PBY Prospect Capital Corporaton

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the transition period from             to           

Commission File No.  1-3381

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

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 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

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

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

As of August 26, 2011, there were 52,674,692 shares of the registrant’s Common Stock outstanding.

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PART I - FINANCIAL INFORMATION

ITEM 1  CONSOLIDATED FINANCIAL STATEMENTS

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

(unaudited)

See notes to consolidated financial statements.

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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND CHANGES IN RETAINED EARNINGS

(dollar amounts in thousands, except per share amounts)

(unaudited)

See notes to consolidated financial statements.

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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(unaudited)

See notes to consolidated financial statements

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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 — BASIS OF PRESENTATION

The Pep Boys — Manny, Moe & Jack and subsidiaries (the “Company”) consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the Company’s financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. The Company bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of the Company’s assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and the Company includes any revisions to its estimates in the results for the period in which the actual amounts become known.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted, as permitted by Rule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “Interim Financial Statements.” It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011. The results of operations for the twenty-six weeks ended July 30, 2011 are not necessarily indicative of the operating results for the full fiscal year.

The consolidated financial statements presented herein are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows as of July 30, 2011 and for all periods presented have been made.

The Company’s fiscal year ends on the Saturday nearest January 31. Accordingly, references to fiscal years 2011 and 2010 refer to the fiscal year ending January 28, 2012 and the fiscal year ended January 29, 2011, respectively.

The Company maintains a trade payable program that is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company from its vendors. The Company, in turn, makes the regularly scheduled full vendor payments to the bank participants. In the first quarter of fiscal 2011 as a result of the Company’s review, the Company determined that the gross amount of borrowings and payments on the trade payable program shown on the statement of cash flows under “Cash flows from financing activities” included certain vendors that had not participated in the trade payable program. As such, the Company made an equal and offsetting adjustment to reduce the trade payables borrowings and payments line items within financing activities by $106.1 million for the twenty-six weeks ended July 31, 2010. The full year impact of this adjustment is to reduce the line items $225.2 million and $90.3 million for the years ended January 29, 2011 and January 30, 2010, respectively.  These adjustments have no net impact on net cash used in financing activities or on any other cash flow line items.

NOTE 2 — NEW ACCOUNTING STANDARDS

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). This accounting standard update clarifies that SEC registrants presenting comparative financial statements should disclose in their pro forma information revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The Company adopted ASU 2010-29 during the first quarter of the current fiscal year.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact the adoption will have on the consolidated financial statements.

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In June of 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 was issued to improve the comparability of financial reporting between U.S. GAAP and IFRS, and eliminates previous U.S. GAAP guidance that allowed an entity to present components of other comprehensive income (“OCI”) as part of its statement of changes in shareholders’ equity. With the issuance of ASU 2011-05, companies are now required to report all components of OCI either in a single continuous statement of total comprehensive income, which includes components of both OCI and net income, or in a separate statement appearing consecutively with the statement of income. ASU 2011-05 does not affect current guidance for the accounting of the components of OCI, or which items are included within total comprehensive income, and is effective for periods beginning after December 15, 2011, with early adoption permitted. The application of this guidance affects presentation only and therefore is not expected to have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

NOTE 3 — ACQUISITIONS

During the current fiscal year, the Company acquired the assets related to seven service and tire centers located in the Seattle-Tacoma area, the assets related to seven service and tire centers located in the Houston, Texas area and all outstanding shares of capital stock of Tire Stores Group Holding Corporation which operated an 85-store chain in Florida, Georgia and Alabama under the name Big 10. Collectively, the acquired stores produced approximately $94.7 million in sales annually based on audited and unaudited pre-acquisition historical information. The total purchase price of these stores was approximately $42.6 million in cash and the assumption of certain liabilities. The acquisitions were financed through cash flows provided by operations. The results of operations of these acquired stores are included in the Company’s results from their respective acquisition dates.

The Company has recorded its initial accounting for these acquisitions in accordance with accounting guidance on business combinations. The acquisitions resulted in goodwill related to, among other things, growth opportunities and assembled workforces. A portion of the goodwill is expected to be deductible for tax purposes. The Company has recorded finite-lived intangible assets at their estimated fair value related to trade name, favorable and unfavorable leases.

