (“Base Salary”)
payable over each calendar year at the regular pay periods of the Company. During
the Employment Period, Base Salary shall be reviewed by the Board at least
annually and may be increased, but not decreased, at any time and from time to
time as shall be determined by the Board in its sole discretion.

(d)   Annual Bonus.   During the Employment Period, the
Executive shall be eligible to earn a bonus based upon performance objectives
established by the Board, with threshold, target, maximum and CAP bonus levels
of 75%, 150% 225% and 300% of Base Salary, under the Company’s Executive Annual
Incentive Bonus Plan (the “Bonus Plan”). If the target performance goals for
Fiscal 2007 are not attained such that the Executive would earn at least
$1,800,000, the Company shall pay to Executive a guaranteed bonus, without
regard to achievement of goals, for Fiscal 2007 equal to $1,800,000 (the “Guaranteed
Bonus”).

(e)   Annual Grants.   During the Employment Period, the
Executive shall be eligible for an annual equity grants (the “Annual Grants”),
at the discretion of the Board, with target grants of stock options to purchase
150,000 shares of the Company’s Common Stock and such number of restricted
stock units with a fair market value equal to the Executive’s then current
annual base salary, under the Company’s 1999 Stock Incentive Plan (or its
successor plan). The Annual Grants shall be subject to the following vesting
schedule: 25% fully vested on their grant date and 25% to vest on each of the
first, second and third anniversaries of their grant date.

(f)    Employee Benefit Plans.   In addition to the Base
Salary, Bonus and Annual Grants as hereinabove provided, the Executive shall be
entitled to participate during the Employment Period in all incentive programs,
savings, pension and retirement plans and programs generally available to other
senior executives of the Company from time to time other than those embodied in
separately negotiated agreements.

(g)   Welfare Benefit Plans.   During the Employment Period,
the Executive and the Executive’s family shall be eligible for participation
(to the same degree as other senior executives of the Company) in each welfare
benefit plan of the Company, including, without limitation, all medical,
prescription, dental, disability, salary continuance, life, accidental death
and travel accident insurance plan and programs of the Company and its
affiliated companies. The Executives annual automobile allowance, payable in
bi-monthly installments, shall be $30,000.

(h)   Vacation.   During the Employment Period, the Executive
shall be entitled to four weeks per calendar year of paid vacation.

 2
 

(i)    Business Expenses, Temporary Living, Travel and Relocation Expenses,
etc.   The Company shall promptly reimburse the Executive for
all reasonable employment, travel, entertainment and other business related
expenses incurred by the Executive in accordance with the policies, practices
and procedures of the Company in effect from time to time. The Company shall
reimburse the Executive for all reasonable and customary travel, commuting and
temporary living expenses during the first year of the Employment Period. Should
the Executive, at his sole discretion, relocate to the greater Philadelphia
metropolitan area during the Employment Period, the Company shall reimburse the
Executive for all reasonable and customary relocation costs and expenses
(including costs associated with the sale of his residence (including, without
limitation, sales commission and closing costs).

(j)    Executive Supplemental Retirement Plan.   The Executive
shall be immediately eligible to participate in the Company’s Executive
Supplemental Retirement Plan at a contribution level equal to 16% (of Base
Salary and Annual Bonus) fully vesting on (i) the fourth anniversary of
the Effective Date or (ii) the Executive’s earlier involuntary termination
without “Cause,” as defined below, or termination for “Good Reason,” as defined
below.

(k)   Controlling Document.   To the extent there is any
inconsistency between the terms of this Agreement and the terms of any plan or
program under which compensation or benefits are provided hereunder, this
Agreement shall control. Otherwise, the Executive shall be subject to the
terms, conditions and provisions of the Company’s plans and programs, as
applicable.

4.     Termination.   This Agreement and Executive’s employment
shall terminate under the following circumstances:

(a)   Death or Disability.   This Agreement shall terminate
automatically upon the Executive’s death. During the Employment Period, if, as
a result of physical or mental incapacity or infirmity, Executive shall be
unable to perform his duties under this Agreement for (i) a continuous
period of 90 days or more, or (ii) periods aggregating 120 days or more
during any period of 12 consecutive months (each a “Disability Period”), and at
the end of the Disability Period there is no reasonable probability that
Executive can promptly resume his duties hereunder, Executive shall be deemed
disabled (the “Disability”) and the Company, by notice to Executive, shall have
the right to terminate this Agreement and the Executive’s employment for
Disability at, as of or after the end of the Disability Period. The existence
of the Disability shall be determined by a reputable, licensed physician
selected by the Company in good faith, whose determination shall be final and
binding on the parties. Executive shall cooperate in all reasonable respects to
enable an examination to be made by such physician. Notwithstanding the
foregoing, the Company may conclusively determine Executive to have suffered a
Disability and terminate the Employment Period on account of such Disability at
any time after Executive has commenced receiving benefits under the Company’s
Long Term Disability Salary Continuation Plan.

(b)   With or Without Cause.   The Company may terminate this
Agreement and the Executive’s employment with or without “Cause.”  For purposes of this Agreement, “Cause” means
(i) the continued failure of Executive to comply with the lawful
directives of the Chairman or the Board (other than any such failure resulting
from Executive’s incapacity due to physical or mental illness or any such
failure subsequent to Executive being delivered a Notice of Termination without
Cause by the Company or delivering a Notice of Termination for Good Reason to
the Company) within 30 days after a written demand is delivered to the
Executive by the Company specifying the failure; (ii) any act by Executive
of illegality, dishonesty or fraud in connection with the Executive’s
employment; (iii) the willful engaging by Executive in gross misconduct
which is demonstrably and materially injurious to the Company or its
affiliates; (iv) Executive’s conviction of or pleading guilty or no
contest to a felony; or (v) a violation of Section 6
or 7 herein. For purpose of this paragraph (b), no act or failure to
act by Executive shall be considered “willful” unless done or omitted to be
done by Executive in bad faith and without reasonable belief that Executive’s
action or omission was in the best interests of the Company or its affiliates. Any
act, 

 3
 

or failure to act, based
upon authority given pursuant to a resolution duly adopted by the Board or
based upon the advice of counsel for the Company shall be conclusively presumed
to be done, or omitted to be done, by Executive in good faith and in the best
interests of the Company. Cause shall not exist unless and until the Company
has delivered to Executive, along with the Notice of Termination for Cause, a
copy of a resolution duly adopted by two-thirds (2¤3) of the
entire Board (excluding Executive if Executive is a Board member) at a meeting
of the Board called and held for such purpose, finding that in the good faith
opinion of the Board an event set forth in clauses (i) - (v) above
has occurred and specifying the particulars thereof in detail.

(c)   With or Without Good Reason.   This Agreement and the
Executive’s employment may be terminated by the Executive with or without Good
Reason. For purposes of this Agreement, “Good Reason” means:

(i)    any change
in the duties or responsibilities of Executive that is inconsistent in any
material and adverse respect with Executive’s position, duties,
responsibilities or status as President & CEO (including any material
and adverse diminution of such duties or responsibilities or change in his
reporting relationship so that he is to report to someone other than the Board
or its Chairman); provided, however,
that Good Reason shall not be deemed to occur upon (A) a change in duties
or responsibilities (other than reporting responsibilities) that is solely and
directly a result of the Company no longer being a publicly traded entity and
does not involve any other event set forth in this paragraph (c).

(ii)   any
substantial failure by the Company to comply with any of the provisions of Sections 3 or 8(c) of this Agreement;

provided, however,
that a termination by Executive for Good Reason shall be effective only if,
within 30 days following the delivery of a Notice of Termination for Good
Reason by Executive to the Company, the Company has failed to cure the circumstances
giving rise to Good Reason to the reasonable satisfaction of the Executive.

(d)   Notice of Termination.   Any termination by the Company
with or without Cause or by the Executive with or without Good Reason shall be
communicated by Notice of Termination to the other party hereto given in
accordance with Section 9(d) of this
Agreement. For purposes of this Agreement, a “Notice of Termination” means a
written notice which (i) indicates the specific termination provision in
this Agreement relied upon, (ii) sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive’s
employment under the provision so indicated, if applicable, and (iii) if
the termination date is other than the date of receipt of such notice,
specifies the proposed termination date.

(e)   Expiration of the Employment Period.   This Agreement
and the Executive’s employment shall terminate upon the delivery of a notice of
non-extension of the Employment Period by either the Executive or the Company
as set forth in Section 2.

(f)    Certain Modifications.   Notwithstanding anything to the
contrary contained in this Section 4
or in any other Section of this Agreement, Good Reason shall not be deemed
to occur, and the Company shall not be deemed in violation of any provision of
this Agreement, upon any change in duties or responsibilities of the Executive
that is a result of a modification of the organizational structure of the
Company.

5.     Obligations of the Company Upon Termination.

(a)   Death.   If the Executive’s employment is terminated by
reason of the Executive’s death, this Agreement shall terminate and the Company
shall pay the Executive’s estate his Base Salary through the date of
termination at the rate in effect at the time of death and any other benefits
(including death benefits and any bonus due under the terms of the Bonus Plan)
to which Executive is entitled to hereunder 

 4
 

as of the date of the
Executive’s death and shall have no further obligations to the Executive under
this Agreement.