The Company expensed all costs related to these acquisitions during fiscal 2011. The total costs related to these acquisitions were $1.3 million and are included in the consolidated statement of operations within selling, general and administrative expenses.

The purchase price of the acquisitions have been preliminarily allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill on the basis of estimated fair values, as follows:

Intangible assets consist of trade names ($0.6 million) and favorable leases ($0.2 million). Long-term liabilities includes unfavorable leases ($9.1 million). The trade names are being amortized over their estimated useful life of 3 years. The favorable and unfavorable lease intangible assets and liabilities are being amortized to rent expense over their respective lease terms, ranging from 2 to 16 years.

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Sales and net earnings for the fiscal 2011 acquired stores totaled $21.9 million and $0.7 million, respectively for the period from acquisition date through July 30, 2011.

The purchase price allocation remains preliminary for some of the acquired stores due to the finalization of certain valuation adjustments. The Company believes that this will be finalized by the fourth quarter of fiscal 2011 and that any adjustments to the purchase price allocation will not be material.

As our acquisitions (including Big 10) were immaterial to our operating results both individually and in aggregate for the thirteen and twenty six week periods ended July 30, 2011 and July 31, 2010, pro forma results of operations are not disclosed.

NOTE 4 — MERCHANDISE INVENTORIES

Merchandise inventories are valued at the lower of 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 only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of 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 $518.6 million and $486.0 million as of July 30, 2011 and January 29, 2011, respectively.

The Company’s inventory, consisting primarily of auto parts and accessories, is used on vehicles typically having long lives. Because of this, and combined with the Company’s historical experience of returning excess inventory to the Company’s vendors for full credit, the risk of obsolescence is minimal. The Company establishes a reserve for excess inventory for instances where less than full credit will be received for such returns or where the Company anticipates items will be sold at retail prices that are less than recorded costs. The reserve is based on management’s judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where the Company received less than full credit from vendors for product returns. The Company also provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program. The Company’s inventory adjustments for these matters were approximately $5.5 million at July 30, 2011 and $6.0 million at January 29, 2011.

NOTE 5 — PROPERTY AND EQUIPMENT

The Company’s property and equipment as of July 30, 2011 and January 29, 2011 was as follows:

NOTE 6 — WARRANTY RESERVE

The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor is warranted in full by the Company for a limited specific time period. The Company establishes its warranty reserves based on historical experiences. These costs are included in either costs of merchandise sales or costs of service revenues in the consolidated statements of operations.

The reserve for warranty cost activity for the twenty-six weeks ended July 30, 2011 and the fifty-two weeks ended January 29, 2011 is as follows:

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NOTE 7 — DEBT AND FINANCING ARRANGEMENTS

The following are the components of debt and financing arrangements:

As of July 30, 2011, 126 stores collateralized the Senior Secured Term Loan.

On July 26, 2011, the Company amended and restated its Revolving Credit Agreement. The Company’s ability to borrow under the Revolving Credit Agreement is based on a specific borrowing base consisting of inventory and accounts receivable up to a maximum availability of $300.0 million. The amendment reduced the interest rate applicable to borrowings by 75 basis points to a rate between London Interbank Offered Rate (LIBOR) plus 2.00% to 2.50% and extended the maturity date of the Revolving Credit Agreement to July 26, 2016. The related refinancing fees of $2.4 million are being amortized over the new five year life. As of July 30, 2011, there were no outstanding borrowings under the Revolving Credit Agreement and $30.0 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of July 30, 2011, there was $201.0 million of availability remaining.

Several of the Company’s debt agreements require compliance with covenants. The most restrictive of these covenants, an earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirement, is triggered if the Company’s availability under its credit agreement drops below $50.0 million. As of July 30, 2011, the Company had an availability of $201.0 million and was in compliance with all covenants contained in its debt agreements.

Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The estimated fair value of long-term debt including current maturities was $300.5 million and $298.3 million as of July 30, 2011 and January 29, 2011, respectively.

NOTE 8 — SALE-LEASEBACK TRANSACTIONS

The Company did not execute any sale-leaseback transactions during the twenty-six weeks ended July 30, 2011. During the twenty-six weeks ended July 31, 2010, the Company sold one property to an unrelated third party for net proceeds of $1.6 million. Concurrent with this sale, the Company entered into an agreement to lease the property back from the purchaser over a minimum lease term of 15 years. The Company classified this lease as an operating lease. The Company actively uses this property and considers the lease as a normal leaseback. The Company recorded a deferred gain of $0.4 million.

The Company operated 725 store locations at July 30, 2011, of which 232 were owned and 493 were leased.

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NOTE 9 — INCOME TAXES

The Company recognizes taxes payable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. All available evidence, both positive and negative, is considered to determine whether based on the weight of that evidence a valuation allowance is needed. To establish this positive evidence, the Company considers future projections of income and various tax planning strategies for generating income sufficient to utilize the deferred tax assets. Due to an organizational restructuring of its subsidiaries and the Company’s improved profitability and projected future income, the Company released $3.4 million (net of federal tax) of valuation allowance relating primarily to certain unitary state net operating loss carryforwards and credits during the thirteen weeks ended July 30, 2011.

For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. During the thirteen and twenty-six weeks ended July 30, 2011, the Company did not have a material change to its uncertain tax position liabilities.

NOTE 10 — ACCUMULATED OTHER COMPREHENSIVE LOSS

The following are the components of other comprehensive income:

The components of accumulated other comprehensive loss are:

NOTE 11 — IMPAIRMENTS AND ASSETS HELD FOR SALE

During the second quarter of fiscal 2011 and 2010, the Company recorded a $0.4 million and a $0.8 million impairment charge, respectively, related to stores classified as held and used. The Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of the stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The fair market value estimate is classified as a Level 3 measure within the fair value hierarchy. Of the $0.4 million impairment charge in fiscal 2011, $0.1 million was charged to costs of merchandise sales, and $0.3 million was charged to costs of service revenues. Of the $0.8 million impairment charge in fiscal 2010, $0.6 million was charged to costs of merchandise sales, and $0.2 million was charged to costs of service revenue.

During the second quarter of fiscal 2010, the Company also recorded a $0.2 million impairment charge related to a store classified as held for disposal. The Company lowered its selling price reflecting declines in the commercial real estate market. The fair market value of the store is classified as a Level 2 measure within the fair value hierarchy. Substantially all of this impairment was charged to costs of merchandise sales.

The Company did not sell any properties during the twenty-six week period ending July 30, 2011.

During the thirteen week period ended July 31, 2010, the Company sold one store classified as held for disposal for net proceeds of $0.8 million and recognized a net gain of $0.2 million. During the twenty-six week period ended July 31, 2010, the Company sold

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four stores classified as held for disposal for net proceeds of $2.9 million and recognized a net gain of $0.3 million.

Assets held for sale were $0.4 million as of July 30, 2011 and $0.5 million as of January 29, 2011 and are recorded within other current assets.

NOTE 12 — EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per share for earnings from continuing operations and net earnings:

At July 30, 2011 and July 31, 2010, respectively, there were 2,682,000 and 2,402,000 outstanding options and restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total numbers of such shares excluded from the diluted earnings per share calculation are 830,000 and 1,088,000 for the twenty-six weeks ended July 30, 2011 and July 31, 2010, respectively. The total numbers of such shares excluded from the diluted earnings per share calculation

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are 888,000 and 1,071,000 for the thirteen weeks ended July 30, 2011 and July 31, 2010, respectively.

NOTE 13 — BENEFIT PLANS

The Company has a qualified 401(k) savings plan and a separate plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company also maintains a non-qualified defined contribution Supplemental Executive Retirement Plan (the “Account Plan”) for key employees designated by the Board of Directors. The Company’s contribution to these plans for fiscal 2011 is contingent upon meeting certain performance metrics. The Company has not recorded any contribution expense for these plans in the first half of 2011. The Company’s expense related to the savings plans and the Account Plan for the thirteen weeks ended July 31, 2010 was approximately $0.7 million and $0.3 million, respectively, and for the twenty six-weeks ended July 31, 2010, approximately $1.6 million and $0.7 million, respectively.