(b)   Disability.   If the Executive’s employment is
terminated by reason of the Executive’s Disability, this Agreement shall
terminate and the Company shall pay the Executive his Base Salary through the
date of termination at the rate in effect at the time of Disability and any
other benefits (including Disability benefits) to which Executive is entitled
to hereunder at the date of the termination and shall have no further
obligations to the Executive under this Agreement.

(c)   With Cause, Without Good Reason or Non-Extension of Employment Period.   If
the Executive’s employment shall be terminated (i) by the Company with
Cause, (ii) by Executive without Good Reason or (iii) on account of
the delivery by either party of a notice of non-extension of the Employment
Period, the Company shall pay the Executive his Base Salary through the date of
termination at the rate in effect at the time Notice of Termination is given
and shall have no further obligations to the Executive under this Agreement.

(d)   Without Cause or With Good Reason.   If, during the
Employment Period, Executive’s employment shall be terminated (i) by the
Company without Cause, or (ii) by Executive for Good Reason, the Company
shall pay to the Executive or provide the following amounts and benefits, with
respect to which Executive shall have no duty of mitigation:

(A)  to the
extent not theretofore paid, the Company shall pay the Executive’s Base Salary
through the date of termination at the rate in effect on the date of
termination plus any Bonus amounts had been earned but had not yet been paid
and any vacation pay for accrued but unused vacation through the date of
termination in the calendar year which includes the date of termination (such
amount to be paid in a lump sum within 10 days of such termination);

(B)   the Company
shall pay to the Executive an amount equal to two times his then current Base
Salary (such amount to be paid in a lump sum within 10 days of such
termination);

(C)   if the date
of termination is prior to the payment of the Guaranteed Bonus, the Company
shall pay to the Executive an amount equal to the Guaranteed Bonus (such amount
to be paid in a lump sum within 10 days of such termination); and

(D)  to the
extent at least 333,333 of the Inducement RSUs are not fully vested as of the
termination date, the Company shall cause such additional number of the
Inducement RSUs to immediately vest as is equal to 333,333 minus such number of
the Inducement RSUs that have otherwise fully vested as of the termination
date.

All payments and
benefits to be provided to the Executive under this Section 5(d) shall
be subject to the Executive’s (x) compliance with the restrictions of Sections 6 and 7(a) herein and (y) execution of a
general release and waiver of claims against the Company in the form to be
determined by the Company at the time of termination. Anything herein to the
contrary notwithstanding, if the Executive becomes entitled to payments
pursuant to Section 5(d) hereof, Executive
agrees to waive payments under any severance plan or program of the Company.

(e)   Change of Control Agreement.   Notwithstanding the
foregoing, the Company shall have no obligation to provide, and the Executive
shall not be entitled to receive, the payments and benefits to be provided
under this Section 5, if the Executive’s
employment shall be terminated during such Executive’s Employment Period (as
defined in that certain Change of Control Employment Agreement, dated as of the
date hereof, between the Company and the Officer (the “Change in Control
Agreement”)). During the Employment Period (as defined in the Change of Control
Agreement), the Change of Control Agreement shall supercede this Agreement in
its entirety.

 5
 

6.     Confidential Information.   The Executive shall forever
hold in a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or any of
its affiliated companies, and their respective businesses, which shall have
been obtained by the Executive during the Executive’s employment by the Company
or any of its affiliated companies and which shall not be public knowledge. The
Executive shall not, without the prior written consent of the Company or except
as required by law or in a judicial or administrative proceeding with subpoena
powers, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it.

7.     Covenant Against Competition.

(a)  The
Executive shall not, during his employment with the Company, and for two years
thereafter, directly or indirectly, (a) induce or attempt to influence any
employee of the Company to terminate his employment with the Company or hire or
solicit for hire on behalf of another employer any person then employed or who
had been employed by the Company during the immediately preceding six months or
(b) engage in (as a principal, partner, director, officer, agent,
employee, consultant or otherwise) or be financially interested in any business
operating within the United States of America, if (i) such business’
primary business is the retail and/or commercial sale of automotive parts,
accessories, tires and/or automotive repair/maintenance services including, without
limitation, the entities (including their franchisees and affiliates) listed on
Schedule 7 hereto, or (ii) the
retail and/or commercial sale of automotive parts, accessories, tires and/or
repair/maintenance services is the primary focus of such engagement or
financial interest. However, nothing contained in this Section 7
shall prevent the Executive from (i) following his employment with the
Company, engaging in (as a principal, partner, director, officer, agent,
employee, consultant or otherwise) or be financially interested in any new or
used automotive dealership business (including an automotive repair and
maintenance service business that is ancillary thereto) or (ii) holding
for investment up to two percent (2%) of any class or equity securities of a
company whose securities are traded on a national or foreign securities
exchange.

(b) The Executive
acknowledges that the restrictions contained in Section 6
hereof and this Section 7, in view of the
nature of the business in which the Company is engaged, are reasonable and
necessary in order to protect the legitimate interests of the Company, and that
any violation thereof would result in irreparable injuries to the Company, and
the Executive therefore acknowledges that, in the event of his violation of any
of these restrictions, the Company shall be entitled to obtain from any court
of competent jurisdiction preliminary and permanent injunctive relief (without
the posting of any bond) as well as damages and an equitable accounting of all
earnings, profits and other benefits arising from such a violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled.

(c)  If the
Executive violates any of the restrictions contained in this Section 7, the restrictive period shall be extended
from the time of the commencement of any such violation until such time as such
violation shall be cured by the Executive to the satisfaction of the Company.

(d) The
invalidity or unenforceability of any provision or provisions of this Section 7 shall not affect the validity or
enforceability of any other provision or provisions of this Section 7, which shall remain in full force and effect.
If any provision of this Section 7
is held to be invalid, void or unenforceable in any jurisdiction, any court or
arbitrator so holding shall substitute a valid, enforceable provision that
preserves, to the maximum lawful extent, the terms and intent of this Agreement
and shall correspondingly modify the Company’s obligations under Section 5(d). If any of the provisions of, or covenants
contained in, this Section 7
are hereafter construed to be invalid or unenforceable in any jurisdiction, the
same shall not affect the remainder of the provisions or the enforceability
thereof in any other jurisdiction, which shall be given full effect, without
regard to the invalidity or unenforceability in such other jurisdiction. Any
such holding shall affect such provision of this Section 2,
solely as to that jurisdiction, without rendering that or 

 6
 

any other provisions of
this Section 2 invalid, illegal, or
unenforceable in any other jurisdiction. If any covenant contained in this Section 2 should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant will be
modified so that the scope of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid, legal and enforceable
and a corresponding reduction in the scope of the Company’s obligations under Section 5(d) shall also be made.

8.    Successors.

(a)   This
Agreement is personal to the Executive and without the prior written consent of
the Company shall not be assignable by the Executive otherwise than by will or
the laws of descent and distribution. This Agreement shall inure to the benefit
of and be enforceable by the Executive’s legal representatives.

(b)   This
Agreement shall inure to the benefit of and be binding upon the Company and its
successors.

(c)   The Company
will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used in this Agreement, “Company”
shall mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.

9.     Miscellaneous.

(a)   This
Agreement shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania without reference to principles of conflict of
laws. The parties hereto agree that exclusive jurisdiction of any dispute
regarding this Agreement shall be the state courts located in Philadelphia,
Pennsylvania.

(b)   The
captions of this Agreement are not part of the provisions hereof and shall have
no force or effect.

(c)   This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.

(d)   All notices
and other communications hereunder shall be in writing and shall be given by
hand delivery to the other party or by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:

If to the Executive, to:

the residence address of the Executive set forth in
the Company’s books and records

If to the Company, to:

The Pep Boys—Manny, Moe & Jack

3111 West Allegheny Avenue

Philadelphia, PA 19132

Attention:  Chairman of the Board

cc: General Counsel

 7
 

or to such other
address as either party shall have furnished to the other in writing in
accordance herewith. Notice and communications shall be effective when actually
received by the addressee.

(e)   The Company
may withhold from any amounts payable under this Agreement such Federal, state
or local taxes as shall be required to be withheld pursuant to any applicable
law or regulation.

(f)    This
Agreement, together with the Change of Control Agreement and the agreements
evidencing the Inducement Grants, contains the entire understanding of the
Company and the Executive with respect to the subject matter hereof.

(g)   If the
Executive is precluded from performing this employment by reason of any
pre-existing contractual restrictions, the terms and benefits of this Agreement
shall be null and void.

IN
WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has
caused this Agreement to be executed in its name on its behalf, on the date(s) shown
below.

	
  

  	
  /s/ JEFFREY C. RACHOR

  
	
   

  	
  Dated: April 13,
  2007

  
	
   

  	
  THE
  PEP BOYS—MANNY, MOE & JACK

  
	
   

  	
  By:

  	
  /s/ WILLIAM LEONARD

  
	
   

  	
   

  	
  William Leonard

  	
   

  
	
   

  	
   

  	
  Chairman of the Board

  	
   

  
	
   

  	
   

  	
  Dated: April 13, 2007

  	
   

  

 

 8

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