The Company also has a frozen defined benefit pension plan covering the Company’s full-time employees hired on or before February 1, 1992. The Company’s expense for its pension plan follows:

The defined benefit pension plan is subject to minimum funding requirements of the Employee Retirement Income Security Act of 1974 as amended. While the Company has no minimum funding requirement during fiscal 2011, it made a $3.0 million discretionary contribution to the defined benefit pension plan on April 28, 2011.

NOTE 14 — EQUITY COMPENSATION PLANS

The Company has stock-based compensation plans, under which it grants stock options and restricted stock units to key employees and members of its Board of Directors. The Company generally recognizes compensation expense on a straight-line basis over the vesting period.

The following table summarizes the options under the Company’s plan:

In the first half of fiscal year 2011, the Company granted approximately 265,000 stock options with a weighted average grant date fair value of $5.38. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the thirteen weeks and twenty-six weeks ended July 30, 2011, for the options granted was minimal.

In the first half of fiscal year 2010, the Company granted approximately 303,000 stock options with a weighted average grant date fair value of $4.26. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the thirteen and twenty-six weeks ended July 31, 2010, for the options granted was minimal.

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The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on historical volatilities for a time period similar to that of the expected term blended with market based implied volatility at the time of the grant. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term.

The following are the weighted-average assumptions:

RESTRICTED STOCK UNITS

Performance Based Awards

In the first quarter of fiscal 2011, the Company granted approximately 95,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves a return on invested capital target for fiscal year 2013. The number of underlying shares that may be issued upon vesting will range from 0% to 150%, depending upon the Company achieving the financial targets in fiscal year 2013. The fair value for these awards was $12.48 at the date of the grant. The compensation expense recorded for these restricted stock units was minimal during the thirteen weeks and twenty-six weeks ended July 30, 2011.

In the first quarter of fiscal 2010, the Company granted approximately 105,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves a return on invested capital target for fiscal year 2012. The number of underlying shares that may be issued upon vesting will range from 0% to 150%, depending upon the Company achieving the financial targets in fiscal year 2012. The fair value for these awards was $10.34 at the date of the grant. The compensation expense recorded for these restricted stock units during the thirteen weeks and twenty-six weeks ended July 30, 2011 and July 31, 2010, was minimal.

Market Based Awards

In the first quarter of fiscal 2011, the Company granted approximately 48,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and will become exercisable if the Company satisfies a total shareholder return target in fiscal 2013. The number of underlying shares that may become exercisable will range from 0% to 175% depending upon whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $14.73 grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks and twenty-six weeks ended July 30, 2011, was minimal.

In the first quarter of fiscal 2010, the Company granted approximately 52,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and will become exercisable if the Company satisfies a total shareholder return target in fiscal 2012. The number of underlying shares that may become exercisable will range from 0% to 175% depending upon whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $12.99 grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks and twenty-six weeks ended July 30, 2011 and July 31, 2010, was minimal.

Other Awards

In the first quarter of fiscal 2011 and 2010, the Company granted approximately 50,000 and 61,000 restricted stock units related to officers’ deferred bonus matches under the Company’s non-qualified deferred compensation plan, which vest over a three year period.

In the second quarter of fiscal 2011, the Company granted approximately 42,000 restricted stock units to its non-employee directors of the board that vested immediately. The fair value was $10.67 per unit and the Company recognized compensation expense of approximately $0.4 million for these restricted stock units.

In the second quarter of fiscal 2010, the Company granted approximately 52,000 restricted stock units to its non-employee directors of

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the board that vested immediately. The fair value was $9.55 per unit and the Company recognized compensation expense of approximately $0.5 million for these restricted stock units.

The following table summarizes the units under the Company’s plan, assuming maximum vesting of underlying shares for the performance and market based awards described above:

NOTE 15 — FAIR VALUE MEASUREMENTS AND DERIVATIVES

The Company’s fair value measurements consist of (a) non-financial assets and liabilities that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities.

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table provides information by level for assets and liabilities that are measured at fair value, on a recurring basis: